6/1/2016

The Buffett Essays Symposium: Annotated 20th Anniversary Transcript

TheBu ettEssaysSymposium:Annotated20thAnniversary
Transcript
Posted by Lawrence Cunningham, George Washington University Law School, on Wednesday, June 1, 2016

Tags: Berkshire Hathaway, Board independence, Board leadership, Board performance, Boards of
Directors, Director qualications, Executive performance, Management, Warren Buffet
More from: Lawrence Cunningham
Editor's Note: Lawrence Cunninghamis theHenry St. George Tucker III Research Professor of Law atthe
George Washington University Law School. This post is based on Mr. Cunninghams recently published
book,The Buffett Essays Symposium: Annotated 20thAnniversary Transcript.

Warren Buffett spoke from the front row about director stewardship: As a stockholder, Im really only interested in
the board accomplishing two ends. One is to get a rst class manager and the second is to intervene in some way
when even that rst class manager will have interests that are contrary to the interests of the owners.
The occasion was a 1996 symposium I hosted with Warren, and his business partner Charlie Munger, featuring
Buffetts letters to Berkshire shareholders, which I had rearranged thematically inThe Essays of Warren Buffett:
Lessons for Corporate America.
Intellectual sparks ew. After governance expert Ira Millstein declared that boards must develop strategic plans for
acquisitions, Buffett countered that more dumb acquisitions are done in the name of strategic plans than any
other. When I and my colleague, Bill Bratton, acknowledged including modern nance theory in our teaching,
Munger chastised us for peddling twaddle and gibberishquickly adding, I like both these guys.
Before a sell-out crowd of 150, twenty experts pressed Warren and Charlie on many issues of corporate life that
were and remain central: director stewardship, shareholder activism, incentive compensation, income inequality,
merger activity, even the fairness of the income tax. The Berkshire executives pushed back during twelve hours of
panels on governance, nance, M&A, accounting and taxation.
When I recently stumbled upon the symposium transcript, I was struck by how many of the questions we
discussed remain vital. Plus a change, plus cest la mme chose. So I enlisted a few original participants
Deborah DeMott, Ed Kitch, Dale Oesterle, and Jim Repettiand other experts, Robert Hagstrom and Shae
Parrish, to annotate and publish a book: The Buffett Essays Symposium: Annotated 20 th Anniversary
Transcript.
One marvel is how consistent Buffett and Munger have been, both with each other and over time, even as their
company evolved from a $25 billion investment vehicle to a $250 billion conglomerate. Yet we glimpsed rare
occasions when Buffett and Munger disagreed: on whether shareholders or boards should have the ultimate say
on merger proposals. We can also document a change of heart, such as Mungers statement then that it would be
a disaster if every company in America were like Berkshire to today wondering why more companies fail to
emulate Berkshire.
While the discussion is packed with gems in many elds, here is Buffetts elaboration from the transcript on the
rst of the two jobs directors must do:

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The Buffett Essays Symposium: Annotated 20th Anniversary Transcript

The rst one: getting the rst class manager. I have never seen in those seventeen casesand Im not
aware of it in other caseswhere a question of mediocrity or worse and the evaluation of change has
been made in the presence of a chief executive. It just doesnt happen. So, I think absolutely to have
any chance of having that one solved, you have to have regular meetings of evaluation of chief
executives, absent that chief executive.
If they are rump meetings or something of the sortif theyre not regularly scheduledthere is just too
much tension created. Because a board may be a legal creation, but its a social animal. It is very
difcult for a group of people without a very strong leader to all of a sudden, spontaneously decide that
theyre going to hold some meetings elsewhere and discuss whether this person who may be a
perfectly decent individual, really should be batting clean-up.
So, I think there should be a lot of emphasis on process in terms of evaluation of a CEO. I dont know
how you create a greater willingness on the part of directors to really bounce somebody that they
would bounce if they owned 100% of the company or if their family was dependent on the income from
the business and so on. I just have not seen it in corporate America.
If you get that rst class chief executivewhich is a top priorityhe doesnt have to be the best in the
world, just a rst class one. You may be able to turn a ve into a ve-and-a-half or something by having
him consult with lots of other CEOs and get a lot of advice from the board. But my experience is that
you dont turn a ve into an eight. I think youre better off getting rid of the ve and having him nd
something else to do in life and going out and acquiring an eight.
From such orations, you can compile a concise guide to board service, despite the variety of directorships and the
importance of context. It would be based on a few broad general propositions:
1. Most Important Job: CEO selection and replacement.
2. Most Essential Skills: business savvy and interest, shareholder orientation, and independence of mind.
3. Greatest Challenge: conventional congenial boardroom atmosphere.
4. Best Solution: regularly scheduled periodic meetings of outside directors absent the CEO to discuss the
CEO.
You would need additional entries for specic tasks that became prominent in the last two decades, like
compensation committee and audit committee functions, but these would be equally simple (e.g., dont serve on
the former unless you canpersonallynegotiate terms).
Buffetts commentary remains equally valid, the biggest change being in his experience. As I wrote in
myannotation on this commentary in theBuffett Essays Symposium Transcript:
Buffett is famously savvy at nding rst class chief executives for Berkshires subsidiaries. In the two
decades since the symposium, however, he has had to prove equally adept at replacing them when
necessary, though usually without fanfare. While circumstances vary and little is said publicly, in that
time CEO changes occurred at Benjamin Moore, Fechheimer Brothers, The Pampered Chef, Johns
Manville, Larson Juhl, and NetJets. Notoriously, David Sokol, a Berkshire troubleshooter who ran its
energy business and was widely seen as a potential successor to Buffett, resigned after buying stock
in Lubrizol before pitching it as a Berkshire acquisition candidate.
Buffett and Mungers relative constancy over two decades is all the more remarkable when you consider the vast
multiplication of scale that has occurred at Berkshire. Here are highlights from a chart in the books Epilogue.
Berkshire: 1996v.2016
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The Buffett Essays Symposium: Annotated 20th Anniversary Transcript

(dollars in billions except per share amounts, many gures are averaged or rounded for salience)
1996

2016

Book Value Per Share

$20,000

$150,000

Class A Share Price

$35,000

$200,000

Market capitalization

$60

$320

Book value of marketable securities

$30

$120

Book value of operating assets

$2

$500

$2.5

$20

Wholly-owned direct subsidiaries

15

60

Acquisition cost of direct subsidiaries

<$5

>$170

Shareholders equity

$25

$250

Float

$7

$85

Directors

12

33,000

350,000

Employees at headquarters

12

25

Annual meeting attendance

7,000

40,000

Net earnings

Employees

Staying consistent through such radical change underscores the wisdom of the positions Buffett and Munger have
staked. The wisdom enables making pithy guidelines like those extracted above for directors. They adhere to
Einsteins dictum, which Munger quoted at the symposium: Everything should be as simple as possible, but not
more so.

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