Berkshire Hathaway 2016 Annual Meeting Transcript

Transcript of the 2016 Berkshire Hathaway Annual Meeting held on April 30, 2016 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 why Charlie always gets the girl

Warren Buffett:

Good morning. I’m Warren Buffett. This is Charlie Munger.

I’m the young one.

You may notice in the movie, incidentally, that Charlie is always the one that gets the girl, and he has one explanation for that. But I think mine is more accurate.

As you know, every mother in this country tells her daughter at an early age, if you’re choosing between two very old and very rich guys, pick the one that’s older.

The annual meeting is on webcast for the first time

Warren Buffett:

I’d especially… we’re webcasting this for the first time, so I’d especially like to welcome our visitors from all over the world.

We’re having this meeting simultaneously translated into Mandarin. And that poses certain problems for me and Charlie, because I’m not sure how sensible all our comments will come out once translated into Mandarin.

In fact, I’m not so sure how sensible they come out initially sometimes.

But we’re delighted to have people around the world joining us.

Meeting agenda

Warren Buffett:

Now the drill of the day is that I’ll make a couple of introductions, and we’ll show a couple of slides, and then we’ll go on to questions from both our two panels and from the audience, we’ll rotate them. And we’ll do that until about noon.

Actually, about a quarter of twelve, I’ll give you a rundown on a bet that was made that we report on every year.

But then I’ll also, in connection with that, explain, and it ties in with it, what I really think is probably the most important investment lesson in the world. So we’ll have that about a quarter of twelve and I hope that keeps you around.

And then we’ll break at noon for an hour for lunch. We’ll reconvene at one o’clock.

We’ll proceed until 3:30 with questions. We’ll then adjourn for fifteen minutes and at 3:45 convene the formal meeting.

Appreciation for Carrie Sova

Warren Buffett:

I’d like to just make a couple of introductions.

I hope Carrie Sova is here. Do we have a spotlight? Carrie puts this whole meeting together.

There she is.

Wonder Woman.

Carrie joined us, Carrie joined us as a receptionist about six years ago, and I just kept throwing more and more problems at her.

And she’d put together the 50th anniversary book, which we’ve actually expanded further this year. We have a revised edition. (you can try to get a copy of the book here)

Charlie and I autographed a hundred of them. We interspersed them among the group being sold.

And Carrie, while doing that, she also had a young baby girl, her second baby, late in January.

But then she’s gone ahead to put on this whole annual meeting.

It’s a remarkable achievement and I really want to thank her, it’s been terrific.

Introduction of Berkshire’s board of directors and a surprise guest

Warren Buffett:

Actually, we have one surprise guest. I think my youngest great-grandchild, who will be about seven months old, is also here today and if he happens to break out crying a lot, and don’t let it bother you. It’s just his mother is explaining to him my views on inherited wealth and…

We also have our directors with us. And they’re here in the front row.

I’ll introduce them. If they’ll stand when introduced, withhold your applause, no matter how extreme the urge to applaud them individually. And when we’re finished, then you can go wild.

First of all, Howard Buffett. Steve Burke. Sue Decker. Bill Gates. Sandy Gottesman. Charlotte Guyman. Tom Murphy. Ron Olson. Walter Scott. And Meryl Witmer. And that’s our wonderful group.

Berkshire’s first quarter earnings

Warren Buffett:

Now we just have two slides to show you now.

The first one is a preliminary… summary figures… for the first quarter.

And you’ll notice that insurance underwriting… these are after-tax figures by category… are down somewhat.

The basic underwriting at GEICO is actually improving, but we had some important hailstorms in Texas toward the end of the quarter. We’ve actually had some since the end of the quarter, too, so there were more cat losses in the first quarter than last year.

Railroad earnings are down significantly, and railroad car loadings throughout the industry, all of the major railroads, were down significantly in the first quarter, and probably will continue to be down, almost certainly will continue to be down, the balance of the year.

We have two companies which we added to the manufacturing, service, and retailing field:

Precision Castparts and Duracell, but they were added during the quarter, so their full earnings aren’t shown in the figures.

In the other category, we have, and I don’t like to get too technical here, and you should read the 10-K… 10-Q… when it comes out next weekend.

But, when we borrow money in other currencies, and the only currency we’ve done that with is the euro, but we have a fair amount of money that we borrowed in euros, and the nature of accounting is that the change in value of the foreign exchange… change in value each quarter
…is actually shown in interest expense.

So if the euro goes up, we have a lot of extra interest expense, they’re shown that way. It’s not a realized factor, but it moves from quarter to quarter. And if the euro goes down, it offsets interest expense.

It’s a technicality, to some extent, because we have lots of assets in Europe and they are expressed in euros when they go up. It does not go through the income account. It goes directly to other comprehensive income. So I just, that figure which looks a little unusual, that’s the reason for it.

And we always urge you to pay no attention to the figures below operating earnings. They will bounce around from quarter to quarter, and we make no attempt to manage earnings in any way, to have them be smoother. We could do that very easily, but it’d be ridiculous.

We make investment decisions solely on the basis of what we think the best investment decision is, not on the basis of how it will affect earnings in any quarter or in any year.

And in the first quarter we exchanged – we completed a transaction that was begun over a year ago… whereby we exchanged our Procter and Gamble stock for cash and for Duracell, and that accounts for the large… largely accounts… for the large capital gain in the quarter.

So, those are the figures for the first quarter.

And then, to illustrate what we’re sort of all about here, I put up a second slide.

And I started this slide in 1999. The reason being that at the end of 1998, we affected a large merger with Gen Re, and at that point we sort of entered a different era.

After 1998 merger with Gen Re, we had a little over a 1,500,000-some A-equivalent shares out.

And our shares… up to that point, we’d increase the outstanding shares by more than 50 percent over the 30-some years preceding that point.

Since that time, as I note here, we’ve only increased the number of shares, over the next 17 years, we’ve only increased the shares outstanding by 8.2 percent.

So these figures represent a fairly unchanged share count since that point, whereas the share count had changed quite a bit before.

And, as you’ll note, in terms of operations, I’ve told you that our goal at Berkshire is to increase the normalized earnings, operating earnings, every year.

And I’ve said sometimes it will… we hope it will only be… it’ll turn out to be only a little bit… and sometimes we can get some fairly decent jumps. But that’s the goal.

Now, earnings will not increase every year, because there’s such a thing as a business cycle, and in times of recession we’re going to earn less money, obviously, than in times when things are much better overall.

And on top of that, we’re heavily in an insurance business, and earnings there can be quite volatile because of catastrophes.

And this chart shows you what’s happened to the operating earnings since that time. Again, pointing out that shares outstanding have gone up very little during that period.

You’ll notice in 2001, when we suffered significant insurance losses due to 9/11, we actually were in the red, in terms of operating earnings.

And you’ll notice the figures are very irregular, but over time, by adding new subsidiaries, by further developing the businesses we have by bolt-on acquisitions, by the reinvestment of retained earnings, the earnings have moved up, in a very irregular fashion, quite substantially.

I’ve put in, also, the capital gains we’ve achieved through investments in derivatives, and they total some $32 billion after-tax, close to fifty billion pretax.

Those are not important in any given year. Those numbers can go all over the place.

The main advantage, from my standpoint, in that $32 billion, is it gives us money to buy other businesses.

What we really want to focus on, what we hope, is that the bigger under operations, five, or ten, or twenty, years from now, grow substantially, partly because retained earnings from operations, partly because our operations improve in their own profitability, partly because they make bolt-on acquisitions, partly because we have gains from securities, which enable us to buy even more businesses.

But we don’t manage, as you know, we don’t manage to try to get any given number from quarter to quarter. We never make a forecast on earnings. We don’t give out earnings guidance. We think it’s silly.

We do not have budgets at the parent company level. Most of our subsidiaries have budgets, but they don’t submit them, or they’re not required to submit them, to headquarters.

We just focus, day after day, year after year, decade after decade, on trying to add earning power, sustainable and growing earning power, to Berkshire.

So that’s a quick summary. Now we’ll move on to the questions.

I just ask, with the audience, that you limit your question to one question. The multiple questions have a way of sneaking in, occasionally, but… so let’s keep them to a single question.

Q&A – Morning Session

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

1. Why Berkshire changed its acquisition strategy.
2. What Warren liked about Precision Castparts.
3. Warren: “can’t imagine anybody any happier than I am”.
4. Why Berkshire sold down its holdings in Munich Re and Swiss Re.
5. Why GEICO is suddenly losing to Progressive Direct.
6. How the rise of Amazon will affect Berkshire’s subsidiaries.
7. Warren defends Coke from the accusation that it is an unhealthy beverage.
8. The risks and rewards for Berkshire Hathaway Energy to continue to shift to renewable sources of energy.
9. Warren and Charlie still thinks derivatives are a danger to the financial system.
10. Float is not worth as much to insurance companies now as it was 10 years ago or 15 years ago. To know more about what insurance float is, click here.
    
11. Warren regards BNSF as a very good business to hold forever.
12. Don’t worry about what other people are doing to make money.
13. The 99 percent should not be subsidizing the 1 percent.
14. Warren and Charlie don’t think they can predict commodity prices.
15. Why higher education is not getting more funding from philanthropy.
16. Effects of a Trump presidency on Berkshire.
17. Why BNSF failed to merge with Canadian National in 1999.
18. Warren’s comments on Wells Fargo moving into the investment banking industry.
19. Why Berkshire is “very, very unlikely” to be targeted by activist investors.
20. Berkshire’s competitive advantages in its varying leasing businesses.
21. Warren and Charlie wants Berkshire’s managers to focus on building the competitive advantages of their business.
22. Warren shares the history of the Sequoia fund and what he thinks of Valeant Pharmaceuticals.

An update on Warren’s bet against hedge funds

Warren Buffett:

In a few minutes we’ll break, but I think it almost ties in with this last question.

If we could put slide 3 up.

I promised… some years ago I made a wager… and I promised to report, before the lunch, how the wager was coming out.

And I’ve been doing that regularly, but it probably seems appropriate, since it’s developed this far, to point out a rather obvious lesson, which is what I hoped to drive home, to some degree, by offering to make the wager originally.

Incidentally, when I offered to make the wager, namely that somebody could pick out five hedge funds and I would take the unmanaged S&P index used by Vanguard Fund, and I would bet that over a ten-year period that the unmanaged index would beat these five funds that were all being managed, presumably… they could pick any five funds… that were managed by people who were charging incredible sums to people because of their supposed expertise.

And, fortunately, there’s an organization called, or at least you go… if you go to the Internet, if you put in longbets.org… it’s a terribly interesting website.

You can have a lot of fun with it because people take the opposite side of various propositions that have a long tail to them and make bets as to the outcome, and then they both give their… each side gives their reasons.

And you can go to that website and you can find bets about, you know, whether… what population will be doing 15 years from now or… all kinds of things.

And our bet became quite famous on there. They… and a fellow I like, who I didn’t know before this, Ted Seides, bet that he could pick out five hedge funds… these were funds of funds.

In other words, there was one hedge fund at the top and then that manager picked out who he thought were the best managers underneath, and then bought into these other funds in turn, so that the five funds of funds represent, maybe, 100 or 200 hedge funds underneath.

Now bear in mind that the hedge fund… the fellow making the bet… was picking out funds where the manager on top was getting paid, perhaps, 1/2 percent a year, plus a cut of the profits, for merely picking out who he thought were the best managers underneath, who in turn were getting paid, maybe, 1 1/2 or 2 percent, plus a cut of the funds’ profits.

But certainly the guy at the top was incentivized to try and pick out great funds, and at the next level, those people were presumably incentivized, too.

So the result is, after eight years, and several hundred hedge fund managers being involved, is that now the totally unmanaged fund by Vanguard with very, very minimal costs, is now 40- some points ahead of the group of hedge funds.

Now that may sound like a terrible result for the hedge funds, but it’s not a terrible result for the hedge fund managers.

These managers… A), you’ve got this top-level manager that’s charging probably 1/2 percent, I don’t know that for sure, and down below you’ve got managers that are probably charging 1 1/2 to 2 percent.

So if you have a couple of percentage points sliced off every year, that is a lot of money.

We have two managers at Berkshire that each manage $9 billion for us. They both ran hedge funds before.

If they had a 2-and-20 arrangement with Berkshire, which is not uncommon in the hedge fund world, they would be getting $180 million each, you know, merely for breathing, annually.

That… I mean that… it’s a compensation scheme that is unbelievable to me, and that’s one reason I made this bet.

But what I’d like you to do is for a moment imagine that in this room we have the entire… you people own all of America, all the stocks in America are owned by this group. You are the Berkshire 18,000, or whatever it is, that has someone managed to accumulate all the wealth in the country.

And let’s assume we just divide it down the middle, and on this side we put half the people… half of all the investment capital in the world… and that capital is what a certain presidential candidate might call “low energy.”

In fact, they have no energy at all. They buy half of everything that exists in the investment world, 50 percent, everyone on this side. And so now half of it is owned by these… by these no-energy people.

They don’t look at stock prices. They don’t turn on business channels. They don’t read The Wall Street Journal. They don’t do anything. They just… they are a slovenly group that just sits for year after year after year owning half of the country… half of America’s business.

Now what’s their result going to be? Their result is going to be exactly average, as how America business does, because they own half of all of it. They have no expenses, no nothing.

Now what’s going to happen with the other half? The other half are what we call the “hyperactives.”

And the hyperactives, their gross result is also going to be half, right? They can’t… the whole has to be the sum of the parts here, and this group, by definition, can’t change from its half of the ultimate investment results.

This half is going to have the same gross results… you’re going to have the same results as the low-energy… no-energy people, and they’re also going to have terrific expenses, because they’re all going to be moving around, hiring hedge funds, hiring consultants, paying lots of commissions and everything.

And that half, as a group, has to do worse than this half. The people who don’t do anything have to do better than the people that are trying to do better. It’s that simple.

And I hoped through making this bet to actually create a little example of that, but that offer was open to anybody. And I would make, incidentally, the same offer now except, you know, being around in 10 years to collect gets a little more problematic as we go through life.

But it seems so elementary. But I will guarantee you that no endowment fund, no public pension fund, no extremely rich person, wants to sit in that part of the auditorium.

They just can’t believe that because they have billions of dollars to invest that they can’t go out and hire somebody who will do better than average. I hear from them all the time.

So this group over here, supposedly sophisticated people, generally richer people, hire consultants, and no consultant in the world is going to tell you, just buy an S&P index fund and sit for the next 50 years.

You don’t get to be a consultant that way. And you certainly don’t get an annual fee that way.

So the consultant’s got every motivation in the world to tell you, this year I think we should concentrate more on international stocks, or this year this manager is particularly good on the short side.

And so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end and participating in American business without cost.

And then those consultants, after they get their fees, they, in turn, recommend to you other people who charge fees which, as you can see over a period of time, cumulatively eat up capital like crazy.

So, I would suggest that what I felt sure… I didn’t feel sure because nothing… you can’t tell for sure about any 10-year period… but it certainly felt very probable or I wouldn’t have stuck my neck out.

It just demonstrates so dramatically… I’ve talked to huge pension funds, and I’ve taken them through the math, and when I leave, they go out and hire a bunch of consultants and pay them a lot of money. And… it… just unbelievable. And the consultants always change the recommendations a little bit from year to year. They can’t change them 100 percent, because then it didn’t look like they knew what they were doing the year before, so they tweak them from year to year.

And they come in and they have lots of charts and PowerPoint presentations, and they recommend people who, in turn, are going to charge them a lot of money. And they say, well, you can only get the best talent by paying 2-and-20, or something of the sort.

And the flow of money from the hyperactive to what I call the helpers is dramatic, while this group over here sits here and absolutely gets the record of American industry.

So I hope you realize that for most… for the population as a whole… American business has done wonderfully, and the net result of hiring professional management, you know, is a huge minus.

And at the bookstore we have a little book called “Where Are the Customer’s Yachts?” written by Fred Schwed. I read it when I was about 10-years-old. Been updated a few… well it hasn’t been updated, but new editions have been put out a few times… but the basic lessons are there. (you can get a copy of the book here)

That lesson is told in that book from 1940. It’s so obvious, and yet all the commercial push is behind telling you that you ought to think about doing something today that’s different than you did yesterday.

You don’t have to do that. You just have to sit back and let American industry do its job for you.

Charlie, do you have anything to add to my sermon?

Charlie Munger:

Well, you’re talking to a bunch of people who have solved their problem by buying Berkshire Hathaway.

That worked even better. And there have been a few of these managers, the managers…

Warren Buffett:

Sure.

Charlie Munger:

… who’ve actually succeeded. They are a few in the universities who are really good.

But it’s a tiny group of people. It’s like looking for a needle in a haystack.

Warren Buffett:

Yeah. And when I was given the job of naming two in 1969, I knew… I knew two… I knew a couple of others. Charlie wasn’t interested in managing more money then, and my friend Walter Schloss would not scale up well, although he had a fabulous record over 45 years, or thereabouts.

But, you know, that was all I could come up with at that time. And fortunately, you know, I did have a couple. And the people who went with Sequoia Fund have been well-served, if they stayed for the whole period.

But the… the people… there’s been far, far, far more money made by Wall… by people in Wall Street… through salesmanship abilities than through investment abilities.

There are a few people out there who are going to have an outstanding investment record. But there are very few of them, and the people you pay to have identify them don’t know how to identify them. And… and they do know how to sell you. That’s my message.

Q&A – Afternoon Session

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

1. Is there an opportunity in commercial lines to go direct akin to what GEICO did in personal auto insurance?
2. How Berkshire’s culture will be preserved when Warren and Charlie is no longer around.
3. Berkshire’s criteria in selecting board members.
4. Warren talks about Berkshire’s share buybacks.
5. How the new Nebraska Furniture Mart store in Dallas is doing.
6. Has Warren considered funding a lobbying campaign against weapons of mass destruction?
7. An update on the business performance of Lubrizol.
8. Warren and Charlie tries to learn as much micro economic factors as they can when buying a business.
9. Warren: “I would much rather make money for Berkshire than for myself”.
10. The future outlook of Berkshire’s free cash flow.
11. How Warren and Charlie was able to develop a clear mental framework that allowed them to succeed.
12. Why Berkshire doesn’t perform due diligence on companies before buying them.
13. How succession planning is handled at Berkshire’s subsidiaries.
14. Why Berkshire doesn’t have the highest credit rating.
15. How to tell when management is cutting too much costs and hurting the company.
16. The Van Tuyl deal is better than it looks.
17. How low interest rates affect the way Warren values businesses.
18. Warren and Charlie declines to comment about GEICO and IBM’s collaboration.
19. Will Berkshire divest its stakes in American Express?
20. Warren and Charlie is not interested in owning cattle.
21. How compensation systems are designed in Berkshire.
22. Warren and Charlie talks about BNSF’s capital expenditures.
23. How low prices of oil would affect the United States.
24. It doesn’t matter whether the excess cash of Berkshire is at a certain or another subsidiary.
25. Berkshire doesn’t try to separate out supposed one-time costs just to be able to report higher operating earnings.
26. Berkshire’s credit default swaps are basically all in a runoff position.
27. Outstanding managers are invaluable to Berkshire.
28. The float created by retrocessional reinsurance demonstrates that Berkshire is “willing to pay a little money now to have just a certainty of having a lot of money available in case something really attractive comes up”
29. Warren doesn’t see a nationwide bubble in residential real estate.
30. Update on Ted Weschler and Todd Combs.
31. Berkshire moved money around the organization to fund the acquisition of Precision Castparts.
32. Warren and Charlie passes on giving an analysis of IBM.
33. Where Warren and Charlie got their sense of humor from.

End of Q&A

Warren Buffett:

We will reconvene in 15 minutes for the formal part of the meeting.

We have one proxy item to act on, and… so I hope that those of you who are interested in learning more about, actually, the insurance aspects of climate change, will stick around, and we’ll have a discussion on that. And I’ll see you at 3:45. Thank you.

Start of formal business meeting

Warren Buffett:

OK. If everybody will please settle down, we’ll proceed with the meeting.

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 2016 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’re available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire.

Sharon Heck is secretary of Berkshire Hathaway, and she will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting. She will certify the count of votes cast in the election for directors, and the motion 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… turned off the lights on me… entitled to vote and represented at the meeting?

Sharon Heck:

Yes, I do.

As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 2nd, 2016, the record date for this meeting, there were 807,242 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,254,393,030 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one ten- thousandth of one vote on motions considered at the meeting.

Of that number, 575,608 Class A shares and 772,724,950 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 28th.

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. 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 shareholders be dispensed with and the minutes be approved.

Warren Buffett:

Do I hear a second?

Marc Hamburg:

I second the motion.

Warren Buffett:

The motion has been moved and seconded. We will vote on the motion by voice vote. All those in favor say, “Aye.”

Opposed? The motion is 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 did not send in a proxy or wishes to withdraw a proxy previously sent in, you may vote in person on the election of directors and other matters to be considered at this meeting. Please identify yourself to one of the meeting officials in the aisle so that you can receive a ballot.

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, Thomas Murphy, Ron Olson, Walter Scott, and Meryl Witmer be elected as directors.

Warren Buffett:

Is there a second?

Marc Hamburg:

I second the motion.

Warren Buffett:

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

Are there any other nominations or any discussion?

The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the election of directors and deliver their ballot to one of the meeting officials in the aisles.

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

Becki Amick:

My report is ready.

The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast not less than 643,789 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, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer have been elected as directors.

Shareholder motion requesting Berkshire’s insurance businesses to issue a report on climate change risks

Warren Buffett:

The next item of business is a motion put forth by the Nebraska Peace Foundation.

The motion is set forth in the proxy statement, and will the projectionist please put up number 9? Here we are.

The motion requested our insurance business issue a report describing their response to the risks posed by climate change, including specific initiatives and goals relating to each risk issue identified.

The directors have recommended that the shareholders vote against the proposal.

I will now recognize… and I think it’ll be up in area one… I will now recognize Dr. James Hansen to present the motion.

But I believe, maybe, the gentleman from the Nebraska Peace Foundation may be introducing it, and then he may introduce Dr. Hansen.

To allow all interested shareholders to present their views, I ask the initial speaker to limit his remarks to five minutes, and then those… the microphone in zone one is available for those wishing to speak for or against the motion, subsequently… zone one is the only microphone station in operation.

For the benefit of those present, I ask that each speaker for or against the motion limit themselves, with the exception of the initial speaker, to two minutes, and confine your remarks solely to the motion. And the motion should be left up on the… let’s see, is that up there or not?

Yeah, OK, the motion shall be left up there.

In a sense, incidentally, it asks us to present a report about the risk to the insurance division by climate change, and I did address this subject in the annual report. That would be a report, and it was a report that was concurred in by Ajit Jain, who is our number one expert on insurance risks. So that does represent the view of our insurance division, and myself, as the chief risk officer.

But the subject now is open and we welcome the initial speaker’s comments.

And if you’re just going to introduce Dr. Hansen… I can’t see who’s who up there… then I presume that he will have the five minutes and then subsequent speakers will have two minutes. So go to it, you’re on.

Audience Member:

Thank you. My name is Mark Vasina. I’m the treasurer of the Nebraska Peace Foundation, the owner of one A share of Berkshire Hathaway.

We are the sponsor of the shareholder resolution which Mr. Buffett has described. In so doing, making the recommendation to develop a risk analysis and report on it, we’re following the lead of the Bank of England, which last September published a comprehensive report on climate change risks facing the insurance industry, and recommended that its regulated companies conduct reviews of the risks and make this available.

The Bank of England regulates the UK insurance industry, which is the third-largest global insurance market. I’ll turn the rest of my time over to world-renowned climate scientist Dr. James Hansen.

Audience Member:

Thank you for this opportunity.

I want to make a suggestion that I hope you will ponder.

Some aspects of climate have become clear. Humans are changing the atmosphere, and we can measure how this is changing earth’s energy balance. More energy is coming in than going out.

So the ocean is warming, ice sheets are melting, and sea level is beginning to rise.

We are now close to a point of handing young people a situation that will be out of control, with ice sheet disintegration and multimeter sea level rise during the lifetime of today’s young people, which would mean loss of coastal cities and economic devastation.

Sea level rise would be irreversible on any time scale of interest to humanity. The other irreversible effect of rapid climate change would be extinction of a substantial fraction of the species on Earth.

The bottom line is that we cannot burn all fossil fuels, and the economic law of gravity is that as long as fossil fuels appear to be the cheapest energy, we will keep burning them.

So my request, given the respect and the trust the public has in you, is that you reflect upon the possibility of a public statement in favor of a revenue-neutral, gradually-rising carbon fee.

A carbon fee is needed to make the price of fossil fuels honest, to include the costs to humanity of their air pollution, water pollution, and climate change.

A rising carbon fee is needed to spur effective investments by the private sector in clean energies and energy efficiency.

Most important, it will steadily phase down fossil fuel use. I’m not asking you to endorse a carbon fee on the spot, but I hope that you will reflect upon it and perhaps provide a clear statement in your next report.

It could be your greatest legacy. It could affect everything, even the course of our future climate.

Thanks.

Warren Buffett:

Thank you, Dr. Hansen.

I might say that we… although we may differ on some specifics, and I don’t know… I am no expert on this subject whatsoever… I don’t think you and I have any difference in the fact that it’s important that climate change… you know, since it’s something where there is a point of no return… if we are on the course that you think is certain and I think is probable, that it’s a terribly important subject.

But the motion that was put forth was relating to the insurance aspects of it, and we have discussed… believe me, we have thought and discussed insurance aspects, and I’ve, in effect, given a report in the… which was asked for by this… within the annual report.

So it is really not… the issue before the shareholders is not how I feel about whether climate change is real, or whether a carbon tax is appropriate, it’s whether it poses a risk to our insurance business.

And I recognize the Bank of England… read that report… but we respectfully disagree with them in terms of… not in terms of the importance of climate change… but in terms of the risk to our insurance business.

We don’t… we are not forced… we don’t write policies for a long period of time. We’re not forced to write a policy on anything, so we are… our judgment is made as propositions are presented to us, usually as to whether, for one year, we are willing to accept a given risk for a given price.

And that… obviously, climate is enormously important in our activities, hurricanes being the most important, probably, although we also get involved in earthquakes… but that is what the proposal is about, and that… and we’ve given a response to that, and it does not mean that we differ on the importance of climate change to the human race.

So with that, I would be delighted to hear from the various seconders.

Audience Member:

Hello. My name is Jim Jones. I’m the executive director of the Katie School of Insurance at Illinois State University.

I would like to express my concerns, based on three hidden risks associated with climate change.

The first relates to stranded assets of insurers investing in fossil fuels. The second is a more insidious risk related to climate change. This risk is associated with the long-term liabilities associated with property, life, and health lines of business.

And I realize that a number of intelligent people and experts don’t see a long-term liability, but they’re missing one important part, is that primary insurers are not able to withdraw or reprice books… entire books of business.

Following Hurricanes Katrina, Rita, and Wilma, new hurricane models were developed in Florida, and they attempted to get the recommended rate approvals for that. They were not allowed to, and so many insurers began to withdraw from that market.

Ten years later, that… about 40 percent of the under-performing business is still on the books of those insurers, and this could play out in several other states that are exposed to climate risk.

For a reinsurer, the value of reinsurance with their customers is a long-term business.

The reason why this is so important is because, according to my count, 156 of your reinsurance customers have filed climate change disclosures, and these customers are looking for long-term interest being protected by their reinsurer.

And if not, there’s a potential for a relationship default risk that could occur if they perceived your reinsurance as just being one-year contracts that can be repriced or withdrawn.

And you enter into that world of the expanding market competition of alternative reinsurance, which just last year was $72 billion, and earlier this quarter, we set a record of $2.2 billion in cap bonds.

Warren Buffett:

Thank you. The… I would point out that we have not been asked, ever, to my knowledge, to write long-term contracts. Our primary insurers know that we look at it one year at a time, and we will not write business that we think has a major negative probability.

They don’t expect us to.

It’s way less a relational business than in the past. It’s much more a transactional business.

But it… we will not write… if we lose a customer because they want us to do something stupid, we lose the customer, and there is not a… in our business… I’m not speaking for other reinsurers, but in our business, and I believe with most other reinsurers, they are not going to do something that they think is terribly disadvantageous to them just to maintain a relationship.

That’s not really a relationship. It’d be a subsidy.

So I do… that does not strike me, frankly, as a factor at all of any negative consequence at Berkshire.

We… in terms of what happened after Katrina… rates went up, and actually it… the hurricane experience in Florida has been better than any period since before 1850 that we have any records on.

That’s been a surprise to us, incidentally. But we have not written business… catastrophe business… in Florida during that period, because we didn’t think the rates were adequate. They were adequate, we just were wrong about it.

So the… and incidentally, that does not… the fact that we walked away from cat business in Florida that we thought was mispriced… does not hurt us in the business.

It’s really a… it’s much more of a transactional business in the… there may have been a time when relationships were very big in reinsurance, but with so many entrants in it, it is very much a transactional business. And no one expects you to do something that’s very stupid.

You know, if they do, it’s the wrong kind of a relationship. But glad to hear the next speaker.

Audience Member:

Hello, Mr. Buffett. My name is Jane Kleeb. I run a group called Bold Nebraska, which was part of an unlikely alliance who beat Keystone XL, to protect the aquifer in our state as well as property rights.

And I met you several years at Senator Nelson’s home, and I had pulled you aside and asked how could we get health care reform passed?

And you told me two things: You said, the polling numbers matter, and that we have to keep on applying public pressure.

And we feel the same way about climate change and climate action. The most recent Yale study said that even 47 percent of conservatives believe in climate change and want to start seeing corporate and government action.

And your response to this resolution struck me, because one of the sentences said that if you live in a low-lying area, you should probably move.

Well, we work with Native brothers and sisters who live in coastal communities, and one of those tribes is now the first United States climate refugees.

They didn’t have the option to move. They were forced to move.

And so we’re turning to you and we’re turning to ourselves to continue to apply public pressure and hope that both you and Charlie stand with us.

And maybe it’s not this year, and maybe it’s not the year after, but we really look forward to you doing full climate risk analysis, as well as divesting from all the fossil fuels that you own.

And lastly, it takes both small and mighty, as well as big and powerful, to solve this problem of climate change. So you blocking small solar in Nevada is the wrong road to go down. Thank you.

Warren Buffett:

I think you’ll have a reasonable time to move, but I would say, if you’re making a 50-year investment in low-lying properties, it’s probably a mistake.

I actually said you may… as a homeowner in a low-lying area… you may wish to consider moving.

And I would say that if you expect to be there for ten years or so, I don’t think I would consider moving. But if I thought I was making a 100-year investment, I don’t think I would make it.

I think it gets to the question… we have a shareholder proposal that says, what are the risks to the insurance division from climate change?

We’re not denying climate change is an incredibly important subject. We’re not denying its existence.

But it will not hurt our insurance business, and it’s immaterial compared to other things that could affect our insurance business. And, you know, that is the issue before the meeting. But I’ll be glad to hear from the next speaker.

Audience Member:

Good afternoon, Mr. Buffett. My name is Kay Harn. I’ve been a shareholder for more than a decade, basically my investing life.

Today someone said that you think ahead of the crowd. With regards to this resolution, you’re saying that the Berkshire insurance business will just raise rates the next time the policy is renewed, and that makes sense. But you agree that climate change poses a major problem for our planet.

I would say that climate change poses a major problem for the stability of our global financial markets, if the political action continues at its current pace with regards to this issue.

I personally agree with Dr. Hansen, that a carbon fee is the solution to address this issue. I’m wondering if you can tell us what you think the solution to address this issue is, and whether you think the Berkshire businesses, more broadly than just insurance, will be impacted by this issue in the next decade or two.

Warren Buffett:

Yeah. I would doubt if it’s affected in the next decade or two.

But I won’t argue with you at all that it’s likely, not certain, that… unless various techniques are designed for reducing… well, for sequestration, different things of that sort… that plenty of people will be working on… or unless the emissions greenhouse… gas emissions… are reduced significantly… that it’s a terribly important problem for civilization.

And there have been other… I mean, there’s certainly going to be some very smart people working on ways to change the balance in some way, either through less being released in the atmosphere or by various techniques that might diminish the impact, but no one here will deny that it’s important.

I don’t think it will impact… I don’t think it will impact, in a serious way, the climate… or insurance, for that matter… in the next decade or two.

But, as I pointed out in the report, if you’re dealing with something where there’s a point of… where you pass a point of no return, the time to do something isn’t when we get ten minutes away from the point of no return.

So there are policies, which we’ve subscribed to very strongly, in terms of renewables and that sort of thing, but I think there’s also possibilities that within the scientific community, there will be solutions that are beyond my limited knowledge of physics to conjure up myself, but there are a whole lot of people out there that are a lot smarter.

And I think that a basic problem on the reduction… if those things don’t come to pass… is the fact that it’s a planetary problem, and it requires cooperation by very important countries, and I think President Obama has made a good start in working with leaders of other countries. But it can’t be solved by the United States alone, as you know better than I.

I’d be glad to hear from the next speaker.

Audience Member:

Hello. My name is Nancy Meyer, and I’ve been a shareholder for 15 years with my husband.

We have great faith in Berkshire Hathaway. That’s why we invested. So I’m just here to say that, as a shareholder, I’d like to ask my fellow shareholders to consider the economic costs of climate change and urge Berkshire Hathaway to adopt this resolution to show leadership in the insurance industry. Thank you.

Warren Buffett:

Thank you. I appreciate the fact you’ve been a shareholder, but I do think for reasons that… I don’t really think that the resolution… I think the resolution is, in a sense, inapplicable to our insurance business.

I mean, insurance… global climate is not a risk to our insurance business. It may be a risk to the planet over time, but that’s a different thing.

I mean, you can… we can adopt all kinds of resolutions about saying that, obviously, nuclear proliferation is a threat to the planet, and you can say, well then, it’s a threat to Berkshire.

But in terms of being Berkshire-specific, you know, you can read the resolution and, like I say, our answer, with Ajit Jain, probably the smartest person I know in insurance, and I have 99 percent of my net worth in Berkshire that’s all destined to go to philanthropic institutions, and I’m not eager to see that disappear, and I do regard myself as the chief risk officer of Berkshire, and I worry about things that can hurt Berkshire, and I do not see it in our insurance division, in relation to climate change. But, thank you.

Audience Member:

Good afternoon, Mr. Buffett. I am Richard Miller, in the Creighton Theology Department, here in Omaha. And I study and teach climate change and its social effects.

I just wanted to make you aware that Berkshire is operating within a larger economy, and that the most important climate analysis… economic analysis… from Nicholas Stern, indicates that on our current path, by the end of this century, 30 percent loss in global GDP is possible.

The other issue is, when we talk about doing something about climate change, doing something means to avoid major sea level rise, we need to reduce emissions globally, starting today, 7 percent per year.

The only time we’ve ever reduced emissions, over a ten-year period, in a growing economy, was in the 1990s in England, and we reduced them 1 percent per year.

So we’re talking about a completely different thing than President Obama’s gradual move.

And we need to do something… no, we need to do massive transformation… immediately. And with your large global holdings, you are a world significant figure on this, not just about this particular shareholder resolution. Thank you for your time.

Warren Buffett:

Thank you.

Is that the… complete the speakers?

Audience Member:

Say that again?

Warren Buffett:

Are you the final speaker?

Audience Member:

Yes, I think those are all the speakers.

Warren Buffett:

OK. Well, thank you. Charlie, do you have anything you want to say?

Charlie Munger:

Well, yes.

We’re in Omaha, which is considerably above sea level. We have no big economic interest in this subject in our insurance companies. We don’t write much of that catastrophic insurance we used to write many years ago.

So we’re asked, as a corporation, to take a public stance on very complicated issues. We’ve got crime in the cities. We’ve got 100… we’ve got 1,000… complicated issues that are very material to our civilization.

And if we spend our time in the meeting taking public stands on all of them, I think it would be quite counterproductive.

And I don’t like the fact that the people that constantly present this issue never discuss any solution, except reducing consumption of fossil fuels.

So there are geo-engineering possibilities that nobody’s willing to talk about, and I think that’s asinine, so put me down as not welcoming.

Warren Buffett:

We don’t want to have a political rally.

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 deliver their ballot to one of the meeting officials in the aisles.

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

Becki Amick:

My report is ready.

The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast 69,114 votes for the motion and 531,724 votes against the motion.

As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares properly cast on the matter, as well as all votes 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:

Thank you, Ms. Amick. The proposal fails.

End of formal business meeting

Warren Buffett:

Does anyone have any questions for our audit firm before we adjourn? If not, I recognize Mr. Scott to place a motion before the meeting.

Walter Scott:

I move this meeting be adjourned.

Warren Buffett:

Mr. Olson?

Ron Olson:

And I second it.

Warren Buffett:

Motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say, “Aye.”

All opposed say, “No.”

Click here to see the full transcripts of all Berkshire Hathaway Annual Meetings on record.

To share this article, click on the buttons at the right (or below if you’re viewing this using a mobile phone or tablet).