Berkshire Hathaway’s Governance Unique Among Public Companies

By Brian Baker
Medill Reports

Todd Combs, an investment officer at Berkshire Hathaway Inc., received $376,750 in total compensation last year for serving on the board of directors at JPMorgan Chase & Co. That’s nearly 140 times what Bill Gates earned as a director on the board of Berkshire.

“No Berkshire director is in it for the money,” said Charles Munger, vice chairman of Berkshire during the company’s 2017 annual meeting. “It’s a very old-fashioned system.”

Despite Berkshire’s wide following and general admiration for CEO Warren Buffett, its approach to corporate governance remains an anomaly. As the day when Buffett is no longer running Berkshire gets closer, some are beginning to question whether that governance can continue without him.

Brian Tayan, a corporate governance researcher at Stanford University, said Berkshire’s challenge when Buffett is gone will be to shift its governance strategy from being built around Buffett to being built around the company. Although he doesn’t expect immediate changes, Tayan said he expects Berkshire will look more like other businesses in the future.

“I think the directors recognize that they’re playing a slightly different game with someone like Warren Buffett there, but their legal duties are just the same,” Tayan said. “They’re going to have to adapt – the system will have to adapt.”

Berkshire, a conglomerate that owns businesses in several different industries including auto-insurer GEICO and the BNSF railroad, has always embraced a culture of frugality and low corporate overhead. Berkshire and its subsidiaries employ about 377,000 people, according to Securities and Exchange Commission filings, but fewer than 30 work at its Omaha headquarters.

Median director compensation was $260,000 at S&P 500 companies in 2016, according to a report by Pay Governance LLC, an executive compensation advisor. Berkshire’s median director pay was $2,700 last year, among the lowest in the S&P 500, according to Bloomberg data.

Diane Lerner, a managing partner with Pay Governance, said most companies need compensation packages to be competitive to attract talented candidates to their boards. Directors want to be compensated for their time, and companies are willing to pay them to ensure they are prepared for meetings, she said. Director compensation usually includes a combination of a cash retainer and an equity grant, Lerner said.

Berkshire does not pay its board members the way most companies do. Directors receive $900 for attending a meeting in person and $300 for a phone meeting, according to its proxy statement. They are not awarded stock options or restricted shares. Instead, shares held by directors are purchased in the market the way they would be by any other shareholder.

This approach is partially symbolic and reinforces Berkshire’s culture of frugality and shareholder focus, Tayan said. It wouldn’t make a difference if a director like Bill Gates was paid $1 million a year because he’s already worth tens of billions of dollars, he said.

Buffett has written about executive compensation and corporate governance in his widely read shareholder letters, where he said that the most important job of a board is to pick the right CEO and evaluate their performance. Directors with a stake in the company are more likely to do this well, Buffett said in the past.

“I think it’s terrific that we’ve got the people that represent, in many cases, lots of shares themselves,” Buffett said on May 5 at the company’s annual meeting. “They didn’t get special deals. It’s a group of owner-oriented, Berkshire-conscious, business-savvy owners.”

Jonathan Brandt, an analyst at Ruane, Cunniff & Goldfarb L.P., said he’s not convinced the directors’ stakes in Berkshire make a difference. They think like owners because that’s how they think, not necessarily because they own shares, he said. Ruane, Cunniff & Goldfarb, a money manager that manages the Sequoia Fund, owned shares of Berkshire worth about $1.5 billion at the end of last year, according to an SEC filing.

“I don’t think the board does that much,” Brandt said. “I don’t think (Buffett) checks in with them before he buys $40 billion of Apple.” Buffett said Saturday that Berkshire owns about five percent of Apple Inc.

Brandt said he expects certain aspects of Berkshire to change when Buffett is no longer there, including communication with the CEOs of the companies Berkshire owns. Buffett commented during the annual meeting that he has talked with the CEO of one of Berkshire’s most successful businesses about three times in the past 10 years.

“Having the CEO not talk with the subsidiary CEOs is not sustainable, and it shouldn’t be sustainable,” Brandt said.

There are already signs that the company is preparing for a day without Buffett. In January, the Berkshire board elected Greg Abel and Ajit Jain as new members. Abel, who joined Berkshire Hathaway Energy in 1992, was named vice chairman of Berkshire’s non-insurance operations while Jain, who joined Berkshire in 1986, was named vice chairman of the insurance business.

The appointments fueled speculation that either Jain or Abel will be Buffett’s successor as CEO. In its proxy statement, Jain and Abel reported stakes in Berkshire worth about $100 million and $1.9 million, respectively. As a group, Berkshire’s directors and executives own 41.7 percent of the company’s Class A shares and 4.8 percent of the Class B shares.

Berkshire’s unique approach to corporate governance does not necessarily make it right for other companies, Tayan said. Part of the reason it works at Berkshire, he said, is that it was built that way from the beginning. There is a lot of trust built into the system that likely wouldn’t work as well at a place like General Electric Co., he said.

During the annual meeting, Berkshire’s Munger said he’s confident that the culture will continue long after the current management is gone. He noted how few companies have copied Berkshire’s system.

“I think we’ve started something here that will work well enough for it to last,” Munger said. “And one of the reasons it will last is it’s not that damned easy to duplicate.”

Photo at top: A BNSF train sits on the tracks. The railroad is owned by Berkshire Hathaway. (Wikimedia Commons)