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Berkshire’s Directors Have Skin in the Game
Genuine ownership is all too rare on corporate boards.
Berkshire Hathaway is not a conventional company, as anyone who visits its 1990s vintage website can’t help but immediately notice. Other than adding supplemental links over the years, the website remains unchanged from when it was first launched. Quarterly and annual reports consist of dense text with no glossy public relations fluff. This is more than mere optics. Berkshire has catered to the type of serious, long-term oriented shareholders who Warren Buffett and Charlie Munger wish to attract.
Although Berkshire’s 2021 annual report was released on February 26, the company’s proxy statement for the 2022 annual meeting was only filed last night, on Friday, March 11. While annual reports cover a company’s operating results and financial condition, a proxy statement focuses on corporate governance and executive compensation matters. It is surprising how many investors who read annual reports often fail to read proxy statements even though doing so can be equally important.
Most public companies release proxy statements that are at least several dozen pages long, and in some cases proxies can exceed a hundred pages. Compensation consultants have to justify their existence and most corporations are eager to virtue signal when it comes to their policies. In contrast, Berkshire’s proxy is just eighteen pages long and simple to understand. If you are a shareholder, you should read the entire proxy. In this article, I focus on only one aspect of the proxy: the ownership interest of the directors and officers.
Limited Compensation Makes Ownership Critical
Ownership is very important at Berkshire Hathaway. While most large public companies pay directors six figure cash compensation plus stock awards, Berkshire’s compensation for directors is extremely modest, as one can see from the figure below where there are no zeros omitted:
Berkshire pays board members $900 for an in person meeting, $300 for a telephone meeting, and the way to really strike it rich is to serve on the audit committee where members are paid a $1,000 quarterly retainer. Board members are reimbursed for expenses associated with attending meetings, but something tells me that reimbursement requests for private flights and stays at the Four Seasons will probably not go over well at headquarters. Directors receive no stock awards and do not even get directors and officers liability insurance coverage, both of which are par for the course at most public companies.
Given that directors are obviously not serving for juicy benefits and pay, why are they serving at all?
Obviously, many of Berkshire’s board members have personal connections and loyalty to Warren Buffett and Charlie Munger, but these are all busy (and very rich) people who have a high opportunity cost for their time. Furthermore, serving as a director at Berkshire is likely to take more time than serving on a typical company’s board. If you were on Berkshire’s board, would you want to make yourself look stupid by not being up to speed with the company’s reports and financial condition when meeting with Warren Buffett or Charlie Munger? I didn’t think so.
The fact of the matter is that Berkshire’s directors serve not only for the honor of being associated with Warren Buffett, but because they also have significant personal skin in the game.
No director of Berkshire has less than a seven-figure interest in the company (including subsidiary interests), and they have all used their own money to acquire their shares. Berkshire spells this requirement out clearly in the proxy when discussing the company’s criteria for considering new directors: “In particular, any recommended candidate should own Berkshire stock that has represented a substantial portion of the candidate’s investment portfolio for at least three years.”
Summary of Board Ownership
The proxy statement contains a table documenting how many shares of stock each director owns as of March 2, 2022, which is the cutoff date for being able to vote shares at the annual meeting. This is a standardized table which aggregates each director’s personal ownership with other interests where they control the vote of the shares but do not necessarily have pecuniary interests in the shares. Dense footnotes at the bottom of the table document all of this, so there is nothing nefarious about the inclusion of other interests in table, and indeed this disclosure is a regulatory requirement.
Many people reviewing a proxy statement are more interested in the voting power of the directors than in their personal economic ownership, which is why the standardized table is more geared toward showing how many shares a director controls rather than directly owns.1 However, for my purposes, I like to track the amount of personal “skin in the game” each director actually has.
In my opinion, personal skin in the game not only includes shares that a director has a pecuniary interest in personally but also includes shares controlled on behalf of family members, either directly or via trusts. Most people responsible for managing the interests of family members feel at least as strongly about safeguarding those interests as they do when it comes to their own interests.
For my purposes, I divide each director’s holdings into three categories:
Direct ownership. These are shares that the director owns personally, having full pecuniary interest.
Family ownership. These are shares controlled by the director on behalf of family members or trusts.
Other ownership. These are shares controlled by the director on behalf of non-family entities.
The exhibit below shows my segregation of shares for each director along these lines. I provide full details on how I arrived at these figures in the notes following the text of this article, but I will note here that Greg Abel’s shareholdings dramatically understate his true economic interests at Berkshire. A section below discusses Mr. Abel’s interest in Berkshire Hathaway Energy in more detail.
For each director, the blue shaded area contains my view of their personal “skin in the game”. This is defined as the sum of their direct holdings and family holdings. I aggregate their Class A and Class B shareholdings for the “Direct Holdings” and “Family Holdings” columns to arrive at the figures in the blue shaded area. I then use Berkshire’s closing stock price for both classes of shares as of March 11, 2022 to arrive at the value of each director’s holdings.
With the exception of Mr. Abel, discussed in more detail below, we can see that each director has at least a seven figure interest in Berkshire. The median director is Mr. Burke with $13.7 million in Berkshire stock. Of course, Mr. Buffett leads the list at $116.9 billion. Ms. Decker has the smallest interest, but it is still valued at just over $1 million. Vice Chairman Charlie Munger has over $2 billion in Berkshire while Vice Chairman Ajit Jain has a personal interest of $155 million.
To say that this board has skin in the game is clearly an understatement. Nine of the fifteen directors have over $10 million of Berkshire stock, all of which they used their own cash to purchase. An eight figure investment is clearly enough to provide a powerful incentive to pay close attention.
(Note: After publishing the article, a reader wrote to me stating that Howard Buffett and Susan Buffett, the children of Warren Buffett, most likely did not “use their own cash” to buy Berkshire stock, but were instead gifted shares from their parents or other family members. I recall reading that Warren Buffett’s children did inherit some Berkshire stock, so this theory is plausible. I have not researched the origins of Howard Buffett and Susan Buffett’s share ownership.)
Greg Abel’s Berkshire Hathaway Energy Holdings
Someone who just glances at the information in the proxy statement would probably feel like Greg Abel has an insufficient personal interest in Berkshire Hathaway. Mr. Abel is the trustee for a trust holding five Class A shares. The proxy states that he does not have a beneficial interest in those shares. The 2,363 Class B shares are in a family trust, so I did include those shares as “skin in the game”. Even so, the value of those Class B shares is $771,756, a sum that might be impressive at many public companies but is distinctly underwhelming at Berkshire, particularly since Mr. Abel has been designated by the board as the CEO successor.2
So what is going on?
To understand Mr. Abel’s economic situation, one must understand his ownership interest in Berkshire Hathaway Energy. The related persons transaction section of the proxy statement tells the story:
There is a lot of unpack here, much of which I discussed last year in Berkshire’s CEO Succession: A Brief Look at Incentives, and I would suggest that the interested reader should review the information in that article.
The thirty-thousand foot summary is that Mr. Abel owns a 1 percent stake in Berkshire Hathaway Energy, an interest that is worth well in excess of half a billion dollars based on the price established by private market transactions with the late Walter Scott. Mr. Scott’s estate owns about 8 percent of Berkshire Hathaway Energy, while Berkshire Hathaway owns the remaining 91 percent.
So, Mr. Abel has a very large interest in a very large and important Berkshire Hathaway subsidiary, but not in Berkshire Hathaway itself. Here is what I wrote about this state of affairs last year in my article on Berkshire’s CEO succession:
Mr. Abel’s ownership interest is in BHE, not in Berkshire Hathaway, the parent company. This was entirely appropriate when Mr. Abel was Chairman and CEO of BHE. But as the next CEO of Berkshire Hathaway, he will be responsible for the success of the entire conglomerate, not just BHE. It would seem desirable if Mr. Abel’s ownership interest was in the parent company rather than in a subsidiary.
Mr. Abel has the right to put his shares in Berkshire Hathaway Energy to Berkshire Hathaway, the parent company, and the wording of the proxy states that he can receive payment in Berkshire Hathaway shares. I am not sure if Mr. Abel is inclined to do this or not, but it would be appropriate for him to own shares of Berkshire Hathaway rather than Berkshire Hathaway Energy once he becomes CEO. Berkshire Hathaway is also likely to want to own 100 percent of Berkshire Hathaway Energy at some point. Presumably exchanging Berkshire Hathaway shares for Mr. Abel’s Berkshire Hathaway Energy interest would not be a taxable event for Mr. Abel.
Whatever the mechanics of addressing Mr. Abel’s stake in Berkshire Hathaway Energy, it is clear that he has ample “skin in the game”. The modest amount documented in the proxy table is a misleading indicator of his true economic exposure.
More than at any company of similar size that I am aware of, the directors at Berkshire Hathaway clearly have significant skin in the game when it comes to ownership. This is critical at Berkshire because director compensation is so low. The reason directors are going to remain engaged, other than personal loyalty to Warren Buffett or Charlie Munger, is if they have skin in the game through direct or family ownership.
One situation I would point out as somewhat problematic, at least by Berkshire standards, is the fact that Lead Independent Director Susan Decker owns only 3,125 Class B shares with a value of slightly over $1 million. Ms. Decker has been on Berkshire’s board since 2007 and her professional background documented in the proxy leads me to believe that $1 million is not a substantial portion of her net worth. Especially for the lead independent director, it would be good leadership to have a larger stake in the company given the ownership of her peers and I hope she acquires more shares in the future.
Disclosure: Individuals associated with The Rational Walk LLC own shares of Berkshire Hathaway.
Notes on Calculation of Ownership
The following notes document how I divided the table between (1) Direct Ownership, (2) Family Ownership, and (3) Other Ownership. I only document how I divided the interests for board members who have interests other than direct ownership. Warren Buffett, Steven Burke, Kenneth Chenault, Christopher Davis, Susan Decker, Charlotte Guyman, and Charles Munger only have direct ownership interests documented in the proxy and therefore there is no discussion of these directors below.
Gregory Abel: The proxy states: “Includes 5 Class A shares held by a trust for which Mr. Abel is a trustee but with respect to which he disclaims any beneficial interest and 2,363 Class B shares held by Mr. Abel as custodian for members of his family but with respect to which he disclaims any beneficial interest.” Since the trust does not indicate that it is a family trust, I allocated the 5 Class A shares to “Other Holdings”. I allocated the 2,363 Class B shares to “Family Holdings”.
Howard Buffett: The proxy states: “Includes 650 Class A shares held by a private foundation for which Mr. Buffett possesses voting and investment power but with respect to which he disclaims any beneficial interest.” The 650 Class A shares are owned by Mr. Buffett’s charitable foundation and have been allocated to “Other Holdings” leaving 10 Class A shares allocated to “Direct Holdings”. Mr. Buffett’s 2,450 Class B shares are allocated to “Direct Holdings”.
Susan Buffett: The proxy states: “Includes 56 Class A shares and 3,091,712 Class B shares held by a private foundation for which Ms. Buffett possesses voting power but with respect she disclaims any beneficial interest.” The referenced shares are owned by Ms. Buffett’s charitable foundation and have been allocated to “Other Holdings”. I arrived at the “Direct Holdings” interests by subtracting the foundation shares from the total reported shares.
David Gottesman: The proxy states: “Includes 14,279 Class A shares and 2,159,250 Class B shares as to which Mr. Gottesman has shared voting power and 3,928 Class A shares and 2,010,806 Class B shares as to which Mr. Gottesman has shared investment power. Mr. Gottesman has a pecuniary interest in 6,402 Class A shares and 395 Class B shares included herein.” I have allocated the specified 6,402 Class A and 395 Class B shares where the proxy indicates a pecuniary interest to “Direct Holdings”. Since the proxy does not state whether the shares which Mr. Gottesman partially or fully controls are related to family trusts, I have allocated all shares where he does not have a pecuniary interest to “Other Holdings”.
Ajit Jain: The proxy states: “Includes 302 Class A shares owned by Trusts for the benefit of Mr. Jain’s children and grandchildren. Also includes 170,043 Class B shares owned by a private foundation for which Mr. Jain possesses voting and investment power but with respect to which he disclaims any beneficial interest.” I have allocated 302 Class A shares to “Family Holdings” and the 170,043 Class B shares to “Other Holdings” with the remaining interests allocated to “Direct Holdings”.
Ronald Olson: The proxy states: “Includes 29 Class A shares and 1,297 Class B shares held by a trust for which Mr. Olson is a trustee but with respect to which Mr. Olson disclaims any beneficial interest.” The specified 29 Class A and 1,297 Class B shares are allocated to “Other Holdings” since the proxy says nothing about family interests. The remainder of Mr. Olson’s shares are allocated to “Direct Holdings”.
Wallace Weitz: The proxy states: “Includes 154 Class A shares held by a private foundation for which Mr. Weitz possesses voting and investment power but with respect to which he disclaims any beneficial interest.” The 154 Class A shares specified are allocated to “Other Holdings” with remaining shares allocated to “Direct Holdings”.
Meryl Witmer: The proxy states: “Includes 4 shares in which Ms. Witmer is a trustee but with respect to which she disclaims any beneficial interest. Does not include 4 Class A shares owned by Ms. Witmer’s husband.” I include 4 Class A shares in “Other Holdings”. Although the summary table does not include the shares owned by Ms. Witmer’s husband, I have included those shares as “Family Holdings” for purposes of my table. For this reason, the grand total number of A shares for all directors and officers in my table is 4 shares higher than the grand total in the table found in the proxy statement.
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At the 2021 annual meeting, Charlie Munger, perhaps inadvertently, spoke about Greg Abel as Mr. Buffett’s successor. Page K-24 of the 2021 annual report has made Mr. Abel’s status explicit: “Should a replacement for Mr. Buffett be needed currently, Berkshire’s Board of Directors has agreed that Mr. Abel should replace Mr. Buffett.”