Berkshire Hathaway 1996 Annual Meeting Transcript

Transcript of the 1996 Berkshire Hathaway Annual Meeting held on May 6, 1996 on Omaha, Nebraska:

(Click here to skip to the Q&A section)

(To see the full transcripts of all Berkshire Hathaway Annual Meetings on record, click here)

Meeting Start – Warren gives a short talk on how the meeting was organized and will be conducted

Warren Buffett:

Just a little early, but I think everyone’s had a chance to take their seats.

I must say, this is the first time I’ve seen this program. They told me they’d surprise me, and they certainly did.

Marc Hamburg, our chief financial officer, who is now known around the office as CB, was in charge of putting all this together. And we… I want you to know, we have no multimedia (this part of the audio is inaudible).

This entire meeting is handled by a regular staff. We have no public relations department, or investor relations, or multimedia department, or anything of the sort. So, everybody just pitches in. And Marc will, forevermore, be in charge of the pregame ceremonies.

We have a very large crowd today. I hope everybody has found a seat, either in this main room or in the three overflow rooms. I think we can handle around 5,400. And historically, 62 percent or just about exactly 62 percent, every year, of the people who request tickets have come to the meeting.

And if that percentage holds true today, we have just filled the rooms. And we will have a problem in the future, which we haven’t figured out the answer to yet. But we’ve got another year.

The way we’ll run the meeting is that we’ll get the business out of way… out of the way… at the start. And we’ll talk about the Class B issuance, then, too. So, it’ll take a little longer than historically has been the case.

And, then, we’ll have Q & A for… until about noon. We’ll have a short break at noon. There’ll be sandwiches outside, which you can buy.

And Charlie and I will have a couple of sandwiches up here at the podium.

And, then, we will stay around until about 3 o’clock to answer more questions. And at that time, after noon, I’m sure everybody in the overflow rooms will be able to find a seat here in the main room.

But people have come from great distances to attend this meeting. So, we really want to get a… give everyone a chance to get their questions asked. And Charlie and I are delighted to… but we’ll have to break it up at three, no matter what. But we’ll be delighted to stick around.

You can leave anytime, obviously. As I’ve explained in the past, it’s much better form to leave while Charlie is talking.

But the… feel free to do that. And then at noon you’ll get a chance to do it en masse.

We have buses available to take you to… if you have any money left at all after yesterday… to take you to other business establishments of Berkshire, locally.

So that will be the plan. I hope everyone does get their questions answered.

We’ve got a system where we break this room into six zones. And we have a couple of zones in other rooms. And then this afternoon, everybody will be able to be here in the main room. So, that is the procedure.

I’m sure you recognize Charlie Munger, the vice chairman of Berkshire Hathaway, who also had not seen that movie before.
And showed… we were… I think Marc was afraid to show it to us. But in any event… we will go on.

I thought you might be interested. This is a list of people that came in for tickets. And we had, in addition to 99 from Canada and, of course, the U.S., we had Australia, the Channel Islands, England, Greece, Hong Kong, Israel, Portugal, Puerto Rico, Singapore, Sweden, and Switzerland.

I’m not sure all of those people are with us today. But they did send for tickets. And I’ve met a number that did come in from a distance.

Introduction and election of directors

Warren Buffett:

So, with that introduction, I will call the meeting to order.

I’m Warren Buffett, chairman of the board of the directors. And I do welcome you to this meeting. I hope everybody has a good time this weekend.

And I’d like to introduce the directors, in addition to myself and to Charlie.

Now, you don’t get quite your money’s worth this year from our directors. They’ve… collectively, they’ve lost 100 pounds since last… our last meeting. I think they’ve been trying to live on the director’s fees.

We have with us Howard Buffett… let’s stand.

Susan T. Buffett.

Malcolm G. Chace III.

And Walter Scott Jr.

Along with us today are partners in the firm of Deloitte & Touche, our auditors, Mr. Ron Burgess and Mr. Craig Christiansen.

They’re available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire.

Mr. Forrest Krutter is secretary of Berkshire. He will make a written record of the proceedings.

Mr. Robert M. Fitzsimmons has been appointed inspector of elections at this meeting. He will certify to the count of votes cast in the election for directors.

The named proxy holders for this meeting are Walter Scott Jr. and Marc D. Hamburg. Proxy cards have been returned through last Friday representing, it says “number to come.”

Audience:

There’s another script.

Warren Buffett:

Ah, okay, there’s another… oh, yeah. Here’s the script on that one: 1,041,567 Berkshire shares to be voted by the proxy holders, as indicated on the cards. That number of shares represents a quorum. And we will therefore proceed… directly proceed… with the meeting.

We will conduct the business of the meeting, then adjourn the formal meeting. After that, we will entertain questions that you may have.

First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr. who will place a motion before the meeting.

Walter Scott Jr.:

I move that the reading of the minutes of the last meeting of shareholders be dispensed with.

Warren Buffett:

Do I hear a second?

Audience:

I second the motion.

Warren Buffett:

The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say, “Aye.”

Audience:

Aye.

Warren Buffett:

Opposed? Motion’s carried.

Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

Robert M. Fitzsimmons:

Yes. I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by first-class mail to all shareholders of record on March 8, 1996, being the record date for this meeting, there were 1,193,512 shares of Berkshire Hathaway common stock outstanding with each share entitled to one vote on motions considered at the meeting.

Of that number, 1,041,567 shares are represented at this meeting by proxies returned through last Friday.

Warren Buffett:

Thank you. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the two items of business provided for in the proxy statement, he or she may do so.

Also, if any shareholder that’s present has not turned in a proxy and desires a ballot in order to vote in person on those two items, you may do so.

If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish two ballots to you, one for each item.

Will those persons desiring ballots please identify themselves, so that we may distribute them?

First item of business at this meeting is to elect directors. And I’ll recognize Mr. Walter Scott Jr. to place a motion before the meeting, with respect to election of directors.

Walter Scott Jr.:

I move that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace III, Charles T. Munger, and Walter Scott Jr. be elected as directors.

Warren Buffett:

Is there a second?

Audience:

I second the motion.

Warren Buffett:

Are there any other nominations? Is there any discussion?

I learned a lot in China. We did so…

The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections.

Will the proxy holders please also submit to the inspector of elections a ballot on the election of directors, voting the proxies in accordance with the instructions they have received?

Mr. Fitzsimmons, when you’re ready, you may give your report.

Robert M. Fitzsimmons:

My report is ready. The ballot of the proxy holders received through last Friday cast not less than 1,040,667 votes for each nominee. That number far exceeds the majority of the number of all shares outstanding.

The certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting, will be given to the secretary to be placed in the minutes of this meeting.

Warren Buffett:

Thank you, Mr. Fitzsimmons.

Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcom G. Chace III, Charles T. Munger, and Walter Scott Jr. have been elected as directors.

Warren explains the reason behind the creation of the Class B shares

Warren Buffett:

The second item of business of this meeting is to consider the recommendation of the board of directors to amend the company’s restated certificate of incorporation.

The proposed amendment would add a provision to the restated certificate of incorporation authorizing the board of directors to issue up to 50 million shares of a new Class B common stock, with each Class B share having economic rights equivalent to 1/30th of a share of the current common stock, and with 1/200th of the vote, and to re-designate the company’s current common stock as Class A common stock and to make each share of Class A common stock convertible into 30 shares of the new Class B stock at the option of the holder.

I think, before we get into moving that motion… I think this would be a good time to have discussion and take your questions regarding the issuance of the Class B. And I should give you a little background.

I think many of you know the background on this. But over the years, we’ve had probably half a dozen people, one time or another, propose that the creation of an all-Berkshire investment company or unit trust.

In other words, an entity that would hold nothing but Berkshire stock, and then would parcel out its own shares in smaller denomination pieces to the public.

And we have generally discouraged that because we felt that there was considerable potential for abuse in such an arrangement.
And our discouragement has been successful up until last fall, when there was one… there were two proposals… that went as far as submission to the SEC for clearance, that involved unit trusts.

And these unit trusts would’ve owned nothing but Berkshire shares and, then, been sold to the public in small denominations, probably with a minimum investment of around a thousand dollars or so.

And holders of those trusts would’ve bought into an entity that had a defined life, but that had considerable, in the way of costs and some tax consequences, that they might not anticipate when they came in.

And Charlie and I were worried that a combination of Berkshire’s past record… which cannot be repeated… and high sales commissions, and a low denomination, and a lot of publicity about Berkshire and myself, which, as you’ve seen this morning, we attempt to discourage…

The… that the… a great many people would end up buying these unit trust holdings without any idea, really, of what they were buying, and with unrealistic expectations as to the future.

And that that would, in turn, create a considerable demand… because these unit trusts would go out and buy Berkshire shares… that would create a considerable demand against a fixed supply, much of which is almost unavailable because people have a low tax basis and are reluctant to sell, and I hope they’re reluctant to sell for other reasons.

And that the very action of the creation of these, and that push on the demand, would… might very well create some speculative spurt in the stock, which in turn, would induce people who had been approached about the trust to feel they were missing even more of a good thing by rushing in.

Rising prices in certain kinds of markets create their own kind of demand. It’s not a sustained demand. And it’s a demand that the reversal of which, later on, when people become disillusioned, can cause a lot of problems.

But that potential was there with a flood of buyers with unrealistic expectations, high commissions, and a fixed supply. So, we attempted to dissuade both of the promoters.

One backed away and then came out a few months later with something that was a combination of Berkshire and some other securities, which were at least thought to be in our portfolio.

And we started hearing from people that it was clear had no understanding of what they were buying, or the costs involved, or the potential tax implications, or anything of the sort.

So, at that time, we faced… we had to make a decision, and we had to make it rather quickly, as to what would be the best solution to this problem that, in turn, wouldn’t create the same sort of thing that we felt had potential harm when being done by these promoters.

Obviously, we considered a split of the stock. But we were worried that a split would send out signals to all kinds of people who want to believe in things that may not be too believable about future performance and that they would look at it as some grand chance to buy in at a lower price.

Of course, it wouldn’t really be a lower price in relation to value. But it would be a lower denomination.

And that, again, against a fixed supply, might very well have created the same kind of problem, maybe even a greater problem, than would occur with the unit trusts.

So, we came upon the idea of the Class B shares, which would create a supply that would match the demand for, in effect, split shares, and that would be offered in a way that did not create special inducements, or to create false inducements to people  thinking of buying.

And one of the things we did was we stuck a commission on it, on the issuance of the Class B shares, that was about as low as any I’ve ever seen in many years in Wall Street, because we did not want salespeople to have a great inducement… we… to go out and sell the shares.

We wanted anyone that was interested to read the prospectus, and think about it, and make their own decisions.

And we did another thing, which is quite counter to the normal commercial approach, which is that we said we would issue as many shares as people wanted to buy.

And, you know, you do much better in this world if you’re selling something, to say “only one to a customer,” and “you have to get in early,” or “you have to know somebody in order to get shares.” And many new issues are sold that way, and it’s very effective.

I mean, you know, it’s like those old stories in Russia where there’d be lines, and people would get in them without knowing what they were going to buy when they got to the front of the line.

And that’s a very effective selling tool. And it’s one that Wall Street is not unfamiliar with.

But we decided that, to reduce any of that feeling that you have to get in early, or only the big guy’s going to get it, or something of the sort, that we would announce loud and clearly that we would have shares available for everyone that wanted.

So, there was no reason to assume that… it couldn’t be a hot stock, in effect. And we’ve done various other things.

So, I… our hope is that the Class B shareholders that we attract are of the same quality as the people in this room, that they have an investment attitude where they feel they are buying into part of a business, that they expect to stay with it for the indefinite future, maybe the rest of their lives.

And they do not think of it as a little piece of paper that may be hot because it’s a new issue or something of the sort.

It lets the people who are happy with the present shares stay in exactly the same position, which is what I’m going to do, what Charlie will do.

We have made the B very slightly disadvantageous, in two respects, to the A. It has a lower vote, and it will not participate in the shareholder contributions programs.

There were reasons for both of those, but in addition to the… the explicit reasons, there also is the desire that the B not be made fully… it’s just a slight bit inferior…but it’s not fully as attractive as the A, because we did not want to do anything that pushed everybody into converting into the B.

If that started in a big way, the B would then enjoy the better market, and it would create its own dynamic where it made sense for everybody to do it.

So we have left it so there’s no reason for you, if you own the A, to convert to the B, unless you wish to sell or give away some portion of your holding that would be less than a full A share.

And it will be convenient for that reason. But beyond that, there should be no incentive.

If the B should trade slightly above 1/30th of the price of the A, there will be arbitrage activity that will keep that from being anything other than a negligible amount.

It, of course, could trade well below 1/30th because the B is not convertible into the A.

Charlie, would you like to add anything before we start taking questions on this? And I…

Charlie Munger:

No.

Warren Buffett:

…I encourage everyone to ask.

Charlie, as you will note during the meeting, does not get paid by the word.

But we… I encourage every… anyone to ask any question. There are no bad questions about this. I mean, it… last year, we talked about a preferred issue. And people had very valid questions.

I might take those two points of difference between the A and B, just to start with, on the shareholder-designated contributions program, which was $12 a share last year.

In addition to wanting the A to have a very small edge over the B, which would be a reason for not having the B participate, it also would get very impractical, in terms of taking $12, and dividing it by 30, and soliciting the names of charities and to designate contributions.

We can handle the present program fairly efficiently. But we would not want to be sending out checks for a dollar or two, and it would get very inefficient.

So, we have told prospective B holders that that’s not going to happen. And so, they’re fully informed coming in.

In connection with the vote, the issuance of the B does create more votes outstanding. So, absent any change in the situation, through the issuance of shares which we are not particularly eager to issue, the vote… my vote… will be diluted, somewhat, by this.

And, frankly, I had no desire to create a lot more shares which would dilute the vote of the Buffett family. It will be diluted, somewhat, by this action because we will have all the present votes outstanding, plus some votes from the B.

If there is a lot of conversion to the B, it is true that our holding will go up, percentage-wise. But I see no reason why people really should convert. So, I don’t think that’s likely. I think, in the end, it’ll stay very much the same.

And as I mentioned earlier, we want there to be a slight disadvantage to the B.

In all other respects, we will treat the B just as the A. We have a problem with numbers at this annual meeting. We’re going to have to do something next year. And we haven’t figured it out yet, either.

But the suggestion was made by someone that maybe the B would get second-class seating or something. We’re not going to have any of that.

But from this point forward, with the point… with the exception of two things we put in the prospectus, the B shares will be treated, in every way, as equivalent to A. There…

So, with that, and with Charlie’s reluctance to elaborate, we have a six-zone system in here.

And then we have another two zones in the overflow rooms.

So, if there are any questions in zone 1, somebody… just raise your hand and somebody will bring a microphone.

Zone 1 is over there. Two is back in the corner. Three, four, five, and six. So it just goes right around clockwise. Just raise your hand and somebody will bring a microphone to you.

Q&A – Regarding Berkshire’s plan to issue class B shares

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1. Everybody will be paying the same price for the Class B shares.
2. Why Warren wants to discourage Berkshire unit trusts.
3. Berkshire shares are not undervalued.
4. Warren have no immediate plan on how to use the proceeds from the issuance of class B shares.
5. The creation of the class B shares is meant to discourage unit trusts.
6. Berkshire will not be directly offering the new class B shares (Salomon is the designated underwriter).
7. Warren is not aware of any mutual fund holding only Berkshire stock.
8. Symbol for the new class B shares.
9. What would happen if the demand for the class B shares is greater than expected?
10. The general questions will be answered later on in the meeting.
11. The issuance of class B shares will not hurt holders of the class A shares.
12. It won’t be possible to match previous gains even with the proceeds from issuance of the class B shares.
13. Warren doesn’t see a reason for a spike in the stock price after the issuance.
14. Issues with safety are unavoidable as Warren becomes more and more popular.
15. The class A shares will forever be convertible to class B shares.
16. How a class A share can be converted to class B shares.
17. The reason behind the 1-to-30 conversion ratio of the class A and class B shares. 
18. The new class B shares will increase the book value of Berkshire.
19. Warren and Charlie each have a different range of what Berkshire’s intrinsic value is, but they are close.

Berkshire shareholders approve the new class B shares

Warren Buffett:

We do have questions now from zone 7 and 8 in the other room. So, we’ll take on zone 7, please.

Audience:

I guess you’ve answered our questions in seven.

Warren Buffett:

Oh, took care of zone 7. How about zone 8?

Audience:

No questions from zone 8.

Warren Buffett:

Oh, okay.

I think, at this point, we can move on to general questions after we have this vote.

And then, if you have another question or two that comes up during the general question and answer period, I’ll be glad to… we’ll be glad to work those in at that time.

So, we are now at the point: is there a motion to adopt the board of directors’ recommendation?

Walter Scott Jr.:

I move the adoption of the amendment to the fourth article of the restated certificate of incorporation that’s set forth in exhibit A of the company’s proxy statement for this meeting.

Audience:

I second the motion.

Warren Buffett:

The motion has been made and seconded to adopt the proposed amendment to the certificate of incorporation. It says here, “Is there any discussion?” but I’m not going to say that. We are ready to act upon the motion.

If there are any shareholders voting in person, they should now mark their ballot on the proposed amendment to the certificate of incorporation and allow the ballots to be delivered to the inspector of elections.

Would the proxy holders please also submit to the inspector of elections a ballot on the proposed amendment, voting the proxies in accordance with the instructions they have received?

Mr. Fitzsimmons, when you’re ready, you may give your report.

Robert M. Fitzsimmons:

My report is ready. The ballot of the proxy holders received through last Friday cast not less than 970,495 votes in favor of the proposed amendment. That number far exceeds the majority of the number of all shares outstanding.

The certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett:

Thank you, Mr. Fitzsimmons.

The amendment to the certificate of incorporation, as set forth in exhibit A to the proxy statement for this meeting, is approved.

After adjournment of the business meeting, I will respond to questions that you may have that relate to the business Berkshire but do not call for any action at this meeting.

Anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Walter Scott Jr. to place a motion before the meeting.

Walter Scott Jr.:

I move this meeting be adjourned.

Audience:

I second the motion.

Warren Buffett:

The motion to adjourn has been made and seconded. We will vote by voice.

Is there any discussion? If not, all in favor say, “Aye.”

Audience:

Aye.

Warren Buffett:

All opposed say, “No.” The meeting’s adjourned.

Q&A – Morning Session

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1. How Warren would calculate the value of Berkshire A shares.
2. Repurchasing shares above a rationally calculated intrinsic value will harm the shareholders.
3. The new B shares won’t dilute the earnings or value of the A shares.
4. In the banking business, anything you do can be copied by competitors.
5. The impact of GEICO on the rate of growth of Berkshire’s insurance float.
6. At least 80 percent of Berkshire’s businesses are carried on the books at considerably less than what they’re worth.
7. The newly issued B shares will not affect the price of the A shares.
8. The future of World Book.
9. Warren and Charlie is praised for their tremendous integrity.
10. The class B shares are better than Berkshire unit investment trusts.
11. The insurance business is probably the most important business that Berkshire owns.
12. Berkshire’s intrinsic value does not exceed the current stock price.
13. Why street name shares are not able to participate in the Berkshire charitable contributions program.
14. Why there’s no “look-through” earnings on the annual report.
15. What rate should be used when discounting future earnings in calculating a company’s intrinsic value.
16. Will See’s Candies produce and sell fat-free candies?
17. Why the remaining 50% GEICO shares was purchased at a premium of the market price.
18. The newspaper business is not as great as it once was, but it is still a good business.
19. What Warren looks for when reading annual reports.
20. Berkshire is a two-man show in terms of capital allocation.
21. Warren doesn’t answer one-on-one questions.

Conclusion of morning Q&A session

Warren Buffett:

Thanks. It’s noon now. And I’d like to give everybody a chance to visit our other stores and everything. But we will be back here at 12:15.

Q&A – Afternoon Session

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1. Warren neither recommends selling nor buying Berkshire shares.
2. On Bill Gates and American Express’ declining market share.
3. How to identify good management.
4. Charlie: Much of what’s being taught in modern corporate finance courses is twaddle.
5. Every industry, at all times, is interested in downsizing or becoming more efficient.
6. The effect of tremendous amounts of new capital going into reinsurance carriers on the insurance business in general.
7. No plan to diversify and internationalize the insurance business.
8. Borsheims is still doing very well.
9. The USAir investment has considerably improved but fundamental problems are still there.
10. Highly unlikely that the newspaper businesses will go the way of Blue Chip Stamps.
11. On the intrinsic value of the insurance business.
12. Freddie Mac is still a very good business but has become slightly more risky.
13. When to invest on great companies. 
14. Invest in companies you can understand.
15. Berkshire will not disclose more than what is necessary.
16. Y2K is not the kind of problem Warren worries about.
17. Berkshire’s businesses are far easier to predict than most businesses.
18. The most important person at Disney in the last 12 years has been CEO Michael Eisner.
19. Securities businesses are a tough business to manage.
20. Warren and Charlie will never try to predict the market.
21. Where a business is based is not important.
22. All of Berkshire’s cash is invested.
23. Earnings in Salomon will almost always be volatile.
24. Warren doesn’t interfere with how Berkshire’s subsidiaries are managed.
25. The effect of Lloyd’s problems on Berkshire’s insurance or reinsurance business.
26. In running Berkshire, Warren and Charlie assumes they’ll be around forever.
27. On rewarding and charging subsidiaries for releasing/keeping their excess capital.
28. Michael Eisner (Disney CEO) has proven himself very good at understanding what Disney is really all about.
29. Warren and Charlie’s book recommendations.
30. Berkshire’s market share in the super-cat insurance business.
31. There will be a lot of inequality of ability, but what you don’t want is an inequality of opportunity.
32. The competitive position of Wells Fargo.
33. How recent acquisitions doubled the revenue of Berkshire.
34. Lou Simpson has done a fabulous job running the investments of GEICO.
35. Warren will not sell Berkshire’s “permanent holdings” regardless of the price offered for them.
36. Warren shares his thoughts on the chances of Bill Gates being on Berkshire’s board.
37. Not all businesses with “float” are good businesses. To read more about what float is, click here.
    
38. Why the market of the class A shares will be “somewhat” more liquid than that of the class B shares. 
39. The corporate return on equity will not stay 20 percent.
40. Warren sometimes makes personal investments on opportunities that are too small for Berkshire to invest in.
41. Berkshire is not going to continue making 23.6% annual returns in the future.

End of Q&A

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