Defending the Berkshire Way: Buffett reinforces his way of doing things

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Posted: Saturday, May 3, 2014 12:00 am | Updated: 1:51 am, Tue May 20, 2014.

Warren Buffett, in a five-hour shareholders meeting Saturday, reinforced his way of doing things, from his decision not to vote against an executive pay plan at Coca-Cola and his philosophy of letting his managers run their businesses to Berkshire Hathaway's record as a conglomerate.

A case in point:

Since Buffett took over as chairman and CEO of Berkshire 49 years ago, the company has never paid a dividend, instead keeping profits to invest in stocks or to buy other businesses.

Saturday, Buffett said 97 percent of the votes by the million or so Berkshire shareholders rejected a resolution calling for dividends. Results of the vote came during the company's annual meeting at the CenturyLink Center in Omaha.

The meeting had an unofficial attendance estimate of 38,000, prompting a shareholder, at a pinch-point in a hallway into the arena, to say, “You'd think they're getting the four Beatles together.”

Instead, they were gathered to hear from the leaders of the conglomerate made up of more than 80 companies involved with everything from candy, jets, furniture, paint and bricks to railroads and utilities.

Once the meeting got underway, Buffett answered questions that often came as suggestions for changing how he does business.

He said that Berkshire didn't need to borrow money, even at today's low interest rates; that global warming didn't change his business plans because its effects are unknown; that he remains optimistic about the U.S. economy; and that breaking Berkshire into four smaller companies, as one questioner suggested, would be “a terrible mistake.”

#BRK2014

For complete coverage of the 2014 Berkshire Hathaway shareholders meeting, including stories, video, photo galleries and a chat with World-Herald Buffett guru Steve Jordon, visit Dataomaha.com/Berkshire.

In response to a question about Berkshire failing to beat the returns of a stock market index over the past five years, Vice Chairman Charlie Munger pointed out that Berkshire's gains are reduced by income taxes, while taxes don't count against the index.

“Warren likes to make things difficult for himself,” Munger said.

Buffett made his most detailed comments about the Coca-Cola pay issue to date, saying he didn't want to “go to war” against Coke's management over the issue, especially as an ally of financial manager David Winters of Wintergreen Advisors.

Winters had called on Coke shareholders to defeat the pay plan, saying it was excessive and would be costly to shareholders.

Instead, Buffett abstained from voting Berkshire's 9 percent stake in Coke. Buffett then said publicly that he opposed the pay plan and met privately with Coke's top executives. The Wall Street Journal said Thursday that Coke's directors likely would revise the plan in part because of Buffett's pressure.

On Saturday, Fortune magazine staffer Carol Loomis, one of six official questioners at the meeting, said the abstention was “very strange, un-Buffett-like behavior.”

Buffett said Winters' calculations exaggerated the pay plan's cost to shareholders, and Buffett offered his own calculations that indicated a smaller cost to shareholders.

He said serving as a corporate director has both business and social aspects, and agreeing with the board's compensation committee is standard for directors. “That's the way it's done,” he said.

Corporations typically select people for corporate boards who understand those conventions, Buffett said, and pay “independent” directors hundreds of thousands of dollars.

“They do not look for Dobermans,” Buffett said. “They look for cocker spaniels and then they make sure the tails are wagging.”

Journalist Andrew Ross Sorkin noted that Buffett's son Howard is a director of Coca-Cola and had voted in favor of the pay plan. Could Howard be trusted to act correctly if he becomes non-executive chairman of Berkshire someday as planned? Sorkin asked.

Buffett said his son understands the way he thinks and would act as “an extra safety valve” to preserve Berkshire's business culture.

“Howie's the perfect guy to carry that out,” Buffett said.

After the meeting, Doug Mohn, a retired IT professional and investor from Katy, Texas, said he expected that response. “You can't ask a public person in a large crowd of people if you think their son is up to the task and get any different answer.”

Mohn, who also holds Coca-Cola shares with his mother, said he would have liked Buffett to take a stronger stand against its executive pay proposal. “When I vote no at Coke, I know it doesn't mean anything. I just like to think that a 9 percent owner can sometimes ask for what they want and not have to be so oblique, like he's doing this time.”

But Buffett and Munger said arguing loudly and publicly with corporate managers doesn't accomplish as much as working with them. You have to pick your spots and go about it correctly, they said.

“If we all shout, then you would not be able to hear each other,” Munger said.

In an interview later, Sonia Lewis, a human resources specialist from Folsom, California, said she loved the candor of responses by Buffett and Munger about the Coke compensation and other questions.

“It almost feels like the next level of business school, but it's the real deal,” Lewis said. “They were kind of restating their principles, this is why we do what we do.”

She liked their comments about heading off conflict. “I really took that comment to heart,” she said. “People sometimes, if they haven't had a chance to work with executives, it's easy to sit back and critique what they're doing. They were not wavering from that.”

Buffett said he wasn't bothered by an accounting error by Bank of America Corp., where Berkshire has invested $5 billion. Bank of America's stock price dropped after the error was discovered, but Buffett said it didn't change his opinion that the company is a good investment for Berkshire.

He and Munger discussed their practice of letting the heads of Berkshire-owned companies operate independently with as little oversight as possible. Buffett said some might consider Berkshire's operating system “sloppy” because it gives company managers so much leeway.

Berkshire might occasionally save some money or avoid a problem if it kept careful track of everything its company CEOs do, he said, but that would create a negative management tone that would damage the company more.

Buffett said he is slow to replace managers, which might leave a few on the job beyond the proper time, but letting managers be in charge has more benefits.

One questioner asked why Berkshire remains a conglomerate, with a list of widely different businesses, when years ago the conglomerate model used by other companies failed.

Buffett said the older conglomerates often were almost a con game, issuing stock to buy up companies until their values collapsed.

Berkshire, in contrast, rarely issues stock and instead buys companies from its own revenue and allows them to operate profitably within the holding company, he said. The organization lets him move capital to businesses that need it without tax consequences, among other advantages.

Berkshire's growth in earning power can continue for a long time, he said, even though the size of the business has become an “anchor” to its rate of profit.

After the meeting, Mike Bradfield of Calgary, Canada, making his third trip to the meeting in Omaha, said he had sold a business and is managing the building it occupied. “I like to follow the world's most developed common sense,” he said of Buffett.

He said the comments about earnings power made him realize that a business shouldn't simply return a profit each year, but that each year's profit should add to the business's future earnings capacity.

A questioner asked why See's Candy's profits aren't growing. Buffett said sales of boxed chocolates have slowed, apparently being replaced by snacks. But he said the purchase of See's in 1972 taught him a valuable lesson about the power of strong brand names.

He said he probably wouldn't own Coca-Cola shares today without that lesson.

Munger said that was an example of “ignorance removal,” which occurs regularly and gives Berkshire a business advantage. “The good news is, we've got plenty of ignorance left.”

As the meeting broke for lunch, O.T. Babalola of Omaha, a Nigerian and author of a fantasy book called “Equinox,” shouted at Berkshire board member Bill Gates, the co-founder of Microsoft.

As Gates approached, some security guards moved closer. Babalola handed his resume to Gates and then turned and said, “I can't believe what I just did.”

The Omaha World-Herald is owned by Berkshire Hathaway Inc.

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