Berkshire Hathaway 2007 Annual Meeting Audience Question # 4

Corporate jets can be a valuable business tool but like all corporate benefits, it can be misused

Warren Buffett:

Let’s go to number 4.

Audience Member:

Yes. Good morning. I’m Rob (the audio on this part of the video is inaudible). I’m from the UK, and I traveled from Switzerland to be here today.

This is a question that Charlie will like. There’s a study by David Yermack that companies with private jets underperform their peers by 4 percent.

What is the yardstick that you use to judge whether people are good stewards of money… management?

Warren Buffett:

Did he direct that to you, Charlie?

Charlie Munger:

Well, he referred to private jets being a possible indication of executive excess.

I want to report that we’re solidly in favor of private jets.

Warren Buffett:

We even pay for them ourselves.

Charlie used to only… he traveled on the bus, and only then when they offered a senior citizen’s discount.

But in recent years I’ve shamed him into getting his own NetJets share… I have my own… I have two NetJets shares.

Actually, Berkshire is significantly better off in a number of its businesses, and including at the corporate level, because we use corporate jets.

I don’t know which deals wouldn’t have been made, but I do know that… excuse me… I would not have had the same enthusiasm for traveling thousands of miles to go after deal after deal and so on.

And I see what it produces at our… a number of our other businesses. So it has been a valuable business tool.

It can be misused like anything else. I remember many, many years ago, we owned stock in a public company, and the CEO stopped off in Omaha on the way to see me, and he explained that they use some grocery chain in Idaho or something to be sort of their test case on all new products.

And they would go visit it because they also had this lodge out there. I mean, you can abuse any system. But properly used, I would say that corporate jets have been a real asset to Berkshire.

I would go back to this comp question just one second, too.

I mean, comp is not rocket science. I mean, we have very simple systems that compensate those people whose pictures you saw during the movie.

They’re terrific people. We compensate them based on things that are under their control and that we care about. And we don’t make it complicated, and we don’t pay them for things that are happening that they have nothing to do with.

I mean, we talked last year about what you do in a commodity business like copper, oil. I mean, if oil goes from $30 to $60 a barrel, there’s no reason in the world why oil executives should get paid more for what’s going on. They didn’t get it to $60 a barrel.

If they have low finding costs, which is under their control, and which is important, I would pay like crazy for that, because a person who finds oil and develops reserves at $6 a barrel is worth a lot more than somebody that finds and develops them at $10 a barrel, assuming they’re similar quality reserves.

That is the job that you hire the person for. But the price of oil, they’ve got nothing to do with it, and to hand them huge checks because oil goes up or to cut them back because it goes down… if oil went down and somebody had the lowest finding costs that was working for us, we would pay them like crazy.


Charlie Munger:

Yeah. Well, I’d like to go back to that corporate jet thing.

If the trappings of power are greatly abused, I think you would find a correlation that some of those companies would be disappointing to investors.

And, you know, man has known for a long time that getting too enchanted with the trappings of power is counterproductive.

The Roman emperor that’s most remembered as presiding over a period of great felicity was Marcus Aurelius, who was totally against the trappings of power even though he had them all… he had all the power.

So I think all these things can be abused, and I think the best way to tackle a subject is to provide examples of contrary behavior.

Warren Buffett:

Charlie, have a (the audio on this part of the video is inaudible)

Charlie Munger:

I think I’ll go over here.

Warren Buffett:

This is our idea of corporate benefits up here, lots of fudge, lots of peanut brittle. I recommend the diet to everyone.

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