BUFFETT’S PARTNERSHIP ATTITUDE is genuine, not platitude. This attitude is most evident in a wide range of corporate policies, in his annual letters, and at Berkshire’s annual meetings. Consider first a few of the policies—for example, on charitable giving, dividends, and executive pay—before exploring the annual letters and meetings and how they complement each other.
Policies
At most U.S. corporations, boards and senior executives set corporate charitable contribution policy, deciding how much to give and to what charities. Such an attitude is an anathema at Berkshire, where the board removed itself from the equation to let shareholders name the charities of their choice.
Under its shareholder charitable contribution program, Berkshire’s board approved the maximum portion of net earnings to donate, and then allowed each shareholder to name favored charities for their share of that amount. The vast majority of shareholders participated, allocating $200 million over twenty years.1
Consider also Berkshire policy on dividends: aside from a small dividend in 1967, it has never paid one. Buffett has repeatedly explained Berkshire’s policy, which is to retain each dollar of earnings so long as it translates into at least one dollar of market value. Many companies, in contrast, pay a regular dividend without considering relative available opportunities for deploying retained earnings and without consulting shareholders or articulating the rationale.
Berkshire has polled its shareholders on this policy on at least two occasions, once in 1984 and again in 2014, in a formal proxy statement ballot. It got the same answer both times: shareholders overwhelming endorse the policy, with more than 90 percent affirming. Few chief executives poll their shareholders on anything, although they may hire consultants and experts to do so, again underscoring Berkshire’s partnership attitude.
Most large public companies have a policy of regular stock splits. When stock price rises above a certain level, such as $100 or $500, the board divides each share in two, doubling the number outstanding and halving price. They do this to promote trading in the stock, and in the process pay fees to intermediaries, including stockbrokers and stock exchanges. Berkshire has shunned such a policy of stock splits, reducing the role and fees of intermediaries.
The aversion to stock splits endured even when Berkshire’s stock price surpassed dizzying heights. After reaching $30,000 in 1996, most shareholders, with no interest in selling, were content. But some, needing cash or wishing to make gifts, signaled interest in lowering the share price. At this time, as Berkshire’s stellar performance had become well known, demand rose among nonshareholders for a more affordable piece of the action.
Inspired by the demand, two financial promoters designed an investment vehicle to meet it. They proposed to create unit trusts that would buy the expensive Berkshire shares and then issue fractional interests at far lower trading prices of around $500 each. To eliminate the appeal of such trusts, and the associated fees the promoters would charge, Berkshire created a second class of stock (the Class B), with fractional voting and economic rights, set to trade at around $1,000 per share.
The move has proven advantageous in other ways. For instance, by 2010, these new Class B shares traded above $3,000 while the original class (Class A) reached $100,000. That year, Berkshire acquired BNSF Railway, partly paid in stock. To enable the railroad’s many employee-shareholders to accept Berkshire stock, its board split the Class B stock fifty-to-one, lowering its price to around $60 per share. (Lately, the Class B share price has hovered around $200 and Class A has risen above $300,000.) The two-class structure also enables Berkshire shareholders to create liquidity, as Class A shares can be converted, tax-free, into Class B shares.2
Buffett is particularly proud of Berkshire’s approach to executive compensation, which he contends is based on ultimate rationality and never involves outside consultants. He and each top executive simply agree on a base salary plus bonus based on achieving desirable outcomes within the executive’s control. The time horizon often spans years, rather than the customary calendar year, to reflect more faithfully the vicissitudes of given businesses and to promote a longer time horizon. (We look at compensation again in chapter 6.)
Letters
At most public companies, the annual letters to shareholders are ghostwritten, dull and aptly ignored. Buffett pens his missives; they are edited by an unpaid but dedicated writer friend, Carol Loomis; and we have been honored to distribute the classic compendium of them as The Essays of Warren Buffett: Lessons for Corporate America. Berkshire shareholders devour these letters, and parents often give them as gifts to their children.
What most distinguishes Buffett’s annual letters to Berkshire shareholders is not their clarity, crispness, or wisdom—although these are hallmarks. It is rather that they are not letters at all. Each missive, as Buffett calls them, is instead a series of essays: short literary compositions on discrete subjects expounding the author’s viewpoint.
Every Buffett essay has a specific motivation, foremost to attract shareholders and colleagues who embrace the Berkshire business model and deter others. Buffett seeks, and through a half-century has attracted, constituents who think in terms of value rather than price; economic substance over accounting results; and businesses as human creations to hold, not commodities to trade.
In style, Buffett writes as an uncle might, imagining he’s writing to relatives whose trust he has gained and seeks to sustain. A recurring motif, earning Buffett the misleading label “contrarian,” is the artful practice of disagreement. Buffett recites conventional wisdom along with multiple reasons why it is inaccurate or incomplete.
Yet Buffett’s peculiar positions never sound defensive, even when expressly addressing critics. And the rhetorical style boasts the fine carpentry of written excellence, from syntax to sequencing. Opening lines entice while closing ones leave a lingering thought. In between are excursions in logic, sometimes straight to a single point and elsewhere with complex subtlety yielding compound payoffs.
Buffett’s essays are rich with history, putting current debates in broad context, and steeped in statistics, anchoring arguments in data. Buffett contrasts and compares; jokes and quips; and tends to praise by name but to criticize by category.
Above all, the work expresses who Buffett is—a joyous, confident, rational, and astute capitalist. Yale University writing professor William Zinsser says that “Motivation is at the heart of writing.” Buffett loves Berkshire, his curated life’s work defined by unusual shareholders, adroit managers, and idiosyncratic principles. Munger has commented: “Buffett’s whole ego is poured into Berkshire.” That’s Buffett’s not-so-secret sauce.
Meetings
With some exceptions, corporate annual meetings are time drains and few shareholders attend. Berkshire’s annual meeting is a packed intellectual, cultural, and social extravaganza. Buffett adds enduring value to his annual letters by making them the centerpiece of the ensuing shareholders’ meeting, an equally iconic spectacle that draws tens of thousands.
Typical Berkshire shareholders have read Buffett’s letter before the ensuing meeting and discuss it together in breakout sessions. Most people posing questions from the meeting floor show knowledge based on the letter. Fellow owners cheer astute queries and hiss or boo when ignorance is shown.
Recurring themes appear in both the reports and the meetings, increasing the value of both. Together, the devices amount to a long-term program of defining Berkshire’s distinctive ways and of educating shareholders about their value.
Numerous events occur throughout the weekend of the Berkshire annual meeting, scattered across Omaha. Thousands of shareholders attend conferences at the University of Nebraska, panel discussions at Creighton University, and a dinner hosted by Columbia University.
Berkshire shareholders tend to be avid readers. For the past two decades, Buffett has designated a few dozen books for sale at each annual meeting, adding to 120 different titles. Guidance is especially helpful in categories of special interest to Berkshire shareholders. These include designating the top 30 of the 330-plus book titles containing the word “Buffett.”
Berkshire’s shareholders are part of the company’s culture. The Berkshire shareholder is interested yet patient, skeptical yet faithful, and serious yet fun. Berkshire’s family of subsidiaries is often likened to an art collection, with Buffett as the curator. It’s not a stretch to portray Berkshire meeting attendees as the visitors, patrons, and, yes, lovers of the curated content as well as the guides, docents, and tutors for newcomers and veterans alike.
For a collection of essays published in 2018, The Warren Buffett Shareholder: Stories from Inside the Berkshire Hathaway Annual Meeting,3 we asked dozens of Berkshire shareholders to explain the importance of the Berkshire meeting. Many immediately connected the meeting to Buffett’s letters and wrote inspiring essays about what the meetings mean to them. They feature themes of partnership and trust.
Consider highlights from The Warren Buffett Shareholder contributor Robert Denham, longtime Berkshire denizen and Buffett confidant. Denham served, at Buffett’s request, as CEO of Salomon from 1992 to 1997, turning it around after its life-threatening bond trading scandal. Since then a corporate lawyer at Munger, Tolles & Olson, Denham explains how the partnership attitude plays out in Buffett’s letters and Berkshire’s meetings:
Berkshire’s annual report provides a great field guide for those attending the Meeting. It is written carefully and clearly to explain Berkshire’s businesses and the economic environment in which they operate to co-owners not involved in the business but motivated to understand it. Those having read the Annual Report are well-prepared to ask questions, understand the answers, and put both questions and answers in a broader business context. In other words, they are prepared to be a participant in the Meeting and in the weekend’s multiple conversations surrounding it.
Denham expounds on Buffett’s tactful style of address, which reflects on how to think rather than what to think. This is an expression of both respect and trust.
Buffett never fills in the parameters for his listeners or gives his answer. This reticence reflects a belief that every investor has to take responsibility for forming his or her own view of such fundamental items. Although the central focus of discussion is Berkshire’s business and more or less related questions about markets and economics, there is also discussion of how to live a morally valuable life. These discussions reflect the deep commitment to teaching others how to live not just an economically successful life, but also a virtuous and meritorious life.
The contribution by Simon Lorne, Denham’s former law partner and Salomon colleague, likewise stresses the partnership attitude:
In a way, the Meeting is the natural outgrowth of Buffett’s famous shareholder letters. Just as the letters evolved over the years, so has the Meeting. But in fact, just as the Meeting is the natural evolution from the letters, the letters are the natural outgrowth of Buffett’s nature. Buffett treats Berkshire’s shareholders as the true owners of the enterprise. The letters come from that vantage point, and to many the Meeting may be its most visible expression.
Lorne identifies trust as the Berkshire model’s single strategic benefit, of potential value to all: “The rapport that [Berkshire executives] have with their shareholders through devices like the letters and the Meeting, and the trust that is engendered by that process, give them leeway for occasional missteps that other corporations could use.”
The idea of trust is ultimately about faith in people. In The Warren Buffett Shareholder, Georgetown University professor Prem Jain captured this point as he reflected on his decades’-long search for Berkshire’s secret to success:
At the Annual Meetings, Messrs. Buffett and Munger continued to speak at length about Berkshire’s managers and employees. Year after year, they spoke about their managers frequently and passionately and never disagreed in their judgments—where they tended to disagree a lot on many other matters from acquisition prospects to national economic affairs.
After many years, it dawned on me that the deeper answer I was seeking was right before my eyes. The answer was there when Messrs. Buffett and Munger talked about Ajit Jain, Lou Simpson and dozens of other able, trustworthy and passionate managers at Berkshire. There it was, the answer to Buffett’s success: his ability to identify outstanding people.
I concluded that when Buffett invests, he invests in exemplary managers, not thinking of companies separately from management. He allocates capital to people, not just to companies. Products, operations, and financial metrics are important, but secondary.
If people are primary, trust is paramount.