In Search of Warren Wisdom, Part 2
Jeff Bronchick
05/02/00 - 06:11 PM EDT
Editor's Note: In Part 1, columnist Jeff Bronchick explores investing legend Warren Buffett's aversion to technology. Here, he examines Buffett's thinking on excessive compensation and the ability to do preferential deals. Excessive Executive Compensation
Buffett and the crowd spent some time discussing the question of excessive executive compensation -- one of Buffett's longtime pet peeves. Asked one questioner: "If you sit on the board of
Coke (KO Quote) and
Gillette (G Quote) and are so against the policy of carte-blanche executive option grants, then why did ex-Coke CEO
Douglas Ivester get the severance package of a lifetime? And why are Coke and Gillette as bad an abuser of the practice as anyone else?"
After fumbling around a bit, Buffett basically concluded with, "I didn't sit on the audit committee. I am never asked to sit on the audit committee because of my well-known views on the subject; and if you belch too much at the dinner table, you're not invited back."
Chimed in Berkshire Vice Chairman Charles Munger: "Corporate executives get sold this stuff by the damn consultants."
Berkshire Hathaway (BRK.A Quote) does at least walk the walk on this issue. At Berkshire, compensation rewards specific managers on their specific business performance. "Giving all employees options is simply telling employees that you support the lottery," said Buffett, adding my favorite line of the meeting: "Compensation policy speaks to employees every day."
On a related hot-button issue, Buffett thinks a reasonable way to add the true expense of employee stock options back into company income statements is to use 35% of the market value of options issued in any given year.
The Insider's Price
Before I became a Berkshire shareholder and learned to appreciate it, I used to get steamed about Berkshire's ability to acquire either specific securities or entire companies on terms that were highly advantageous to Berkshire. Readers can point to a variety of examples, including convertible bond deals with Gillette,
Salomon Smith Barney and
US Airways (U Quote), and, in my opinion, somewhat lowball bids for
GEICO,
FlightSafety and
Dairy Queen. To be fair, I thought
General Re fell in this category, but I guess we were both wrong.
In his defense, Buffett said that his philosophy, which amounts to a "never sell a great business" outlook, often gave Berkshire an advantage when it came to acquisitions. He said Berkshire can be a "final resting home for the great business," which means that the ideal seller to Berkshire is a public company, majority-owned (or nearly so) by a controlling shareholder or family. That would give it the ability to say "Done deal, who cares what the minority shareholders think?"
What transpires in these situations is a briefly negotiated deal at a price that is "fair," which means fair to Berkshire, as opposed to what should be happening, where management attempts to conduct some form of an auction process.
Next: Jeff Bronchick discusses Buffett's interesting take on how to make money in the insurance business.
