Berkshire Hathaway 2006 Annual Meeting Audience Question # 5

The upsides and downsides of majority voting in the board room

Warren Buffett:

Number 5?

Audience Member:

Warren and Charlie, I want to thank you for putting a once obscure Midwestern city on the map last year with your acquisition of Pete Liegl’s company, Forest River.

I’m Frank Martin from Elkhart, Indiana, the RV capital of the world. I also want to thank…

Warren Buffett:

Glad to have you here, Frank.

Frank has just brought out a book, incidentally, that’s a history of some of his annual letters. It’s a good book, and I recommend you get it (“A Decade of Delusions: From Speculative Contagion to the Great Recession” – you can get a copy of the book here).

Audience Member:

Thank you, Warren.

I also want to thank you for your influence over Robin Williams and other Hollywood stars.

Those of you who have seen the movie “RV” realize that Warren will go to no ends to promote the products of the companies he acquires.

Warren Buffett:

A few people have already noticed that, actually, Frank.

Audience Member:

On a more serious note, there’s a small but growing trend in American business governance to move from plurality voting for directors to majority voting, long the standard in Great Britain.

What do you see as the upside and downside of majority voting, as it relates to raising the standard of ethics in the corporate boardroom?

Warren Buffett:

Charlie, you want to take a swing at that?

Charlie Munger:

I don’t think it’ll have any effect at all on ethics in the corporate boardroom.

There get to be fashions in the governance subject. I think that the troubles in American corporations are not going to be fixed by something like that.

All these reforms have to be considered in the light of the kind of people that are likely to be activist in using new powers, and that crowd is a mixed crowd, to put it gently.

Warren Buffett:

The question in the boardroom is to what extent… and you have to understand, it’s partly a business situation; it’s partly a social situation.

The question is to what extent do the people that are participating there think like owners, and whether they know enough about business so that even if they’re trying to think like owners, that their decisions will be any good.

And Charlie and I have been on boards of companies with dual voting. Berkshire has that, although it’s so minor that it doesn’t really make any difference. But we’ve been on other boards.

I have never really seen any difference in behavior based on the nature of the votes that got them into the boardroom.

But there’s an enormous difference… I think you’d be blown away if you watched boardrooms over the years… there’s just an enormous difference in terms of, really, the business savvy of the people in the room, the degree to which they are thinking like owners as they go along.

And I’ve seen no… I don’t know that dual voting or the lack of dual voting really is going to have very much to do with that.

The key… I’ve mentioned it in the past… there’s all these fashions, as Charlie says, in corporate governance.

But the job of the board is to get the right CEO, to prevent that CEO from overreaching. Because sometimes you have some people that are very able, but they still want to take it all for themselves.

But if they take nothing and they’re the wrong CEO, they’re still a disaster. So low pay itself is not the criteria.
So you want the right CEO. You do not want them overreaching.

And then I think the board needs to exercise independent judgment on important acquisitions, because I think CEOs… even smart CEOs… are motivated, frequently, in acquisitions by other than rational reasons.

And in those three areas, you know, American directors have… I don’t think they’ve given a tremendous account of themselves in recent years, whether at dual system places or otherwise.

The only cure to better corporate governance, in my view, is that the very large shareholders start really zeroing in on whether those questions I just mentioned are being addressed properly.

If they go on to all these peripheral issues, you know, they have a lot of fun and they get in the papers. You know, they have little checklists and they can issue grades and all that. It isn’t going to do anything in terms of making American business work any better.

But if the eight or ten largest shareholder groups, if the really large institutional investors say, you know, “This compensation plan doesn’t make any sense and we’re not voting for the directors, and here’s why we’re not voting for the directors,” you’d get change. But so far, they’ve been unwilling to do that.

It takes the big shareholders. It’s not going to be done by any coalition of small shareholders or people sticking things on ballots.

But the big shareholders of this country, you know, basically they… some of them farmed out their voting, even.

I was amazed to find that out, that a number of very large institutional investors have actually just turned their voting process over to somebody else. They don’t want to think like owners. And, you know, they bear… we all bear… the penalty for that.

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