Paul Hodgson: Is the ‘Sage of Omaha’ falling from governance grace?

How normal governance standards don’t seem to apply to Warren Buffett

Warren Buffett, CEO and chairman of Berkshire Hathaway, has long been considered above the governance law. He could do no wrong. Despite the governance profile of the firm he has led so successfully for so many years – 48 years to be precise – the company was given a pass, not least because many of Buffett’s comments on governance, US corporate behavior and executive remuneration have accorded very closely with the governance community’s views.
But that hallowed position is coming under increasing strain.
Several powerful pension funds declared dissatisfaction with the board and with Buffett’s leadership of it. Those funds – such as Dutch pension giant PGGM and US public pension fund CalSTRS – wanted Buffett to relinquish his chairmanship and for the board to appoint an independent chairman.
I asked Marcel Jeucken, Managing Director of Responsible Investment at PGGM, about the fund’s decision to withhold votes at the annual general meeting on 4 May this year. He replied via e-mail:
“Our vote is not a reflection of Mr. Buffett’s character or performance, and while we do make exceptions to our policy from time to time, we feel that Berkshire Hathaway would benefit from a separation of the roles of chairman and CEO, and the appointment of an independent chairman. It is our belief that such a structure would benefit shareholders by ensuring that the board, as led by an independent chairman, stays focused on developing and following an appropriate succession planning process for both key members of management as well as individual directors themselves.”

Buffett was re-elected as chairman despite the opposition and this happened because of one of the elements of the company’s poor governance profile: shareholder structure.

So let’s look a little more closely at that. Similar to Rupert Murdoch’s News Corp., there are two classes of common stock outstanding at Berkshire Hathaway – Class A and Class B. Class B stock has 1/1500 the value of class A stock, but it has only one ten thousandth of the voting power of class A shares. Each share of Class A stock is convertible into 1500 shares of Class B stock. Class B stock cannot be converted into Class A stock, even if you own a lot of it. As of the close of business on 6 March 2013, Berkshire Hathaway had 892,657 shares of Class A stock outstanding and 1,126,012,136 shares of Class B stock.This dual-class structure gives Buffett and several other board members disproportionate voting power at the company. Basically what this means is that directors and officers as a group own 42.9% of the powerful Class A stock and 8.1% of the weaker Class B stock. Bill Gates, yes, that Bill Gates, owns most of that. As a whole that gives this group 39% of aggregate voting power, with most of it coming from the Class A stock ownership of Buffett himself.
So, any real change is about as likely at Berkshire Hathaway as it is at News Corp.
So, there’s disproportionate voting power for the board. Now let’s look at the board itself. Five of its non-executive directors (NEDs) are very long tenured with at least 15 years of service.
Concerns about a succession plan for Buffett expressed at the recent AGM – which he rebuffed with the old Walt Disney line that there’s a name on a piece of paper in the boardroom desk drawer – failed to recognise the very real succession planning concerns for NEDs. In addition, NED Howard G. Buffett is the son of Buffett senior and NED Ronald Olson is a partner of the law firm of Munger, Tolles & Olson, which received $5.3m in fees from the company and its subsidiaries.
Of Berkshire’s 12-member board, only six NEDs could seriously be considered independent. Two company executives serve on the board: Buffett himself and vice chairman Charles Munger. Munger is also the chairman, president and CEO of Wesco Financial Corp., in which Berkshire has an 80% interest. Howard Buffett clearly cannot be considered independent. And three other NEDs have outside relationships with the company that compromise independence. Bill Gates’ foundation has received very large donations from Buffett who has said he’ll continue contributing for the rest of his life. Ronald Olson has the conflict of interest noted above. Walter Scott Jr. is the chairman of and a 9.4% owner of MidAmerican Energy Holdings, in which Berkshire has an 89.8% interest. Scott and his family have an agreement with the company that gives Berkshire first refusal to purchase their shares should they choose to sell them.
So that’s the board; unlikely ever to be voted out for the same reason that Buffett is unlikely ever to be unseated as chairman. In fact, so confident is Buffett in his CEO/chairmanship that he’s now gone on the warpath for JPMorgan’s embattled Jamie Dimon.

One area where the company is unlikely to draw fire from shareholders is executive remuneration. The remuneration committee report is a mere three paragraphs long and, because no equity awards have ever been made, there is only a single remuneration table. Buffett and Munger earned $423,923 and $100,000 respectively. Marc Hamburg, the CFO, earned just over a million dollars.
Of a potentially more controversial nature was a shareholder proposal at the recent AGM to require company-owned utilities to set goals for reducing greenhouse gas emissions. This proposal fared about as well as the moves to unseat Buffett. According to press reports – Berkshire has been remarkably slow about releasing any voting results – the proposal gained only 57,569 votes, with 598,162 votes cast against the measure. That’s a significant minority if you discount the 39% voting power of the insiders and the board, but it still failed. The board opposed the idea of setting goals for reducing greenhouse gas emissions because it remains unclear how those emissions will be regulated in the US. In addition, it made a number of claims about completed reductions in mercury, sulfur dioxide and nitrogen oxide emissions, as well as expansions in wind and solar power generation.Support for the shareholder resolution on greenhouse gas emissions faltered because many shareholders and advisory firms describe Berkshire Hathaway as a “financial services” company. In theory that is true, but just in the last year, according to Solaron Sustainability Services’ emNews (Every Material News) research database report on Berkshire, the company’s subsidiaries are under attack on these very environmental issues from a number of different avenues. Berkshire subsidiary BNSF is being sued because coal it is transporting for the Peabody Energy Corp has been dumped in waterways causing pollution. Berkshire’s PacifiCorp is one of a number of companies being sued for non-compliance with the Clean Air Act. And Berkshire’s MidAmerican Energy just settled a lawsuit in Iowa for violating the Clean Air Act. And this is just those suits related to emissions; there are other social, environmental and governance issues being addressed through litigation.
Despite the CEO/chairman split similarity, I don’t know of JPMorgan being hit with any similar suits to these.

Paul Hodgson is a partner with BHJ Partners