The Buffett Essays Symposium: Annotated 20th Anniversary Transcript

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 20th 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:

The first one: getting the first class manager. 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. It just doesn’t 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 sort—if they’re not regularly scheduled—there is just too much tension created. Because a board may be a legal creation, but it’s a social animal. It is very difficult for a group of people without a very strong leader to all of a sudden, 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.

So, I think there should be a lot of emphasis on process in terms of evaluation of a CEO. 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. I just have not seen it in corporate America.

If you get that first class chief executive—which is a top priority—he doesn’t have to be the best in the world, just a first class one. 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. But my experience is that you don’t turn a five into an eight. 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.

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 specific tasks that became prominent in the last two decades, like compensation committee and audit committee functions, but these would be equally simple (e.g., don’t serve on the former unless you can personally negotiate terms).

Buffett’s commentary remains equally valid, the biggest change being in his experience. 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. 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 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. Here are highlights from a chart in the book’s Epilogue.

Berkshire: 1996 v. 2016

(dollars in billions except per share amounts, many figures 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
Net earnings $2.5 $20
Wholly-owned direct subsidiaries 15 60
Acquisition cost of direct subsidiaries <$5 >$170
Shareholders’ equity $25 $250
Float $7 $85
Directors 6 12
Employees 33,000 350,000
Employees at headquarters 12 25
Annual meeting attendance 7,000 40,000

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 Einstein’s dictum, which Munger quoted at the symposium: “Everything should be as simple as possible, but not more so.”

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