End of the Era for the #BerkshireHathaway Tribe?
The Tribe
The 2022 #berkshirehathaway annual shareholders meeting (ASM) took place on April 30, 2022, of course in Omaha, NE. I was there. The date of the 2023 #berkshirehathaway ASM is set for May 6, 2023, and I plan to be there as well. Here’s why:?
There are shareholders meetings and, among them, there are tribal shareholders meetings,? where shareholders' demonstrate loyalty to founders beyond just simple ROI. The early Apple tribe is an excellent example. A more current one is the Tesla tribe. The largest (by attendees) is Berkshire Hathaway’s tribe.
?In the last two decades of his life, the late Steve Jobs regularly faced his loyal tribe of Apple faithfuls, energizing and inspiring them with his compelling vision for the future of computing, music, and general aesthetics. He addressed Apple loyalists and critics in highly charged meetings discussing Foxconn suicides in iPhone-manufacturing facilities in China. These Apple shareholders meetings went far beyond reporting returns to shareholders. The tribe dived deep into internal tribal matters: values, beliefs, trust, and a vision for a shared future.
?Last year, in the midst of the pandemic, Elon Musk addressed his EV tribe from a huge elevated stage in the Tesla parking lot. Tribe members sat inside their Teslas, socially distanced yet engaged with other EV tribe members. They honked from their cars to applaud the newly unveiled battery technology and Gigafactory battery plant.?
?And what a tribal gathering it was in Omaha’s 40,000-seat CHI Health Center on April 30 this year: full of energy, showmanship, and a two-day shopping extravaganza. Warren Buffett and Charlie Munger, a dynamic duo of iconic investors with a combined 190 years of wisdom and experience and an unmatched track record in investing, answered shareholders' questions for over 6 hours. The two icons shared their insights on investing and life, education and citizenship, and? management and values. Their remarks were flavored with anecdotes, modesty, humility, and wit. The Berkshire tribe warmly applauded tribal leaders and booed those who were perceived as challengers.
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The Celebration
?The 2022 #berkshirehathaway annual shareholders meeting was a happy celebration for the tribe of “the Nr 1 retirement stock in America,” according to Whitney Tilson.?
Festivities were spread out throughout the entire weekend. A large marketplace showcased Berkshire Hathaway companies, sweetened with $1 Dairy Queen ice cream and bargain-price See Candies, numerous cocktail parties, picnics, school events, a 5k run and walk, and more. Despite the short night and unpleasant weather, the line to enter the CHI Arena at 6.30 a.m. on Saturday, April 30 (the door opened at 7 a.m.) was over a mile long.?
?The #brk shareholders indeed had good reason to celebrate: This year, Berkshire Hathaway stock is up 7.5% compared to a 13.3% decline in the S&P Index as of May 2, 2022. The company has implemented an aggressive buyback program (over $53 billion worth of stock since 2020), and it sits on over $106 billion in cash reserves. Yet despite this celebratory mood, the undercurrent of uneasiness about the future of Berkshire could be sensed in questions about leadership beyond Buffett and risks in the energy business, including how cyber, nuclear, and climate risk could affect Berkshire Hathaway’s insurance businesses and the company in general.
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The Transition
?As the 2022 ASM came to a close, it underscored the looming end of the era for the Berkshire Hathaway tribe. The retirement of the two charismatic tribal leaders—Warren Buffett and Charlie Munger at 91 and 98 years young, respectively, and both still unapologetic and sharp as a razor—has been widely discussed, though both of them remain unquestionable leaders of the tribe and stars of the Omaha tribal festivities. Even as questions about the future and “irreplaceability” of the legendary duo have continued to surface, the leadership transition at Berkshire has been underway for some time.
?At the 2021 ASM, Greg Abel was named as Warren Buffett’s successor. Buffett, who has been enjoying carte blanche approval from the Berkshire Board for his billion-dollar transactions ($41 billion in Q1 2022), has instructed the board to watch him carefully and “take away the keys” at the first sign of a bad investment decision. To emphasize an active transition, Greg Abel, together with Vice Chair of Insurance Operations Ajit Jain, shared the podium with Warren Buffet and Charlie Munger on April 30 during the first part of the Q&A. Buffett praised Ajit Jain and underscored his contributions to Berkshire Insurance culture and value-creation initiatives. Many times during the ASM meeting, Buffett described the culture of trust and respect as cement building blocks that will endure and hold the company together for many years and management teams to come. Perhaps (though this comparison was not explicitly made) it will be similar to the transition of power from Steve Jobs to Tim Cook at Apple. In fact, Tim Cook attended the Omaha ASM, which isn’t surprising since Berkshire Hathaway (BKSB) owns over 5% of Apple (APPL) stock. Warren Buffett is unlikely to go away anytime soon, if one is to believe a life expectancy calculator, according to which Buffett’s life expectancy is 97. Therefore, we expect to enjoy 5 more years of Buffett’s reign at Berkshire while the leadership transition is underway.
The new leadership-in-transition team includes Greg Abel, his executive team, and Chief Investment Officers Todd Combs and Ted Weschler. Together, the team will be navigating this unique conglomerate in a business environment impacted by the sheer size of the company—the 11th-largest business entity in the world by revenue and 6th in the U.S.—as well as economic challenges and geopolitical uncertainty. They must also contend with pressure from new tribal members, namely institutional investors who are putting more demands on disclosures related to issues such as climate action, diversity, and governance, which Berkshire Hathaway has thus far declined to adopt on a company-wide basis.?
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The Culture?
The Berkshire business structure is a unique one. In the words of Charlie Munger, it is based on “delegation just short of abdication” and uncompromising values underscored by trust and mutual respect. However, in a conglomerate that employs over 370,000 people, Buffett himself has acknowledged the risk that “someone is not going to behave properly all the time.”
Buffett prides himself on a company culture that doesn’t interfere operationally with subsidiaries. The independence of subsidiaries has been of paramount importance to the organization and a cornerstone of Buffett’s reputation, allowing Buffett to arrange deals that most likely would not be available to other investors or even his successors. The Berkshire acquisition of Iscar exemplifies the value of relationships. The Iscar owners could have gotten a higher price on the public market, yet they opted to be acquired by Berkshire, which guaranteed full autonomy and, perhaps even more importantly, prestige.
The principles of independence and autonomy create an ongoing conundrum for an organization of Berkshire Hathaway’s size. Until now, calls to implement any company-wide processes or procedures have been fended off successfully. New challenges are emerging, however, such as evolving cyber-security needs or existential climate crises. Societal changes are reflected in calls for disclosures on diversity and climate action championed by new tribe members.
During a Q&A session, Greg Abel acknowledged that in the current politically charged economic environment, cyber warfare is a serious business risk. In the energy and rail business sectors, attacks are happening every second. Abel stated, “Billions of attacks are happening daily.” So far, there haven’t been any significant disruptions to major operations or systems except a few minor events in smaller businesses. This is just one example where the principle of autonomous management intersects with an interdependence of subsidiaries within Berkshire’s complex organizational structure.
New Tribe “Troublemakers”
Both Buffett and Munger haven’t hidden their lack of sentiment about the growing impact of passive investment funds. At the 2022 ASM meeting, Buffett openly admitted to biases against both passive investors/index funds and institutional investors’ influence on governance. In his lengthy commentary to one of the proposals sponsored by institutional investors including CalPERS, Buffett went as far back as his 1997 Salomon Brothers encounter with CalPERS and described it as an interaction where CalPERS had demanded personal attention. So, he flew from New York to California to save the business. Buffett said that paying respect to CalPERS officers felt similar to meeting Chicago-era godfathers while convincing CalPERS not to leave Salomon Brothers.
There were five proposals on the ballot this year for the Berkshire Hathaway shareholders’ vote, including nominations for Directors to the Board. All four other proposals were sponsored by either institutional investors or nonprofits; these latter four all failed at approximately a 4:1 ratio. Buffett’s commentary on three resolutions was more or less elegantly poking at the “undue influence” of passive investors. His remarks on resolutions requesting disclosure on diversity, equity, and inclusion were far more personal, if not philosophical. Buffett admitted, “If I have been born female,? Black or in various other countries, I would not have had remotely the life I’ve been enjoying.” Buffett openly agreed with principles of diversity as important personal and professional values.
Yet, he noted that despite the changes happening in society, in a business culture dominated by white men, the changes are not embraced enough by all to win shareholder approval for such disclosures. Quoting this 4:1 margin, he emphasized again and again that subsidiaries are responsible for running their own businesses, and they will not be told what to do, despite his own personal beliefs.
See You in Omaha in 2023
?I plan to be in Omaha for Berkshire Hathaway’s 2023 ASM to observe the transition of power and culture and witness firsthand how the new tribal vision evolves. Meanwhile, as BRKB is expected to outperform S&P by 2–3 points in the next 12 months (Empire Research), I do intend to keep my positions, though I must admit that recent heavy investment in Chevron rattles my internal directive for green investing to support energy transitions. I will watch Berkshire Hathaway’s portfolio moves carefully.
?As the cherry on the top for Omaha 2023, I do hope to continue enjoying the uncanny wit and wisdom of my favorite contemporary business philosopher Charlie Munger, though I don’t agree with him on issues such as an oil-based U.S. economy for the next 100 years. To that, I say: Charlie, in the next 100 years, I see an electric and autonomous future despite the fact that Cathie Wood continues to take a brutal beating on today's market. I also can’t wait to listen to the—admittedly somewhat rambling—investment advice of the legendary, humble Warren Buffett, who is unapologetic in his commitment to serving his partners/shareholders even as he’s unhappy with the increasing power of institutional investors.
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See you in Omaha on May 6, 2023.
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Your #BRK-B Shareholder
Dare I Say–Concerned BRK Tribe Member