Berkshire Hathaway 2012 Annual Meeting Transcript

Transcript of the 2012 Berkshire Hathaway Annual Meeting held on May 5, 2012 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)

Introduction and meeting agenda

Warren Buffett:

Good morning. I’m Warren, and this hyperkinetic fellow is Charlie.

And we’re going to conduct this pretty much as we have in the past. We’ll take your questions, alternating among the media and analysts in the audience until 3:30, with a break around noon for an hour.

And then we’ll have the regular meeting of the shareholders beginning at that time. Feel free to drift away and shop in the other room. We have a lot of things for you there.

Group photo with See’s candy lollipop

Warren Buffett:

We only have one scripted part of this meeting, and See’s Candy has placed on all of the seats a little packet.

And what we’d like you to do, we’re going to like… we’d like to videotape everyone eating their pop at the same time for posting on Facebook and for use by the media in today’s meeting.

So, if each of you will open up the lollipop now.

Now, first of all, you’ve got them open. We’d like you to hold them up above your head. We’re going to get a shot of 18,000.

Dennis, here we come. And we’ll get a few shots of that.

We got it all, Mele?

OK. And now you can take off the cover and the good part comes, and Charlie and I have… we have fudge up here and we have peanut brittle.

And I said the meeting would run until 3:30. If we’ve consumed 10,000 calories each, we sometimes have to stop a little early at that point.

Berkshire’s first quarter earnings

Warren Buffett:

The only slide we have at this point is we did put out our earnings… first quarter earnings… yesterday.

And in general, all of our companies are… with the exception of the ones in the residential construction business, which was the case last year and it’s the case this year… that all of the companies, except those in that area, pretty much have shown good earnings.

And in the case of the bigger ones, the five largest non-reinsurance companies earned… all had record earnings last year, aggregating of those five companies something over 9 billion pretax.

And in the annual report I said I thought they would… if business didn’t take a nosedive this year… that they would earn over $10 billion pretax this year. And certainly nothing we’ve seen so far would cause me to backtrack on that prediction.

The insurance… if you read our 10-Q and turn to the insurance section, you will see that there was an accounting change mandated for all property-casualty insurance companies, which… rather technical and I won’t get into the details of it… it changed something that’s called the deferred policy acquisition cost, called DPAC.

It has no effect on the operations at all, on the cash, but it did change the earnings downward by about $250 million pretax for GEICO in the first quarter. It’s based on whether you defer some advertising.

It has… GEICO had a terrific first quarter, had a real profit margin of almost 9 percentage points, and the float grew, and everything good happened at GEICO in the first quarter. We had good growth.

But we did make that accounting change. That accounting change also affects, to a lesser degree, the second quarter, and it may even trail just a bit into the third.

But the underlying figures are somewhat better than the figures that we’ve presented there.

And so, overall, we feel good about the first quarter. We feel good about the year.

Warren introduces Berkshire’s board of directors

Warren Buffett:

Maybe we should… even though we’ll do it again at the meeting… but we should probably introduce the directors. And I don’t know whether the audience can see the people here but if you can turn up the lights or something so they can.

We’ll start off, of course, with Charlie, Charlie Munger. And then alphabetically… if the directors would just…

I was going to suggest that you withhold your applause until the end, but I know he’s sort of irresistible, so we’ll make an excuse for him.

For the remainder of the directors, if they stand and remain standing, and then you can applaud them at the end, if you will.

We’ve got Howard Buffett, Stephen Burke, Susan Decker, Bill Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott, Jr.

Now you can go wild.

Q&A Guidelines

Warren Buffett:

Now we’ll start with the questions. And what we will do is we’ll start over here with the media…with one of them… move to one of the analysts, and then move to one of the shareholders, and we’ll go by stations with the shareholders.

And if we get… sometimes we’ve had as many as 60 or 62 questions.

If we get to 54, at which point each person on the panel here has had a shot at 6 questions, then from that point on we’ll do nothing but the… but from the shareholders from 54 on.

So we’ll see how that goes.

Q&A – Morning Session

(Click on a link below to skip to a particular topic)

1. Warren is the chief risk officer at Berkshire and his successor will also have the same role.
2. Is there a difference in basic assumptions and trends for things like mortality rates among Berkshire’s insurance businesses?
3. Warren and Charlie is not spending much time giving advice to China.
4. Berkshire will never make any announcement that its stock is selling considerably above intrinsic value.
5. The ideal conditions for Berkshire to do a share buy-back.
6. American banks are in much better shape than European banks.
7. MidAmerican will never really benefit or be penalized too much by the price of coal.
8. Warren doesn’t see the adaptation of telematics by a competitor threatening GEICO is any way. 
9. Warren: business schools teach a lot of nonsense about investments.
10. What is the “Buffett Rule”?
11. It’s very hard to know when you have had a trend of increased frequency of major catastrophes.
12. Wind power wouldn’t work without subsidies.
13. Don’t let political views affect your investment decisions.
14. Warren and Charlie would prefer not to use any Berkshire stock to fund acquisitions.
15. Charlie: “You can’t bring a lot (of jobs) back if it never left.”
16. How Warren is feeling.
17. Berkshire is not going to assume anything better than the risk-free rate when making bids for annuities. To learn more about annuities, click here.
18. What Warren would do if he had the chance to start all over again.
19. The beauty of stocks is they do sell at silly prices from time to time.
20. Warren and Charlie have never considered macroeconomic affairs when buying a stock or a business.
21. The big subsidiaries of Berkshire have done well over the last 5 years.
22. Berkshire will not have big exposures in derivatives.
23. Warren values Berkshire’s many subsidiaries differently.
24. It’s very hard for an unproductive investment to beat productive investments over any long period of time.
25. Warren assures a shareholder that all his best ideas are in Berkshire.
26. Warren prefers all of Berkshire’s excess cash to be in the holding company.
27. Would Warren consider increasing Berkshire’s stock price by offering dividends or a promised percentage of cash earnings?
28. Why newspapers are not as important as they used to be.
29. Amazon could affect some of Berkshire’s other retailing operations but it won’t affect the Nebraska Furniture Mart.
30. Warren: It would be almost impossible to copy Berkshire.
31. Warren and Charlie have rarely used the shares they own in other companies to vote against the management.
32. It’s very hard to find good commercial insurance or reinsurance companies.
33. Has Warren considered being more flexible in the price at which Berkshire will buy back its stock?
34. The Mexico Bribery Scandal doesn’t change the fundamental dynamic of Walmart. To read more about this scandal, click here.

Lunch break and an update on Warren’s bet against the hedge funds

Warren Buffett:

OK, we’re at noon, roughly.

I made this bet four years ago with a group at Protege Partners about the S&P versus… or an index fund… versus five funds of funds. And I told them at the time I’d put up the results every year.

And as you can see… I can’t see it from here, but the first year they… it was a huge down year. And as you might expect, just like us, we beat the S&P a lot in a down year and the last three years, the S&P has beaten them, but we’re still a tiny bit behind the hedge funds at the end of four years.

There’s six years to go. You might find it interesting, we each bought a zero-coupon 10-year bond so that there would be $1 million to go to the charity of… selected by either them or by me, depending on who won the bet… and that zero-coupon bond has performed magnificently, much better than Berkshire.

We should have bought nothing but zero-coupon bonds. But the zero coupon bond, because interest rates are so low, you know, is practically selling at par, so we have petitioned the stakeholder in this case… and I don’t think we’ve heard yet… but to let us sell the zero- coupon bond and put the money in Berkshire. And I’ll guarantee them that it will be worth more than a million bucks at the end of 10 years.

But so far, the best thing you could have done was ignored both of us and just looked at where we were putting the money.

And I will keep you up to date on this bet as we go along and we’re having a lot of fun.

We’ll come back in an hour, and then we’ll go till 3:30, and then we’ll have the business of the meeting.

Q&A – Afternoon Session

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1. Gen Re was off-track when Berkshire bought it.
2. Why Berkshire will still have its unique culture and structure when Warren is no longer around.
3. Cash-consuming businesses are unattractive unless they can earn a reasonable return.
4. The future outlook of Berkshire’s insurance “float”.
5. It pays to stay away from declining businesses.
6. What to avoid and stay away from in the investment world.
7. Berkshire is a “million miles away” from personal holding company and investment company status.
8. China already got some great companies.
9. Warren on Apple and Google: “I wouldn’t want to buy either one of them” “but I sure as hell wouldn’t short them, either”.
10. Economics usually win out versus political process.
11. A better way to compare Berkshire with the S&P 500.
12. There’s no sharing of information across units in Berkshire.
13. Why Berkshire hasn’t invested in any forest product company.
14. How Warren and Charlie estimates risks.
15. The expiration of Berkshire’s quota share treaty with Swiss Re is a nonevent in terms of future strategy.
16. Warren and Charlie share their thoughts on the mess that is Fannie Mae and Freddie Mac.
17. How Todd Combs and Ted Weschler are compensated.
18. What happened to GEICO in the fourth quarter of 2011.
19. How Warren was able to evaluate whether a company is both environmentally friendly and a good investment.
20. How Warren keeps Berkshire’s many managers motivated.
21. It’s not going to be easy to get America growing by 4 percent annually.
22. Would Warren contribute to a super PAC (Political Action Committee)? To read more about PAC, click here.
23. The market is not going to do exactly what you want when you want it.
24. Why Berkshire still hasn’t paid a dividend to its shareholders.
25. The key to Berkshire’s success.
26. The most effective way to minimize mistakes.
27. Charlie: “We sort of buy barriers; we don’t build them”.
28. Charlie on the future of BYD.
29. Economic value comes from the ability to utilize float if obtained at a bargain rate.
30. Warren and Charlie share their thoughts on the idea of the United States becoming independent in the energy market.
31. On the problem of income inequality.
32. Warren and Charlie talks about sovereign debt.
33. Medical costs are the “tape worm” of American Industry.

End of Q&A

Warren Buffett:

It’s hard. So we’ll end with a hard one. And I thank you all for coming. We’re going to reconvene in about ten minutes to conduct the business of the meeting, and thank you.

Start of formal business meeting

Warren Buffett:

We’ll now go to the business meeting. We follow a script here, at least to quite a degree. And the meeting will now come to order.

I’m Warren Buffett, Chairman of the Board of Directors of the company. I welcome you to this 2012 annual meeting of shareholders.

This morning, I introduced the Berkshire Hathaway directors that are present.

Also with us today are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire.

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

Becki Amick has been appointed inspector of elections at this meeting and she will certify to the count of votes cast in the election for directors and the motions to be voted upon at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

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

Forrest Krutter:

As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 7, 2012, being the record date for this meeting, there were 934,158 shares of Class A common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,075,302,988 shares of Class B common stock outstanding, with each share entitled to 1/10,000th of one vote on motions considered at the meeting.

Of that number, 640,153 Class A shares, and 664,293,280 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 3rd.

Warren Buffett:

Thank you. That number represents a quorum and we will therefore directly proceed with the meeting.

The first order of business will be a reading of the minutes of the last meeting of shareholders, and I recognize Mr. Walter Scott, who will place a motion before the meeting.

Walter Scott:

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

Warren Buffett:

Do I hear a second?

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. Opposed? The motion’s carried.

Election of Berkshire’s board of directors

Warren Buffett:

The next item of business is to elect directors.

If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, you may do so.

Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so.

If you wish to do this, please identify yourself to one of the meeting officials in the aisles, who will furnish a ballot to you.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

Walter Scott:

I move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ron Olson, and Walter Scott be elected as directors.

Warren Buffett:

Is there a second?

It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors.

Are there any other nominations? Is there any discussion?

The motions 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.

Miss Amick, when you are ready, you may give your report.

Becki Amick:

My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast not less than 697,021 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett:

Thank you, Miss Amick.

Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott have been elected as directors.

A shareholder propose that Berkshire establish a written succession planning policy

Warren Buffett:

The next item of business is a motion put forth by the AFL-CIO Reserve Fund. The motion is set forth in the proxy statement.

The motion requests Berkshire Hathaway to amend its corporate governance guidelines to establish a written succession planning policy, including certain specified features.

The directors have recommended that shareholders vote against this proposal.

I will now recognize Ken Mass to present the motion. To allow all interested shareholders to present their views, I ask Mr. Mass to limit his remarks to five minutes.

Ken Mass:

Mr. Buffett… Mr. Buffett, members of the board of directors. My name is Ken Mass. I represent the AFL-CIO, a federation of 56 unions, representing more than 12 million members.

I’m here today to introduce the AFL-CIO shareholders proposal for succession planning.

Our proposal urges the board of directors to adopt and disclose a policy on CEO succession planning.

Planning for the succession of CEO is one of the most important responsibilities of the board of directors. Having a succession plan in place is particularly important at a company like Berkshire Hathaway where the CEO has created tremendous value.

Shareholders are thankful for Warren Buffett’s leadership as CEO.

Last year, shareholders became concerned when David Sokol resigned from the company after allegations of improper trading.

Mr. Sokol has been rumored to be a possible successor to Mr. Buffett.

We filed our proposal last fall because we feel that an internal CEO candidate is needed to carry out Mr. Buffett’s legacy.

Internal candidate may be maintain… can help maintain… Berkshire Hathaway’s strong culture.

In Mr. Buffett’s letter to shareholders earlier this year, he disclosed that the board of directors had identified his successor, as well as two superb backup candidates.

We were relieved to hear this news.

We are not asking the company to disclose the name of Mr. Buffett’s successor. All we’re asking for is the board of directors update shareholders annually on the status of its succession planning.

We are pleased that Berkshire Hathaway has adopted all of these practices we recommended in our shareholders proposal, except for an annual reporting.

We hope the company will continue to keep shareholders informed about the status of its succession plan.

Thank you again… AFL-CIO… for considering this proposal. Thank you.

Warren Buffett:

Thank you Mr. Mass.

Is there anyone else that wishes to speak?

OK, if there’s no one… no one else, I would say, Mr. Mass, you know, we are on the same page.

We regard it… and I speak for all the directors… we regard it as the number one obligation of the board to have a successor, and one that we’re very happy with, as to both ability and integrity, and that we know well, to step in tomorrow morning if I should die tonight.

And we spend more time on that subject than any other subject that might come before the board.

So we do not disagree with you on the importance of it. We have taken it very seriously, and I note that you do not ask us to name the candidates, and I think there are obvious disadvantages to doing that. So again, we’re on the same page on that.

And so as I understand it, you basically want to be sure that we report annually to you that the subject continues to be at the top of the list, and I can assure you that it will. And in terms of affirming that fact, I would say that certainly more often than once a year, I get… in some public forum… I get asked questions where I get to answer precisely the question that you want me to address, and I think that will continue in the future.

We have not built it into any formal item in the proxy statement, which your organization has suggested we do, but we have covered it in the annual report. We cover it at these meetings. We cover it when I’m interviewed, frequently.

And I don’t think that anything would be gained by putting it in some other form, but I do want to say that we… I’m glad you take it seriously. We take it seriously. And I think we’re going to get a result that you’ll be very happy with, although I hope it doesn’t happen too soon.

So, with that I would say that the motion is now ready to be acted upon. If there are any shareholders voting in person they should now mark their ballots on the motion and allow the ballots to be delivered to the inspector of elections.

Miss Amick, when you’re ready, may you give your report.

Becki Amick:

My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast 32,179 votes for the motion and 672,285 votes against the motion.

As the number of votes against the motion exceed a majority of the number of votes of all Class A and Class B shares outstanding, the motion has failed.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett:

The vote was about 95 percent… 5 percent, and thank you, Miss Amick. The proposal fails.

End of formal business meeting

Warren Buffett:

Does anyone else have any further business to come before this meeting before we adjourn?

If not, I recognize Mr. Scott to place a motion before the meeting.

Walter Scott:

I move that this meeting be adjourned.

Warren Buffett:

Is there a second?

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

Is there any discussion? If not, all in favor say yes. Aye. Yes.

All opposed say no.

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