Editor's note: This is the second of two columns on the Berkshire Hathaway annual meeting in Omaha today. To read the first column, click here.
OMAHA, Neb. -- In the second half of the
annual meeting Saturday, Chairman Warren Buffett and Vice Chairman Charlie Munger served up tart-tongued critiques of stock-option plans and weighed in on the toll of asbestos litigation on corporate America.
The morning's overflow crowd ebbed a bit in the afternoon, with many seeking bargains from the 20-plus Berkshire subsidiaries peddling their wares in the adjacent exhibit hall or at nearby Borsheim's or Nebraska Furniture Mart. But from the auditorium stage, Buffett and Munger played on with vigor.
Both Buffett and Munger left no question they find the pickings slim in the stock market. Asked about the relative weight of equities compared to bonds and cash in Berkshire's portfolio, Munger said dryly, "Our constraint does not come from structure; it comes from our lack of enthusiasm for stocks, generally."
Asbestos: Hot and Bad
On asbestos liability, Buffett was blunt. "It's really a cancer on the American corporate world," he said of the recent rash of asbestos verdicts. "Asbestos continues to explode. No matter how bad it is, it will be worse. Many companies that
were thought to be insulated from asbestos litigation have now been dragged in one way or another."
Munger went a step further. "I think we will have more of the mess than we have now," he said when asked about his prediction of asbestos torts five years from now. "It has morphed into a very disadvantageous situation where there is enormous amount of fraud. The wrong people are getting money."
In the end, however, the fallout could present some opportunities for Berkshire. "It is not impossible that asbestos litigation presents some opportunities for Berkshire to buy some companies out of bankruptcy as a result of their asbestos liability," Buffett said. "We will be very careful both in our insurance operations and in our acquisitions in avoiding unnecessary asbestos liability."
Berkshire purchased construction supply company Johns Manville in 2001; it had filed bankruptcy in 1983 as a way to handle asbestos liability claims against itself. "We may see more companies that end up in Berkshire as a result of asbestos-forced bankruptcy," Buffett predicted.
The talk of corporate governance and executive excesses from
the first half of the annual meeting turned to company stock-option plans as the meeting continued. "You talk generally about stock options plans in America and you have seen a lot of terrible behavior," said Munger.
Buffett and Munger are generally opposed to using stock options as executive compensation, but they are adamant that companies should account for stock options as an expense. Those who say expensing options would cause unfair double counting are making "an insane argument," sniped Munger. "An option is both an expense and dilution."
Munger especially condemned veteran, wealthy executives with hundreds of millions in assets who still demand options in return for loyalty. "By that time you should have loyalties," Munger said. "You should be thinking more about
setting the right example rather than taking another hundred million for yourself."
The process, Munger said, is "demented. I also think it is immoral."
Buffett said he also is concerned about stock options priced below the intrinsic value of the company -- particularly when an executive would never consider selling the company for such a discounted price. "A CEO that grants himself an option at a price that is ridiculously low bothers me."
Munger suggested executive compensation is among the worst and most dangerous of abuses in corporate America. "A lot is horribly wrong in corporate compensation in America," he said. "The system of using stock options on the theory that they really don't cost anything has contributed to a lot of gross excess. ... Large percentages of people look at corporation compensation and think
and it is not good for the country."
Insurance: Getting Stronger
As Buffett noted
in his letter to shareholders in March, the Sept. 11 terrorist attacks had a profound impact on Berkshire's insurance business in 2001, leading to a decrease in Berkshire's book value for the first time since Buffett took the reins in 1965. However, Buffett predicted the General Re subsidiary would become "our No. 1 asset," and predicted "terrific results" from the company's major reinsurance business.
Despite the problems, Berkshire's conservative underwriting allowed the company's insurance operations to survive. "We had a margin of safety and it turned out we needed it."
In a new tactic at the Berkshire confab, Buffett delivered prepared remarks about the insurance businesses, showing financial data for various subsidiaries. He spent nearly 20 minutes explaining that Berkshire's float increased by about $1.8 billion in the first quarter, to $37.3 billion. Float is money collected in premiums but not immediately needed to pay claims. Buffett uses the float to fund acquisitions and Berkshire's investments.
Quotes and Quips
Just when the six-hour Q&A marathon threatened to drag, a quip by Munger or Buffett brought the audience back to life.
Berkshire's recent acquisition of Fruit of the Loom provided plenty of "brief" levity, with Buffett noting his new slogan for the company: "We Cover the Asses of the Masses." Why Fruit of the Loom? "We can assure that Berkshire shareholders don't lose their shorts," Buffett quipped. "For years Charlie has been telling me we have to get into women's underwear. And Charlie is 78
so it's now or never."
Asked about Wall Street analyst reports, Buffet was direct. "Analyst reports mean nothing to me," he said. "If anybody who is sending me analysts reports would send me the money they spend on postage I would appreciate it."
Munger, on the other hand, had some earthy terms for derivative accounting. "To say that derivative accounting is a sewer is an insult to sewage."
Munger was also self-effacing about the company's failure to invest in pharmaceutical stocks. "We failed to get it right the last time," Munger said, "and we'll probably fail to get it right the next time."
Next, the Omaha Royals, a minor baseball league club partially owned by Buffett, take on the Oklahoma RedHawks in a Saturday evening ballgame. The focus will be Buffett's first pitch and the hundreds of autographs he'll sign and photos he'll pose for with shareholders. On Sunday, one last chance to grab jewels from Borsheim's, plus Buffett meets the press.
Watch for a complete wrap-up on Monday. Plus, for
subscribers, periodic updates on the Columnist Conversation Sunday.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to