Berkshire Hathaway 2009 Annual Meeting Audience Question # 46

How to correct the problem of excessive executive compensation

Warren Buffett:

OK, area 11.

Audience Member:

Hi, Ralph Witkin from Greenwich, Connecticut. I was first here in 1995. And I really appreciate the way you handle this meeting.

I’ve been to dozens of others. And I know you’re not obligated to do this. And I thank you for it, both of you.

My question is very similar to number 9′s, regarding executive compensation.

Not so much your view on the compensation, but how we, as shareholders, can make some attempt to try to correct this and bring it back into some level of balance. Thank you.

Warren Buffett:

I had a senator call me just the other day. And, his constituents, obviously, are enraged about executive comp.

Probably… you know, AIG really had a huge impact, although, you know, you can take the Merrills and all the rest of them, also.

But that story was huge with people.

And it was probably… in a certain sense, the outrage was disproportionate to what happened. But in any… it doesn’t make any difference. The people are enraged about it.

So this senator called me. And he said, you know… he was essentially saying, “Tell me about a statute we can enact that will make my constituents happy about executive compensation.”

And my advice to him was that he probably couldn’t, and that the last time Congress got into this was in the early days of the Clinton administration, when they passed a bill that said, as I remember, for the top five officers, that you couldn’t get deductibility for comp in excess of a million dollars annually, unless it was tied to performance in some way.

That was probably the most counterproductive piece of legislation that Congress has ever come up with, which is quite a statement to make in itself.

The net result of that was that when the tax was imposed, of course, the stockholders paid it and the officer didn’t. So it penalized the shareholder, who was already getting penalized by the comp.

It led to all kinds of arrangements that were designed to dance around this, which involved lots of lawyering and lots of consultants and lots of pages of proxy statements, the net effect of which was to ratchet up compensation very dramatically. Compensation increased far more, in my view, because that was put on the books than otherwise.

So I suggested to him that the first thing they would do… should do… is probably repeal that and say, “We were wrong,” and then figure out whether they should do something right. But that did not go over very well.

So I would say that… I’ve always proposed this. It never has gone anyplace. But that won’t stop me from continuing to propose it.

All you need in this country is the top half dozen or so investment managers who manage, you know, we’re talking hundreds of billions, trillions, in some cases, of assets.

If they would just speak out on the most egregious cases. Just… you know, there’s a lot of stuff about “say on pay” and everything.

But half a dozen of them, they get lots of publicity… they wouldn’t have to worry about getting their views out.

The way they get big shots to change their behavior is to embarrass them, you know, basically. And the press has great opportunities to do that. And… but they need the cooperation of the big investors.

So if you’ve got three or four of the biggest investors, when the XYZ Company comes out with some crazy plan, to step up and just say, “This is outrageous,” it would change behavior. And it would…

The directors don’t like to look foolish. They don’t like their names in the paper looking foolish. And you would see some real changes.

I think that the legislation for it is going to be… I just don’t know how to write the stuff, you know?

I mean, you read the case recently at Chesapeake Energy, you know, $75 million for kind of a re-signing bonus and some… there were some other things involved, too.

I mean, it just… you wonder what people are thinking. You know what the CEO is thinking. And it just… I don’t think you can write the statute that stops it. And like I said, the one they tried to write just screwed everything up royally.

But I do think big institutions… if they spoke out… you’d only need three or four of them that spoke out jointly. And they don’t have to do it on every corporation at all, just when it’s egregious enough.

But if they get a reputation for speaking out when it’s egregious, every now and then, it would act as… I think there would be some restraining factor that might set in in corporate America. Because the restraining factor is not there then… not there now.

I mean, right now, every consultant comes in and brings along what the people at so-called pure companies are making. And they…

Nobody wants to say their CEO is in the bottom quartile or something. So they just keep comparing themselves to the higher quartiles. And then they ratchet up from there.

And, you know, it’s a game that works wonders. I call it the honor system. You know, the shareholders have the honor and the executives have the system.


Charlie Munger:

Yeah, well, I don’t… I’m not too optimistic about fixing it from the big investor standpoint.

The big investor groups contain many an investment manager making $20 million a year for insignificant contributions. He’s like a man in a glass house that starts throwing stones.

And the public pension funds are dominated, in many cases, by left-wing politicians and by labor unions who tend to have an agenda of their own that doesn’t really relate to good management. So, sometimes, the cure is worse than the disease.

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