2022: How can managers foster a shareholder culture like Berkshire's?

MARTIN WEGAND: My name is Martin Wegand. I live in Nashville, Tennessee. Mr. Buffett and Mr. Munger, thank you for your lifetime of teachings and for hosting us back in Omaha this year. (Applause)

WARREN BUFFETT: Well, thank you.

MARTIN WEGAND: You have mentioned that companies get the shareholders they deserve. And in this year’s letter, you mentioned a great satisfaction of yours is working for the individual long-term shareholders. With the growing influence of institutional index funds, how can management teams foster a shareholder culture like the one we have at Berkshire? Thank you.

WARREN BUFFETT: Well, fortunately we have it, and we know more about how to keep it than to institute one. And it’s very interesting. We have a 1,470,000 class A shares outstanding today. Fewer than we had a year ago. And those seats are filled. I mean you are the shareholders in place.

We like the group we have. So why in the world, when we got a fixed number of seats, should we go out and recruit other people to replace you? You know? I mean the ideal shareholder group we can have is the group we have today. And, you know, if we had a church, we’d want the people to keep coming back week after week after week.

If we had a limited number of seats, and we had some wonderful parishioners, we would not go out and recruit another 50 or 100 of them and have to throw out 50 or 100 of the ones we already had. We’ve got. And every company I know, virtually, you know, is wooing new people to come in.

And whether they’re improving the group they get or not, I mean it strikes us as basically crazy. We don’t want anybody different (Laughter) than we have now. And, you know, we’re not going to get rid of the index fund, so we have to get rid of people like you, and we don’t want to get rid of people like you. (Laughs)

And I just don’t understand why if you had a neighborhood, and the size of the terrain or whatever it was would be such that you could have ten neighbors, and they were all great neighbors, why in the world would you go out and say to a whole bunch of people going up and down the street, you know, “Why don’t you buy the house of the guy next to me?”

You know, (Laughs) it is weird, but there’s an awful lot of people that make their living by doing that, and they never really question. I would sort of ask any company that’s making analyst presentations every month or something, “Which of the present ones are you trying to get rid of?”

You know, basically, because I hope you’re not going to have more shares outstanding at the end of the year than you have now. And am I supposed to, you know, get out of the way so (Laughs) some other fund that is thinking about what your stock is going to do next week replaces me? It is a very, very, very weird situation.

And of course, the really crazy process that has developed is people talking to, we’ll say, analyst group, you know, sort of the high priests of finance, you know, some companies are doing it more than once a month. Well, just imagine if you work for that company, you go to work for that company, and every month people are repeating these things about their company that, “It’s important that we have more services per customer at 6.2 and we got to get to seven,” or something like that.

And they’d say that month after month after month, so it becomes a catechism. And CEO says it or his or her representative says it, and how do you go on the next month and say, “By the way, we were really wrong, and this is what we should be working on.”

You don’t say that. And it’s a terrible problem the new CEO has coming in after a previous CEO has said the important thing to do is to hit your earnings targets. Well, you know, he’s been meeting them, in all probability, by cheating from some time to time.

And this guy hands you the baton, and are you going to come out and say, “Well, we’ve really been cheating a little and it’s really counterproductive to the development of the, you know, companies, not to make earnings projections and just to give you the results as they come, rather than making up a few things.

And the accounting department, you know, they can’t do it. It’s not human nature, and besides, you wouldn’t get appointed the successor. But you just don’t go in and say, “We’ve been perpetuating these myths that we can always deliver 8% growth or we can do this or do that, or the most important thing is this.”

You can’t go in and change that if every month you’ve been preaching to people that this is what we stand for, and just ask another question and carry this message out to the masses, to the analysts and all that. And it’s a totally destructive policy.

I mean, you know, I can, within gap accounting, I can play a lot of games with numbers. We’ve done a lot-ta dumb things at Berkshire. We have never told anybody that the number had to be this or that or to change anything. I mean once you start it, it’s all over.

You can’t quit. It’s like taking $5 out of the cash register. You know, the first time you take the five bucks out, you’ll say, “Well, I’m going to put it back.” And then do it a few times, and you’ll never stop. In fact, do it once and you probably never stop.

But if something is going to be destructive, the thing to do is not start it. And forecasting earnings, I can’t imagine anything more destructive. I’ve got 360,000 people out there, and they know whether I’m lying or not. Many of them.

And they know what they send in figures, and they get changed? You know, what message are you telling? We’ve got one dramatic illustration of that within Berkshire. And it’s just, you know, if you start lying you’ve got a big problem. It’s that simple.

And if you start saying to your team that somehow you’ve got a job — you’ve got shareholder relations, your job is to go out and tell everybody that our stock is the best thing among thousands of choices to buy, every day. Well, that’s crazy.

So what do you tell them? Well, they try to, you know, see which way the wind is blowing and figure out what they have to tell people. And that they go out and tell them, and then if you’re human, and you’ve said, “We’re going to earn $3.59 a share,” you can get to $3.59. And get there quite a while.

And, you know, you can have all these processes, but if you have a culture of lying, the processes really don’t — they just disappear. And Charlie and I have seen it, well, probably every time we’ve gone on a board. Charlie, tell them about it? (Laughs)

CHARLIE MUNGER: Well, I think Berkshire’s culture’s going to last a long time after we’re gone. And I think it should, and I think it’ll prosper pretty well. The rest of corporate America is quite different, and it gets more different, I think, with each passing decade.

And it’s getting very peculiar. Pretty soon they’re going to hold all the shareholders’ meetings online, and the shareholders won’t even come. And it’s just it’s getting very peculiar. And the index fund’s getting more and more important than the voting. And it’s like everything else in life. It changes, and not always in ways you like.

WARREN BUFFETT: And it ends up for selecting different CEOs and all kinds of things. I mean, you’re not going to appoint a successor CEO that’s going to come in and say everything that’s been done before, you know, has been kind of fraudulent. You know? I mean if we needed to book an extra sale after the end of the quarter, if we needed to adjust the reserves, once you start lying, it’s all over.

And I just don’t know any way around that, except to try every way you can to not — if you set the wrong example at the top, you’ve got a real problem. You know? And we’ve never told anybody to change a figure. And we never will. And if they had been changing figures, you know, we’d be in all kinds of trouble, because they know it and I’d know it and the next person would know it. And it just deteriorates.

And we’ve really seen it time after time. The way boards operate, you know, it has to be process-oriented. I mean I understand the problems that Delaware has in writing a statute that judges face when they look at things, but it’s just extraordinary what an emphasis on process can do to an organization, because they think they can do anything if it’s allowed.

And, you know, eventually the foundation crumbles.