BOARD CASES

• A harmonious relationship among board members and significant shareholders, marked by mutual trust and respect, is fundamental to effective board dynamics and ethical business governance.
• Nevertheless, it is essential for boards to embrace differing opinions and dissent. Directors, stakeholders should be empowered to express their views openly and honestly, even if it leads to contentious debates or opposition.
• A board and its principal shareholders should come to a significant agreement and a unified decision only after engaging in comprehensive discussions and thorough debates.

BOARD CASE I - Berkshire Hathaway Inc., BRK.A (NYSE)

Famed investor and the legendary Warren Buffett’s annual letter from 2023 Annual Report to the Berkshire Hathaway Inc. shareholders this past Saturday paid tribute to his longtime business partner and friend Charlie Munger, who died last November.

Charlie Munger, renowned for his instrumental role at Berkshire Hathaway, passed away just before his 100th birthday. He met Warren Buffett in 1959 and later advised Buffett on transforming Berkshire Hathaway by focusing on acquiring excellent businesses at fair prices—a departure from Mr. Buffett's original investment strategy. Mr. Munger, who initially had no financial stake in Berkshire, became Mr. Buffett's partner and was pivotal in guiding the company's strategy, leading to its enormous success.

Despite his significant contributions, Mr. Munger remained humble, allowing Mr. Buffett to be the public face of Berkshire's achievements. Mr. Buffett acknowledges Charlie Munger as the "architect" of Berkshire Hathaway, crediting him for the company's success while describing himself as the one who executed Mr. Munger's visionary plans.

Berkshire now has – by far – the largest GAAP net worth recorded by any American business.

Record operating income and a strong stock market led to a year-end figure of $561 billion. Read the 2023 Annual Report here https://berkshirehathaway.com/2023ar/2023ar.pdf

Highlights -

• Dedication to Charlie Munger: Warren Buffett dedicated Berkshire Hathaway's 2023 annual report to Charlie Munger, who passed away at 99, highlighting Munger's pivotal role as the "architect" behind Berkshire's success.
• Buffett-Munger Partnership: The pair met in 1959, and Mr. Munger, who joined Berkshire as vice-chairman in 1978, was known for his wisdom and guidance, acting as a mentor to Mr. Buffett.
• Succession Plan: Warren Buffett has named Greg Abel as his successor, expressing full confidence in Abel's capability to lead Berkshire's non-insurance businesses and improve the conglomerate.
• Financial Performance: Berkshire Hathaway reported a significant increase in operating earnings to $8.5 billion in Q4 and a total of $37.3 billion for the year, with a net profit of $96.2 billion, reversing the previous year's net loss.
• Insurance Business Success: The insurance underwriting business significantly contributed to earnings, with $848 million in Q4 and a total of $5.4 billion in 2023, showcasing a major turnaround from the previous year's loss.
• Stock Repurchases: Berkshire repurchased $2.2 billion in stock in the last quarter, totaling approximately $9.2 billion for the year.
• Cash Reserves: Berkshire's cash and equivalents reached a record $167.6 billion, prompting speculation about potential new acquisitions to Mr. Buffett's portfolio.

Based on the themes and insights drawn from Warren Buffett’s 2023 annual letter to Berkshire Hathaway shareholders, here are several recommendations for corporate boards:

1. Value Visionary Leadership: Recognize and empower individuals within the organization who possess a clear, strategic vision for the future. Leadership should not only focus on current success but also on laying the groundwork for long-term achievements.
2. Embrace Mentorship and Collaboration: Foster a culture where experienced leaders mentor younger executives and where collaboration is valued over individual accolades. This ensures continuity of vision and strategy.
3. Acknowledge and Utilize Key Contributions: Just as Warren Buffett acknowledged Charlie Munger’s role as the "architect" behind Berkshire's success, boards should recognize and utilize the key contributions of all team members, regardless of their public profile.
4. Ensure a Clear Succession Plan: Succession planning is crucial for the stability and future success of the organization. Boards should identify and prepare successors for key roles to ensure a smooth transition and continued prosperity.
5. Financial Prudence and Operational Excellence: Warren Buffett’s letter highlights the importance of sound financial management and operational excellence, as demonstrated by Berkshire’s significant operating earnings and successful insurance underwriting. Boards should prioritize these aspects to ensure financial stability and growth.
6. Strategic Stock Repurchases: The strategic repurchase of stock can be a valuable tool for enhancing shareholder value. Boards should consider this tactic as part of their overall strategy, ensuring it aligns with the company’s financial health and market conditions.
7. Maintain Strong Cash Reserves: Berkshire’s record cash reserves illustrate the importance of maintaining a strong financial buffer. This positions a company well for future investments, acquisitions, and navigating economic downturns.
8. Openness to New Opportunities: With Berkshire’s cash reserves fueling speculation about new acquisitions, boards should remain open and agile, ready to seize strategic opportunities that align with their company’s long-term vision.

These recommendations underscore the importance of visionary leadership, strategic planning, financial prudence, and operational excellence in driving corporate success and shareholder value.

BOARD CASE II – The Walt Disney Company, DIS (NYSE)

In this corporate scenario involving the Walt Disney Company, several critical issues and strategic considerations are highlighted amidst a proxy battle and shareholder activism.

The key focus for Disney’s (new) Board Case at present:

The Walt Disney Company, under its accomplished CEO Bob Iger, reported strong quarterly earnings ahead of a crucial shareholder vote, amidst a proxy battle with activist investors like Nelson Peltz's Trian Fund Management.

The company's stock experienced a significant surge following the announcement, underscoring confidence in Disney's strategic direction and management's ability to navigate challenges. Disney's focus on improving the profitability of its streaming business, with a goal to achieve double-digit profit margins, is a central element of its strategy.

The proxy fight centers around Trian Fund Management's proposal to replace two Disney board members with its own candidates, aiming to drive changes that include achieving Netflix-like margins.

Billionaire activist Nelson Peltz has formalized his pitch to Walt Disney Co. investors to back his bid for a revamp of oversight and strategy at the media and entertainment giant.

After months of public sparring with Disney, Nelson Peltz’s Trian Fund Management recently sent a long-awaited letter to other shareholders, in which it outlined its plans for improving performance at the Burbank, California-based company.

TRIAN SENDS LETTER TO FELLOW DISNEY SHAREHOLDERS STARVED OF RETURNS

Advises Shareholders to Vote “FOR” Nelson Peltz and James A. (“Jay”) Rasulo on the Revised BLUE Proxy Card. https://trianpartners.com/wp-content/uploads/2024/02/Disney-Trian-Fight-Letter-2-Press-Release.pdf

Disney urges shareholders to reject activist’s board nominees.

There are occasional instances when activists can add genuine value and call out genuine misconduct–and then there are instances when activists are motivated by all the wrong reasons.

• Will Nelson Peltz and the activist hedge funds have their way or will CEO Bob Iger hold them at bay?
• Who should and should not be on the board of directors of Disney this year?
• What will the outcome of the upcoming proxy vote mean for Disney stockholders?[share your thoughts in the comments below]

Why Disney needs a corporate CTO, according to one activist investor:

While another activist investor, Blackwells Capital contends the entertainment and media giant should appoint an overarching corporate chief technology officer (CTO) to spearhead technological transformation and oversee innovation. ?

The Walt Disney Company would also benefit from organizing its venture investments into a single vehicle – a centralized venture investment structure, as per Blackwells Capital.

Press Release: Blackwells Capital Nominates Jessica Schell, Craig Hatkoff and Leah Solivan for Election to the Board of Disney.

https://www.blackwellscap.com/pressrelease/blackwells-capital-nominates-jessica-schell-craig-hatkoff-and-leah-solivan-for-election-to-the-board-of-disney/

Board Scenario:

• Proxy Battle and Shareholder Activism: Disney faces a proxy battle led by Nelson Peltz's Trian Fund Management, which seeks board seats and strategic shifts in the company.
• Leadership and Financial Performance: Under Bob Iger's leadership, Disney reported robust earnings and is focusing on streaming business profitability, aiming for double-digit margins by fiscal 2024.
• Strategic Initiatives and Cost Cutting: Disney is cutting costs and reshaping its entertainment operations, particularly around Disney+, to improve financial performance and operational efficiency.
• Board Composition and Governance: Activist investors, including Blackwells Capital and Trian Fund Management, are challenging Disney's current board composition and governance practices, suggesting strategic and operational changes.
• Technology Focus: There's a call from one activist investor for Disney to appoint a corporate CTO to oversee innovation and consolidate venture investments, indicating a push towards a robust technology-driven transformation.
• The upcoming shareholder vote on April 3rd will determine the board's composition and potentially the company's future direction.

Strategic Framework of Recommendations for the Walt Disney Company’s Board Case:

1. Enhanced Communication with Shareholders: Strengthen transparency and communication with all shareholders to clearly articulate the company's strategy, financial health, and governance practices. This could involve more detailed investor relations materials and regular updates on strategic initiatives.
2. Board Composition and Diversity: Review the board's composition to ensure it aligns with Disney's strategic priorities, including directors with a diverse array of experiences, technology innovation, digital transformation, and global market expansion.
3. Transparency in Strategic Goals: Enhance transparency regarding Disney's long-term strategic goals, particularly around streaming profitability and technology transformation, to build shareholder confidence.
4. Engagement with Activist Investors: Engage constructively with activist investors to understand their proposals, perspectives and concerns. This could include discussions on board representation, strategic direction, and operational efficiency, aiming to find common ground or compromise where possible - evaluating their potential impact on Disney's strategic vision and shareholder value.
5. Proxy Advisor Engagement: Engaging with proxy advisors to garner support for the board's recommendations and to counter the activist investors' proposals.
6. Succession Planning and Leadership Stability: Strengthen succession planning processes to ensure leadership continuity, particularly in light of the proxy battle and potential board changes.
7. Strategic Investment in Technology: Consider the creation of a CTO position to lead technological innovation and transformation, aligning Disney's product offerings with evolving consumer preferences and technological advancements.
8. Robust Governance Practices: Strengthen corporate governance practices, including a review of bylaws in light of recent challenges, to enhance board accountability, shareholder rights, and overall governance standards.

This strategic framework aims to address the core issues identified in the scenario, ensuring Disney's board governance is well-equipped to navigate the proxy battle, shareholder activism, and the broader strategic challenges facing the company.

The board should carefully consider these points to resolve the current corporate scenario in a manner that upholds their fiduciary responsibilities and promotes the long-term success of the Walt Disney Company.

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"Bo" Subodh Dalvi (Board Director | Executive Advisor | Corporate Governance | Entrepreneur & Impact Investor)

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