By Anupreeta Das and Erik Holm
For more than six hours on Saturday, Warren Buffett and Charlie
Munger answered questions from Berkshire Hathaway Inc.
shareholders, defending their business decisions and weighing in on
everything from boardroom dynamics to how the company could spend
its multibillion-dollar stockpile.
Once again, the annual May ritual that brings tens of thousands
of shareholders to a corner of downtown Omaha, Neb., lived up to
its reputation as the "Woodstock for capitalists." Hundreds of
devoted shareholders lined up as early as 4 a.m. central time
outside the CenturyLink auditorium, rushing in at 7 a.m. when the
doors opened to grab the best seats in the house.
The first question asked of Mr. Buffett was on his decision to
abstain from voting on an equity compensation plan for executives
of Coca-Cola Co .
Berkshire Hathaway is the beverage maker's largest shareholder
with a 9% stake. Mr. Buffett has said the plan, which has a large
stock-options component, was "excessive." The Berkshire chief
executive has long spoken out against options as a form of
compensation, calling them "lottery tickets" that don't always tie
rewards to performance. Many shareholders were surprised that Mr.
Buffett chose not to vote, given his views.
"It was the most effective way to behave for Berkshire," the
billionaire investor said, explaining that he withheld his vote for
two reasons. He didn't want to "go to war" with the beverage
maker's management, which he supports, and he didn't want to
endorse a public campaign against the equity plan by a smaller Coke
shareholder by voting "no."
Later, Mr. Buffett returned to the topic to share his views on
board dynamics, including the role of compensation committees.
Boards, he said, are "part-business and part-social organizations,"
meaning that directors try to be agreeable rather than
confrontational. In his 55 years of being on corporate boards on 19
companies other than Berkshire, Mr. Buffett said he has never seen
directors oppose a pay plan that had been approved by the
compensation committee.
"I've voted for compensation plans in various places that are
far from what I would have designed myself," Mr. Buffett said.
"That is the way boards work." He said attempting to push changes
amounts to rude corporate behavior: "You keep belching at the
dinner table, you'll be eating in the kitchen."
He also defended his choice of Howard Buffett, his eldest son,
as Berkshire's future chairman, a nonexecutive role. "He's the
perfect guy" to carry out the job of preserving Berkshire's culture
and values, Mr. Buffett said of his son, who is a director of both
Coca-Cola and Berkshire.
Answering a shareholder's question on how the younger Mr.
Buffett could be trusted to preserve Mr. Buffett's principles on
pay given that he voted in support of Coke's compensation plan, Mr.
Buffett said: "The nonexecutive board chairman is not there to set
compensation, he's there to facilitate a change if the board
decides a change is needed."
Shareholders and analysts asked several probing questions of Mr.
Buffett and Berkshire Vice Chairman Charlie Munger, seeking
information on recent challenges at Berkshire's railroad, how much
the company pays certain top executives, as well as plans to use
its enormous cash hoard.
With more than $40 billion of cash in its coffers, and the funds
piling up more quickly than they can be invested, Mr. Buffett
conceded that the day is not too far when Berkshire "will have more
cash than we can intelligently invest."
At that time, Berkshire will look to do what's best for
shareholders, including buying back shares if the stock's value can
be enhanced that way. He didn't directly mention paying a dividend,
something that has been on shareholders' minds of late.
During the meeting, Mr. Buffett said that a shareholder proposal
requesting the Berkshire board to consider paying a dividend was
roundly defeated, getting less than 2% of the vote. It affirmed Mr.
Buffett's argument that leaving him and Mr. Munger to allocate
Berkshire's capital is a better use of funds than returning that
money to investors, although he later said they might soon have to
do so because the billions continue to accumulate.
He said the dividend proposal made it sound like "shareholders
were bereft of the necessities of life," because Mr. Buffett was
hoarding money in Omaha. Still, he said he was surprised at how
little support the dividend proposal got.
Berkshire has constantly been on the lookout for big
acquisitions that can use some of its cash and add to its earnings
growth. Mr. Buffett said Saturday he was willing to spend as much
as $50 billion and take on debt or sell holdings from its stock
portfolio if the right opportunity came along.
However, because Berkshire has so much cash, Mr. Buffett said he
didn't expect to have to sell stocks to fund a purchase. As a
holding company, Berkshire owns dozens of operating businesses
including insurance, railroad, manufacturing and energy businesses.
It also owns a massive portfolio of securities with
multibillion-dollar stakes in companies such as IBM, Coca-Cola,
American Express and Wells Fargo.
Mr. Buffett lavished praise on 3G Capital, the Brazilian
investment firm that Berkshire partnered with last year to buy
ketchup maker H.J. Heinz. 3G is known for being a ruthless
cost-cutter that gets heavily involved in running the companies it
owns. That approach is at odds with Berkshire, where Mr. Buffett
stays out of the way of executives who run subsidiary
businesses.
"They don't overreach, they don't over promise" and they are
unlikely to renege on a deal, Mr. Buffett said of 3G. Mr. Munger
said he appreciated 3G's ability to cut unnecessary costs.
Berkshire would welcome the opportunity to partner with 3G on more
deals, the duo said.
Mr. Buffett did rue the fact that he hasn't had much luck
getting foreign founders or family-owned companies, the type of
entity Berkshire typically likes, to sell to him. "I've been a
little disappointed we haven't had better luck outside the country,
but we'll keep working at it," he said. Israeli metal-cutting
equipment company Iscar is one of few companies Berkshire owns
outside of the U.S. Berkshire Hathaway's energy unit this week
agreed to buy a Canadian power transmission business for $2.9
billion.
Mr. Buffett also expressed support for the management of Bank of
America Corp., a company in which Berkshire Hathaway owns preferred
stock.
Last month, the bank had to reverse course on a stock buyback
and dividend-increase plan after miscalculating capital levels.
"That error they made doesn't bother me," Mr. Buffett said in
response to a shareholder question. "It doesn't change my feeling
about Bank of America's risk management one iota."
Mr. Buffett invested $5 billion in Bank of America in 2011 in
the form of preferred stock that paid 6% a year, and received
warrants to purchase 700 million shares as part of that deal. The
terms of the preferred stock were renegotiated earlier this year to
allow the lender to include it as part of its capital.
The bank was forced to shelve a plan to repurchase shares and
boost its dividend for the first time since 2008, after discovering
an error that left the lender with $4 billion less in capital than
it thought it had.
Roughly 38,000 people attended the meeting with Mr. Buffett and
Mr. Munger, who fielded questions with their trademark humor and
wit from shareholders, a panel of analysts and another of
journalists.
At one point, Mr. Buffett called Mr. Munger, Berkshire's
90-year-old vice chairman, his "canary in the coal mine."
Asked about Berkshire's weaknesses, the duo agreed that they
sometimes haven't moved fast enough to replace people at the
company. Sometimes, "we've waited too long on managers," Mr.
Buffett said.
The session broke for lunch at noon central time, allowing
shareholders to peruse the display hall nearby, where
Berkshire-owned companies such as See's Candies, Dairy Queen and
Fruit of the Loom were selling their wares. These temporary display
booths collectively do millions of dollars of business over the
Berkshire-meeting weekend.
The start of the annual meeting follows Friday's announcement of
lower first-quarter profits at Berkshire, which were weighed down
by two of the investment holding company's major businesses,
including the Burlington Northern Santa Fe railroad, which reported
a lower first-quarter profit.
Mr. Buffett said the railroad has recently suffered from service
challenges because of a big increase in volume on a route that
carries oil from the Bakken shale. "We've got a lot of trains
running on that line that weren't running five years ago," he said,
adding that Burlington Northern would spend $5 billion in capital
expenditures this year to fix the problems. The railroad's
executive chairman, Matt Rose, added that Burlington was also hurt
by a severe winter.
Write to Anupreeta Das at anupreeta.das@wsj.com and Erik Holm at
erik.holm@wsj.com
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