Opinion: Berkshire’s biggest shareholders could undermine Buffett’s legacy and all that makes the company unique


The critical conclusion of Berkshire Hathaway BRK.A.’s recent annual meeting,
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BRK.B,
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has been the least informed: the shareholder base has changed radically and the only way to ensure that Berkshire survives beyond Warren Buffett is for its controlling stake to be preserved after it leaves the scene.

Buffett spent his life cultivating a high-quality shareholder base in Berkshire, mainly individuals and families who shared his specific views on corporate life. It begins with the visualization of Buffett and the shareholders as co-owners of an association. It includes unusual practices, such as having a board of smart entrepreneurs who know the company, giving executives extraordinary autonomy, keeping companies acquired forever, and reinvesting all capital instead of paying dividends.

As Buffett plans to move to Berkshire after he leaves, he is confident in the sustainability of these trust-based practices. This trust requires the trust that your fellow shareholders will also understand and accept the practices. To that end, Buffett’s ownership would gradually transfer, over a 12-year period, its 32% share of votes to charities, which would sell them on the open market.

Whenever these actions pass into the hands of high quality shareholders, they can be trusted to choose a board that also understands and supports those principles that, in turn, would appoint the directors to do so. The problem is that Berkshire’s shareholder base has changed dramatically in recent years and transferring the shares as planned would put control in the hands of asset managers whose indifference or ignorance would kill Berkshire as we know it.

While Berkshire still has a large number of high-quality shareholders who understand the value of the company culture, much of Berkshire’s shareholder base now includes institutional asset managers who don’t care about the particular characteristics of specific companies, but they invest and vote in a formulaic way.

Index fund giants like BlackRock BLK
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and influential pension funds like CalPERS, for example, invest in virtually every business instead of choosing stocks. They vote on director elections and shareholder proposals based on checklists, social activist campaigns, and delegation advice that often have nothing to do with the general or specific business of these companies.

Buffett was once able to count on his flock to attend to his company after leaving the scene. That is far from true now.

Grab shareholder proposals at this year’s Berkshire meeting. One proposed splitting the role of CEO and chairman of the board, rather than Buffett continuing in both. Asset formula managers love these simple universal rules. But the proposal violated Berkshire’s trust-based partnership culture and was done in total ignorance. Although he should have gotten zero votes, he received 20% of the non-Buffett shares. Although far from a majority, for a company that bets its future on its shareholders, this is an existential concern.

Worse, consider three proposals for creating consolidated reports on business unit greenhouse gas emissions and workforce diversity. The Berkshire board made it clear that it agrees with the goals of minimizing emissions and maximizing diversity. But he argued that these results are more likely to be achieved using their self-reliance-based culture than top-down consolidated reports. However, these proposals received more than a third of the non-Buffett votes, with some activists approving the 47% headlines.

Again, it’s not a majority, but imagine votes on other issues in the coming years that will undermine Berkshire’s valuable practices. Someone might propose to sell a subsidiary because of the delay in short-term performance, contradicting Berkshire’s commitment to permanent ownership. Another could propose declaring large cash dividends to fuel liquidity cravings, despite Berkshire’s practice of protecting its tax-paying shareholders by opportunistically reinvesting all capital. With shareholders like these, such destructive votes could happen.

It is possible that the power of these formula asset managers will diminish in the coming years. Their power stems from the fact that they vote for the shares they have on behalf of their customers, the final owner. As more clients discover that the votes of executives do not align with their preferences, these managers will change their approach. This pressure has led some of the largest indexers to promise this, and there are plenty of proposals in Washington to demand it. But that will take years.

Buffett was once able to count on his flock to attend to his company after leaving the scene. That is far from true now. No doubt Buffett is working to adjust his plans for Berkshire after he leaves. For example, you might consider getting a controlling stake in one or more of your three children, who could continue to defeat these new asset managers. In the name of preserving this unique and valuable institution, I would vote in favor.

Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and editor since 1997 of “The Essays of Warren Buffett: Lessons for Corporate America.” Cunningham owns shares in Berkshire Hathaway. For updates on Cunningham’s research on quality shareholders, sign up here.

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