2014: Can we count on Howard Buffett to defend the culture of Berkshire?

ANDREW ROSS SORKIN: Warren. This is a tough corporate governance question. I probably received about a dozen of them this week, some polite and some less polite. This —

WARREN BUFFETT: Use one of the polite ones.

ANDREW ROSS SORKIN: This is probably one of the more polite ones.

“Your son Howard serves on the board of Coke and voted to support its CEO pay package proposal, which you have said was excessive and you were against.

“You have said Howard will become non-executive chairman of Berkshire after you step down, as its, quote, ‘protector of culture,’ to uphold the morals that you and we all hold so dear.

Given his role in the Coke vote, how can we count on Howard to defend the culture of Berkshire and ensure that the future management of Berkshire does not benefit at the expense of its shareholders?”

WARREN BUFFETT: Yeah. Well, I think, as I mentioned in at least one interview, I voted for not — I’m not referring to Coke here necessarily — but as a director of various companies, I not only voted for comp plans that were far from what I would’ve come up myself, but I voted for acquisitions that I didn’t think make much sense.

I voted against a few. And they attracted a lot of attention. But they were big ones, where I really think — where I thought — it really made a difference.

But the nature — and this is something worth exploring, generally, because the nature of boards is such that they’re part business organizations and part social organizations. And people behave in some ways with their business brain and they behave to some extent with their social brain.

And I would say — and I said this — that in 55 years of being on corporate boards, and 19 companies aside from Berkshire, I don’t think I’ve ever seen a comp committee report come in and get a dissenting vote.

And the social reason for that is that the board organizes itself in a way whereby certain activities are delegated to a smaller portion of the board, one being a compensation committee.

And that committee presumably meets for a few hours the day before the meeting, or maybe the morning of the meeting. And then they go into a board meeting. And the comp committee reports on its activities. And you’ve delegated that activity, as a board member, to that group.

It’s almost unheard of to question that. I’m not saying that maybe it shouldn’t be questioned, but I’m just saying that that is the way it works.

Now bear in mind that the so-called independent directors on such a board are probably receiving maybe $200,000 a year, maybe $300,000 a year. Believe me, they are not independent.

They’re independent as measured by some standards, perhaps, at the SEC, but they — you know, how would you feel about having a job that required you to go to work four or six times a year, pleasant company, you know, certain amount of prestige attached with it, and on top of it, you get paid maybe $300,000 a year and you kind of hope to get another job like that? That is not independence.

So, you get a group coming in like that from the comp committee. And in those 19 boards, I was put on the comp committee exactly once. Charlie might be able to tell you exactly what the result was that time. They do not look for Dobermans. (Laughter)

They look for cocker spaniels. And then they make sure that the tails are wagging. (Laughter)

But that is — don’t condemn it too much because you and I are doing similar things in other parts of our lives.

You know, the social dynamics are important in board actions. My son Howard — in fact, my other two children as well, if they were involved — you know, they would have a dedication, and do have a dedication, to the culture of Berkshire, which is clearly defined. It’s one of the reasons I want it clearly defined. And it’s reinforced by the behavior and it’s reinforced by results.

And, incidentally, their job would not be to set the compensation. I mean, the non-executive board chairman is not there to select the compensation of the CEO or others. He’s not there to select the CEO.

He is there to facilitate a change if the board of directors decides a change is needed. And that can be important. Very, very, very unlikely to be important in the case of Berkshire.

But it’s a nice, little, extra safety valve. And Howie’s the perfect guy to carry that out.

And like I say, I voted for comp plans at various places, including way back, you know, at Coke that were far from what I would’ve designed myself. And the ones I designed myself would have worked.

But that is the way boards work.

I was made chairman of one comp committee, and Charlie can tell you a little about that.

CHARLIE MUNGER: Yeah. (Laughter)

Warren was totally voted down at Salomon Inc. In fact, people acted like, what in the hell is he doing? How could he be disapproving compensation on Wall Street?

And I think the general idea that a person should just shout disapproval all day long of everything he disapproves of is very suspect. In the world in which we inhabit, people accomplish more if they pick their spots for public disapproval.

And knowing both Howie and Warren Buffett, I don’t think you have to worry that they’re going to go crazy or be soft and foolish just because they don’t shout all the time about everything they disapprove of. If we all did that, we wouldn’t be able to hear each other.

WARREN BUFFETT: Yeah. (Applause)

If you — if you’re in any social organization and you keep belching at the dinner table, you’ll be eating in the kitchen before very long. (Laughter)

And people won’t pay any attention to you.

I mean, you really have to — you not only have to pick your spots, you have to pick how you do it.

I mean, you — that could even be — I mean, sure, Charlie gives the marital advice around here, as you noticed, in the movie, but it’s not even a bad thought to keep in mind in marriage, I mean, in terms of — of attempting to change the behavior of others, which is — you’ll have a very limited ability to do, in any event. It’s not helped by shouting a lot.

CHARLIE MUNGER: I offend more people than you do. And I’m quite satisfied with your level of disapproval. (Laughter)