2022: Are the incentives properly aligned at Berkshire Hathaway Energy with minority shareholders?

Eric Erta: Eric Erta from Albuquerque, New Mexico. First, thank you for a lifetime of knowledge you’ve shared with all of us. You've not only advanced our understanding but have also taught us to behave more rationally, treat one another with more love, and lead more fulfilling lives. So, a very sincere thank you for that. (Applause)

Warren Buffett: Thank you.

Charlie Munger: Uh-huh.

Eric Erta: My question is about Berkshire Hathaway Energy and its unique structure since Berkshire doesn’t own 100% of the company. The first part of the question concerns Greg's ownership and its alignment with overall Berkshire incentives. A wise man named Charlie once said, in a 1995 Harvard speech, how important incentives are to human behavior. Greg’s stake in BHE is worth over $500 million, so I’m curious if there are any plans to convert his BHE ownership to Berkshire stock. If not, could you explain why we shouldn’t worry about Greg’s incentive structure going forward?

Eric Erta: The second part is about leverage at BHE. You’ve always said BHE operates with appropriate leverage given its earning power, but it’s still a significant debt figure relative to current earnings, especially compared to Berkshire’s standards. If Berkshire owned 100% of BHE, would you still operate with the same leverage?

Warren Buffett: OK. I’ll take the second part, and then toss the first one to Charlie. (Laughter)

Regarding BHE's leverage, it’s largely regulated by utility authorities. BHE started with regulated utilities and still focuses primarily on them. We’re actually looking to buy more regulated utilities. Different states require BHE to have a substantial amount of debt because it allows for cheaper rates to customers. If regulators set a return on equity, say 9%, and we can borrow capital at 3%, they’ll want us to use more debt, as it results in lower costs for consumers. We’d prefer all equity, but regulators wouldn’t allow that, as it would lead to higher consumer prices.

For example, in Iowa, where we’ve just been approved to spend over $3 billion, regulators expect a certain debt level. This is typical nationwide, except in Nebraska, where it’s all public power. If Berkshire owned 100% of BHE, we’d follow the same approach to align with regulatory requirements.

Charlie Munger: The first question is simple too—it’s a historical accident. We had a similar situation with Walter Scott, a long-time director who also held stock in the company. It’s not a big issue; Greg has always acted in Berkshire's best interest.

Warren Buffett: We’ve had different ownership percentages in BHE since around 2000. I actually first discussed buying BHE with Walter Scott at a party, where he mentioned the company wasn’t fitting the public mold well and asked if we wanted to take it private. I said, “Sure,” and we quickly reached an agreement. BHE's structure has evolved since then, with Berkshire now owning about 91%, Walter’s estate around 8%, and Greg about 1%.

If the Scotts or Greg ever wanted to sell their shares, we’d be open to it. But I’ve never seen any conflict with Greg’s incentives; he’s always prioritized Berkshire’s interests. If I thought otherwise, he wouldn’t be the right person to run Berkshire.

While I’m here, I can make deals efficiently without unnecessary process, but if I’m not around, there’d be more formalities. Lawyers and bankers tend to complicate things, so it would be easier if any ownership change happened while I’m alive.

Of course, we’d prefer owning 100% rather than 91% since it means more earnings for Berkshire, but there’s no pressure on the Scotts or Greg to sell. And as long as I’m here, Berkshire shareholders will never be taken advantage of—you could sue my estate otherwise! (Laughs)

Charlie Munger: I wish we had 20 more conflicts of interest just like it.

Warren Buffett: Exactly. It’s a logical question, but there’s no problem. Any resolution will be beneficial to all involved, and we’re not concerned about what the Scotts do with their shares. Walter was our partner, and we consider his family partners too. They don’t need to worry about us taking advantage. It’s a good question—thank you.