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6/1/2016

The Buffett Essays Symposium: Annotated 20th Anniversary Transcript

The Bu ett Essays Symposium: Annotated 20th Anniversary
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 qualifications, Executive performance, Management, Warren Buffet
More from: Lawrence Cunningham
Editor's Note: Lawrence Cunningham is the Henry St. George Tucker III Research Professor of Law at the
George Washington University Law School. This post is based on Mr. Cunningham’s recently published
book, The Buffett Essays Symposium: Annotated 20th Anniversary Transcript.

Warren Buffett spoke from the front row about director stewardship: “As a stockholder, I’m really only interested in
the board accomplishing two ends. One is to get a first class manager and the second is to intervene in some way
when even that first 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
Buffett’s letters to Berkshire shareholders, which I had rearranged thematically in The Essays of Warren Buffett:
Lessons for Corporate America.
Intellectual sparks flew. 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 finance theory in our teaching,
Munger chastised us for peddling “twaddle and gibberish”—quickly 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, finance, 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 ça change, plus c’est la même chose. So  I enlisted a few original participants—
Deborah DeMott, Ed Kitch, Dale Oesterle, and Jim Repetti—and 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 Munger’s 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 fields, here is Buffett’s elaboration from the transcript on the
first of the two jobs directors must do:

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shareholder orientation. and NetJets. It is very difficult for a group of people without a very strong leader to all of a sudden. don’t serve on the former unless you can personally negotiate terms).g. I think there should be a lot of emphasis on process in terms of evaluation of a CEO. While circumstances vary and little is said publicly. just a first class one. Most Important Job: CEO selection and replacement. in that time CEO changes occurred at Benjamin Moore.edu/2016/06/01/the-buffett-essays-symposium-annotated-20th-anniversary-transcript/ 2/3 . Johns Manville. but these would be equally simple (e. you can compile a concise guide to board service. Fechheimer Brothers. So. he has had to prove equally adept at replacing them when necessary. From such orations. You may be able to turn a five into a five-and-a-half or something by having him consult with lots of other CEOs and get a lot of advice from the board. Buffett’s commentary remains equally valid. though usually without fanfare. however. Buffett and Munger’s relative constancy over two decades is all the more remarkable when you consider the vast multiplication of scale that has occurred at Berkshire. spontaneously decide that they’re going to hold some meetings elsewhere and discuss whether this person who may be a perfectly decent individual.. really should be batting clean-up. but it’s a social animal. the biggest change being in his experience. Here are highlights from a chart in the book’s Epilogue. It would be based on a few broad general propositions: 1. absent that chief executive. Notoriously.harvard. I think you’re better off getting rid of the five and having him find something else to do in life and going out and acquiring an eight. you have to have regular meetings of evaluation  of chief executives. Because a board may be a legal creation. 2. resigned after buying stock in Lubrizol before pitching it as a Berkshire acquisition candidate. despite the variety of directorships and the importance of context. Most Essential Skills: business savvy and interest. If they are rump meetings or something of the sort—if they’re not regularly scheduled—there is just too much tension created. 4. I have never seen in those seventeen cases—and I’m not aware of it in other cases—where a question of mediocrity or worse and the evaluation of change has been made in the presence of a chief executive. If you get that first class chief executive—which is a top priority—he doesn’t have to be the best in the world. So. like compensation committee and audit committee functions. and independence of mind. a Berkshire troubleshooter who ran its energy business and was widely seen as a potential successor to Buffett. David Sokol. In the two decades since the symposium.law. 3. As I wrote in my annotation on this commentary in the Buffett Essays Symposium Transcript: Buffett is famously savvy at finding first class chief executives for Berkshire’s subsidiaries. The Pampered Chef. 2016 https://corpgov. Berkshire: 1996 v. Larson Juhl. I just have not seen it in corporate America. It just doesn’t happen. Greatest Challenge: conventional congenial boardroom atmosphere. But my experience is that you don’t turn a five into an eight.6/1/2016 The Buffett Essays Symposium: Annotated 20th Anniversary Transcript The first one: getting the first class manager. Best Solution: regularly scheduled periodic meetings of outside directors absent the CEO to discuss the CEO. You would need additional entries for specific tasks that became prominent in the last two decades. I think absolutely to have any chance of having that one solved. I don’t 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.

000 350.edu/2016/06/01/the-buffett-essays-symposium-annotated-20th-anniversary-transcript/ 3/3 .harvard. The wisdom enables making pithy guidelines like those extracted above for directors.000 $150.5 $20 Wholly-owned direct subsidiaries 15 60 Acquisition cost of direct subsidiaries <$5 >$170 Shareholders’ equity $25 $250 Float $7 $85 Directors 6 12 33.000 $200.law.000 Class A Share Price $35.6/1/2016 The Buffett Essays Symposium: Annotated 20th Anniversary Transcript (dollars in billions except per share amounts.000 40.000 Net earnings Employees Staying consistent through such radical change underscores the wisdom of the positions Buffett and Munger have staked. which Munger quoted at the symposium: “Everything should be as simple as possible. but not more so. They adhere to Einstein’s dictum.000 Employees at headquarters 12 25 Annual meeting attendance 7. many figures are averaged or rounded for salience) 1996 2016 Book Value Per Share $20.000 Market capitalization $60 $320 Book value of marketable securities $30 $120 Book value of operating assets $2 $500 $2.” https://corpgov.