Berkshire Hathaway 2003 Annual Meeting Audience Question # 49

Warren and Charlie shares their thoughts about the increasing tort spending in the United States

Warren Buffett:

Number 9.

Audience Member:

My name is Vic Cunningham. I’m a shareholder from Wilton, Connecticut.

I heard your comments earlier about popping off. But actually, I find it admirable the way you guys, the two of you, have leveraged your clout as investors to be advocates for change.

You know, your outspoken comments on expensing stock options promoted, you know, productive discussions, in not only corporate boardrooms throughout this country, but more importantly on Capitol Hill.

Currently, tort spending in this country continues to rise as a percentage of GDP, and I would argue a lot of that’s unproductive spending.

Is there a point… and it seems like right now that, you know, they’re trying to stretch their tentacles, not only from, you know, tobacco companies but to consumer product companies like McDonald’s and possibly even Coca-Cola.

Is there a point where you would use your considerable clout to try to guilt Congress into moving towards some kind of comprehensive tort reform for this country?

Warren Buffett:

Well, I’m sympathetic to the… what you’re saying. I would say that our considerable clout is nothing compared to the clout of the plaintiffs’ lawyers.

There’s no question that… in a certain way, it’s appalling when you look at the frictional costs to society of the tort system we have.

But Charlie is a lawyer. He can probably speak much more intelligently than I can as to how you could modify this, because there are plenty of things wrong, too.

I’ve… I mean it’s sort of infuriating to see specious shareholder suits raised on, you know, any kind of a deal, just because there’s a lot of DO… D&O insurance… and they know people will pay off rather than go through the nuisance of a suit.

And we never… we don’t pay off… but corporate America does. And so, it’s a game.

And the people that pursue that activity, you know, are not pursuing it, I think in many cases, because of a great pursuit of justice, but because it’s a damn profitable sort of game.

And, you know, the people that are paying. It usually doesn’t come out of their own pocket, so it gets back to that… the lack of parity in the interest of the people on both sides.

But then, when I look at some of the things that have happened in corporate America, I certainly don’t want to get rid of the plaintiffs’ lawyers either… entirely… because I think some terrible things have happened and I think people should pay.

I just wish the people paid rather than the D&O carriers, because when a D&O carrier pays, or when a company pays, it… the costs get socialized, and the people that did the wrong things seldom pay out of their own pockets.

I… Charlie, what… tell me, how do we improve the tort system?

Charlie Munger:

Well, if you define the tort system to include the workmen’s compensation system, which I would, you get terrible abuses.

In California, Costco has about one-third of its employees and two-thirds of its workmen’s compensation expense.

California is an institutionalized fraud. Fraudulent chiropractors, fraudulent lawyers, fraudulent what have you. And they put this enormous burden on business. And of course, eventually the jobs will leave.

I had a friend who took a plant away from Texas where he had workmen’s compensation expense of 30-odd percent, and took it to Ogden, Utah, where it went to 2 percent.

So fraud, allowed to run, builds on itself. And then you’ve got all these lawyers and lobbyists who like the fraud. And chiropractors and God knows what.

And so, it’s a major problem. And in California, it’s gotten so bad that my guess is there will be some reform, even with the two-thirds Democratic legislature.

Warren Buffett:

What would you change, in terms of the shareholder situation?

Charlie Munger:

Well, that’s harder, because if you take the worst of the plaintiffs’ lawyers, half the time they’re suing somebody that’s behaved terribly.

Now, they’re suing in a process where a lot of money is paid out, as you say, on a socialized basis, and doesn’t really go to the people that were hurt. So, they’re like a public scold that gets paid an enormous sum out of the public.

But certainly, a lot of the defendants in these cases that are screaming about the plaintiffs’ bar have done some very regrettable things. So, I think that gets very hard to figure out what should be done.

The present system is crazy, and I don’t know how I’d improve it. You could easily improve it if you could count on government being rational and fair, but how do you do that?

Warren Buffett:

Would you do anything toward making the people who are defendants in D&O situations pay any portion of it themselves or not?

Charlie Munger:

I think there would be a great improvement, net, in Omaha… in America… if there were no D&O insurance. Zero. I think people… would behave a lot better.

The counterargument is you’d never get anybody with any money who was willing to serve on a board. But my guess is that, net, even after taking into account that little problem, the system would work better than the present one.

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