Opinion: Why Berkshire Hathaway would be hurt by the changes proposed by these big shareholders

Corporate proxy season has arrived. This is the time of year when companies hold annual meetings where shareholders can make and vote on various proposals. Good feedback and dialogue often result. But some shows prove the logic of corporate law, which places boards of directors rather than shareholders. Boards of directors focus on their company’s economy and are more familiar with its culture, while some shareholders promote parochial goals or political agendas.

Consider the two shareholder proposals put to a vote at this year’s Berkshire Hathaway BRK.A,
+ 1.25%

BRK.B,
+ 1.41%
annual meeting – one on climate change and the other on the diversity of the workforce. If promoters are successful, society will degrade when it comes to the very goals that wind flies espouse. This perversity can be explained either by a misunderstanding of Berkshire – unlikely given the size and sophistication of the supporters – or by a tactic of using Berkshire to promote private interests.

The climate change proposal, by the California Public Employees Retirement System (CalPERS), Federated Hermes and the Caisse de dépôt et placement du Québec (CDPQ), is based on the desire to “promote the long-term success of Berkshire.” The three institutional fund managers propose that Berkshire’s board of directors assesses climate risk management policies annually, publishing summaries on each of Berkshire’s 60+ subsidiaries. The trio say this “would show” that Berkshire “is concerned about the long-term viability of the businesses it owns.” They claim that 1,440 other public company boards are now doing something similar.

While climate change is an important topic requiring remedies, this proposal is not one of them. The proposal does not appreciate three distinctive features of Berkshire culture which both reveal parochialism and doom the proposal to failure. First, Berkshire has a long history of 50 years, owning virtually all of its businesses permanently. He doesn’t need new ways to “promote” or “show” his long-term horizon.

Second, Berkshire and its iconic frontman, Warren Buffett, are idiosyncratic, marching at their own drum against fads and fads. Buffett has repeatedly demonstrated the error of “social proof” – the form of argumentation by supporters that if 1,440 other companies are doing something, it is the right thing to do.

Importantly, as Berkshire’s board of directors explains in advising other shareholders to reject this proposal, Berkshire is a decentralized organization in which each subsidiary operates independently. There are no operations at the Berkshire level where such climate risk management occurs or where a centralized assessment could be conducted. Contrary to conventional belief, such trust-based cultures produce superior decisions on everything from productivity to compliance, including climate risk management, compared to centralized organizations.

For example, Berkshire’s energy subsidiary, one of its largest companies and closely linked to climate issues, has supported the 2015 Paris Agreement from the start by investing in renewable energy and is a major partner from Third Derivative, a global coalition of companies promoting cleaner technologies. Berkshire’s huge rail subsidiary BNSF is an industry leader in efficiency and reducing carbon emissions. Nothing in the shareholders’ proposal would improve these innovations and could not delay them.

Diversity Workforce Proposal, by Powerful “As You Sow” Advocacy Group on Behalf of Small Berkshire Shareholder, Suggests Berkshire Affiliates Report “Diversity, Equity and Inclusion” Efforts (DCI) on all 400,000 Berkshire employees, and report on the Berkshire Board of Directors’ processes, assessments and associated objectives. The proponent again mistakenly cites the herd effect – which ‘everyone’ is doing today – and yet again ignores the Berkshire culture and how its current policy is more likely than the proposal to achieve desired goals. promotion of EDI.

As part of Berkshire’s decentralized and trust-based culture, Berkshire subsidiaries nurture DCI opportunities by spontaneously creating leadership positions and employee-led committees to support these efforts at each company. This fosters a culture and practices that best advance values ​​such as diversity and inclusion in the unique circumstances of each branch around the world. In contrast, the As You Sow proposal reflects a mistaken view that there is a unique way for each of Berkshire’s various companies to measure or adopt DEI. Imposing such a system from headquarters would be more likely to undermine DCI’s objectives.

There is almost no chance that either of these proposals will receive a significant level of support from other Berkshire shareholders. Berkshire shareholder proposals have consistently failed with wide margins – even after excluding Buffett’s stakes by around 30%. Most strongly rejected were the proposals that Berkshire start paying a dividend, rejected in 2014 by 98% of the votes cast, and that the board publish a succession plan, voted against 95% in 2012.

The closest margin, beaten by 88%, was last year’s proposal to require diverse members from outside candidate pools for Berkshire’s board or CEO. This remains well below the overall US business average, which accounts for around 30% of the votes cast. Less than 10% of all receive a majority, often after several stab wounds on the subject.

But shareholder flies appear less interested in winning the vote in Berkshire than in using the company and its other shareholders as a platform to promote parochial interests. They even suggest that the climate change proposal is more of a tool to pressure Berkshire’s external financial auditor to push the boundaries of financial auditing in environmental auditing than a genuine effort to make Berkshire a better one. business.

While shareholder proposals during proxy season can be a cheap and convenient platform for advocating for social change, they can also harm particular companies, as well as the causes themselves, such as ‘illustrate these two elements. For Berkshire, these proposals would erode its culture of trust which has been of great value to its shareholders for six decades. Fortunately, Berkshire’s Board of Directors made this an opportunity to salute its culture and showcase successful efforts to address climate change as well as promote inclusive and diverse workplaces. Score one for American corporate governance this season.

Lawrence A. Cunningham is a professor at George Washington University, a long-time shareholder of Berkshire Hathaway, and editor, since 1997, of Warren Buffett’s Essays: Lessons for American Businesses. For updates, including an invitation to her exclusive webinar at the 2021 Berkshire Hathaway Annual Meeting, register here.

After: Why long-term shareholders Buffett cultivated are a big part of Berkshire Hathaway’s success

Also read: These savvy investors were in favor of ESG long before it was all the rage


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