Berkshire Hathaway Annual Meeting 2010 - Financial Reform, CEO Succession, Capital Intensive Shift

Buffett on quarterly earnings obsession: 'Undue focus on quarterly earnings not only is probably a bad idea for investors but we think it's a terrible idea for managers. If I had told our managers that we would earn $3.175 for the quarter, they might do a little fudging in order to make sure that we actually came out at that number. There was a very interesting study published a few months ago where thousands of earnings reports were examined and instead of taking it out to the penny which is customary in the reporting they took it out one further digit. Of course if it's four or less you round downward and if it's five or more you round upward. They found out that a statistically impossible small number of fours showed up because if they got to four tenths of a cent somehow somebody in the accounting department managed to find another tenth of a cent so they could round upward. It was not an accident. You do not want to have - in our view we think it's terrible practice - to be thinking about trying to report to some penny that you've whispered to Wall Street analysts in previous months. We probably carry that to extreme at Berkshire but we always think of the enterprise as a whole. We don't even put down - we have to when we publish generally - but we don't even put on the earnings per share. We're not focused on that number in any quarter in a year. We're focused on the build up of value.'

Buffett shares early Berkshire story: 'We were having trouble raising five and a half million dollars and I called Gus Levy of Goldman Sachs and I called Al Gordon of Kidder Peabody - those were two of the most prestigious firms in Wall Street at the time - and I said "would you guys help me, we're trying to raise $5.5 million and there's nobody that wants to give Charlie and me $5.5 million and the underwriters we've lined up are having trouble getting it done." Both Gus Levy and Al Gordon said to me "Warren will take a big piece." [Shows tombstone slide] Goldman Sachs and Kidder Peabody were actually the next largest underwriters but they were so ashamed of being associated with our dinky little company that they asked us to leave their names off. They wanted to give us money under an assumed name. But they did come through for us - believe me a lot of people weren't coming through for us then. I do have a long memory for people that have taken good care of Berkshire over time. Al Gordon died last year at the age of 107. He worked until he was 104. He was a remarkable man. Gus Levy was a remarkable man and I thank them for their participation even though they did want to do it under an assumed name.'

On financial reform bill: Buffett: 'I don't think anybody in America right now including people in Congress know what's going to happen and my guess is that most of them have not read the bill either.' Munger: 'Our governmental system which regulates the big investment banks was so permissive and the investment banking culture had a nature that together helped arrange that under stress every big investment bank except Goldman Sachs was going to go belly up. A system that likely to go belly up that is so important to the country should be changed so it's less permissive in what it allows the banks and investment banks to do. The banks and investment banks just hate the idea of losing investment flexibility - for instance on maintaining the biggest derivative book in the world like JP Morgan Chase. They hate giving that stuff up. That doesn't mean it's good for the country that they be allowed to continue to do as they have done.' Buffett on what he'd do: 'If I were the benevolent despot of America I would make Paul Volcker look like a sissy.' Munger: 'I would reduce the activities that are permitted if you're de facto using the government's credit to help your business run. You shouldn't have a balance sheet with a bunch of financial statements in the trillions which you can't really understand even if you're a partner in the business. This is crazy. The complexity that has come into the system is quite counterproductive and of course the people have proven they can't really control it. I think what we need is a new version of Glass-Steagall that drastically limits what both commercial banks and investment banks are allowed to do. They should have a much simpler and safer mode of business.'

On succession planning: 'There will be a new CEO in place in Berkshire within 24 hours and all the directors know who it would be and they're all comfortable with it. There should be somebody in place within 24 hours. The investments - they don't need anything done next week. I can go on vacation on investments. We could - the directors could wait a month, they could wait two months. The Coca-Cola isn't going to go away, Procter & Gamble's not going away, American Express - there's no great need to be doing things day by day. We don't do things day by day. So they can be fairly leisurely in working out probably in conjunction with the new CEO who they would like to bring in, how they would like to compensate them, what the number might be. That is not fixed in stone at all. The one thing I can tell you is that there's some very able people who would like very much I think to be managing money for Berkshire and who would do a good job and who were familiar to at least some of the directors. And that problem would get solved. The CEO problem - which is not a problem but the CEO question - you want an answer for right now and you want to be prepared to implement it the next day. Although I did just have a physical - it came out fine.'

Munger on Berkshire's future: 'I am not the most optimistic of the two people up here and yet I'm quite optimistic that the culture of Berkshire will last a long long time and will outlast greatly the life of the founder. I think it's going to work. I really think - we shouldn't be getting into superlative - but I think we have as strong and distinctive a culture in terms of managers, ownership, the whole works, of any really large company in the country. And it's taken a long time to develop but it becomes self-reinforcing after a point. And we love it and I think they'll love it after I'm gone.' [Audience starts to clap] Buffett: 'Don't clap there.' Shows confidence in institutional durability beyond founders.

Buffett on capital-intensive shift: 'As important a question as you could ask virtually at Berkshire. We are putting money - big money - into good businesses from an economic standpoint but they are not as good as some we could buy when we were dealing with smaller amounts of money. If you take See's Candy - it has $40 million or so of required capital in the business and it earns something well above that. Now if we could double the capital, we could put another $40 million in it at anything like the returns we receive on the first $40 million, I mean we'd be down there this afternoon with the money. Unfortunately the wonderful businesses don't soak up capital - that's one of the reasons they're wonderful. At the size we are we earned operating earnings $2.2 billion or whatever it was in the first quarter and we don't pay it out.' Shows honest acknowledgment that scale forces lower-ROIC investments.

On compensation: 'The first thing we do is we never engage a compensation consultant. We have 70-plus businesses with very different economic characteristics. To try to set some Berkshire standard to apply to businesses such as insurance which has capital as a bulwark but which we get to invest in other things we'd invest in anyway so there's minus capital involved, to a BNSF or a utility business where there's tons of capital involved, or in between See's where there's very little capital involved - we have other businesses that are basically just so damn good that the chimpanzee could run them and we have other businesses that are so tough at times that if we had Alfred P. Sloan back we wouldn't be able to do very well with them. So there's enormous differences in the economic characteristics of our business. I try to figure out what if I own the whole business what is a sensible way to employ somebody and compensate them considering the economic characteristics of the business. So we have all kinds of different plans. It doesn't take a couple of hours of my time a year to do it. We have managers who stay with us so they must be reasonably happy with the plans. It is not rocket science but it does require the ability to differentiate. If we had a human relations department it would be a disaster. They would be attending conferences and people would be telling them all these different things to put in equations. It just requires a certain amount of common sense and it requires incidentally an interaction with the managers where I listen to them, they listen to me and we sort of agree on what really is the measure of what they're actually adding to the company.' Munger: 'U.S. Army and General Electric have centralized personnel policies that probably work best for them and we have just the opposite system and I think it clearly works best for us. Practically nobody else is entirely like us which makes us very peculiar.'

Cleveland shareholder asks Berkshire to hire people to give them hope. Buffett: 'We will hire people when we have something for them to do. [Long pause] We are actually net hiring. When the Burlington is carrying 173,000 cars a week like last week as opposed to sometime back 155,000 we need more people and we need more people at some of our other businesses. But our carpet business we are down 6,000 people plus from our peak. Well people aren't going to quit buying carpet forever. We will be hiring a number of people but there's no sense hiring them when there's nothing for them to do. I went through a period particularly dramatic to me because Berkshire Hathaway owned a couple of textile mills and eventually we had to close those mills after we tried for 20 years to make them work. If you believe in creative destruction and you believe in capitalism essentially figuring out ways to do the same things with less and less people, you better have a social safety net and we've got a pretty good one in this country, a whole lot better than we had 30 or 40 years ago. Right now there is significant unemployment - not any higher than it was in 1982 or thereabouts but it's a lot and it's not going to go away fast although it is going to go away. We should take - in my view society owes some minimum living standard to people who are looking for work, trying to get work and frankly at a time like this they're not going to be able to find it. But I don't think that Berkshire Hathaway should be the social safety net.' Munger: 'If Berkshire started out to create a bunch of make-work jobs in order to increase human hope, the net effect over time would be to reduce human hope.' Buffett: 'I think that's true but I'd rather have Charlie saying it than me.'

Munger on oil: 'You're failing to recognize something really important in the technology of 150 years ago - they really needed the oil to get ahead. In our advanced civilization which has benefited from this last 150 years of technological expertise, we don't - we can get ahead without the oil if we have to. Now Freeman Dyson is a physicist who is not an economist but a genius and he's been very good at pointing out that it isn't that horrible to contemplate a world which goes off oil provided that world is as rich and knowledgeable as ours is now. So the fact that they couldn't have got to where we are now without the oil starting 150 years ago does not mean we can't do without the oil if we have to.' Buffett: 'We need the oil and the gas and the coal eventually for chemical feedstocks more than we need it for keeping warm and propelling our vehicles. And the adjustment fortunately will be fairly gradual. It is not like 85 million barrels of a day goes to 50 million or something in five or ten years. So it's a workable period of adjustment in my view. It doesn't bother Freeman Dyson who knows more about it - I don't think it should bother you too much.'