Saturday was a sad day for shareholders of Berkshire Hathaway Inc., not only because the company reported a $49.7 billion loss for the first quarter that morning (see earnings release and 10-Q), but also because the Oracle of Omaha played to an empty CHI Health Center while the over 40,000 people (including me) who were set to attend 2020 Annual Meeting had to watch it via webcast.
As probably everyone already knows, the Berkshire Hathaway annual meeting is different than any other annual meeting you will find. It’s more like a multi-day convention with the main feature being an all-day meeting inside a 19,000-seat arena where people come to spend a Saturday listening to two legendary businessmen named Warren and Charlie talk for hours upon end about the world of business and investing in a candid and folksy manner. This one is an outlier in every sense of the word. So, not much, if anything, about it can be used as a benchmark for others. Still, since it’s the most famous annual meeting on Earth, and this would be the first time it would be held in the virtual-only format, I felt an obligation to tune in and provide a write-up.
There are good recaps about the substance of the event by CNBC, Yahoo Finance, and other media outlets, and you can find a complete transcript here. I’ll keep my focus on the governance aspects of the meeting.
Virtual-Only for the First Time
Like in the past, the meeting was as supposed to take place in downtown Omaha on Saturday at 3:45 p.m. local time. Doors were to open at 7:00 a.m. with a movie shown at 8:30 and the Q&A session starting at 9:15. The Q&A was scheduled to go to 3:30 p.m., with a short break for lunch. Then, the formal meeting would start at 3:45.
But, this year, Berkshire shareholders received a letter from Warren Buffett, Berkshire’s Chairman, CEO and controlling shareholder, dated March 13, notifying them that the company “will not be able to allow shareholders to physically attend the meeting, and all special events are canceled.” The Proxy Statement, also dated March 13, had already said that Yahoo was going to webcast the meeting, and this notice said it would now be the way for shareholders to attend virtually. So, there you had it. “Woodstock for Capitalists,” the Super Bowl of annual meetings, would be virtual-only! Who would have thunk it?
On April 27, the company issued a press release that gave some more information about the virtual annual meeting:
Warren Buffett, Berkshire’s CEO and Greg Abel, Berkshire’s Vice Chairman-Non-Insurance Operations will be physically present at the meeting. However, the other Berkshire directors will not be attending the meeting. In addition to the formal business to be conducted at the meeting, Mr. Buffett and Mr. Abel will respond to shareholder questions that were submitted to three journalists (Becky Quick, Carol Loomis and Andrew Ross Sorkin). Ms. Quick will ask those questions that the journalists decide are the most interesting and important. Mr. Buffett and Mr. Abel will have no prior knowledge of what questions will be asked, but they will not discuss politics or specific investment holdings.
…
We will greatly miss seeing our shareholders in Omaha this year. If a shareholder is interested in purchasing certain of the items that would have been offered for sale at the meeting, beginning on May 1, 2020, we will provide a link to certain Berkshire subsidiary websites for specific product offerings and sale dates at www.berkshirehathaway.com.
The Proceedings
I navigated to the dedicated Yahoo Finance web address at about 3:45 p.m. EDT on Saturday. This note was prominently displayed:
Yahoo Finance is the exclusive online host of the 2020 Berkshire Hathaway Annual Shareholders Meeting which takes place on Saturday, May 2nd. Live coverage begins here at 4:00pm ET. Investors and non-investors alike can witness history, live, as Berkshire Hathaway Chairman and CEO Warren Buffett shares his unscripted views on the company, the markets, the economy, corporate governance, and a lot more. Please join us here for this unique event on Saturday May 2nd at 4:00pm ET.
Pre-game show
The pre-game show started streaming at exactly 4:00 p.m. EDT with commentary by Yahoo Finance reporters about Berkshire’s recent financial performance and snippets of past interviews with Buffett. Other were also interviewed, including George Washington University Law School Professor Larry Cunningham. The production of the pre-game show was not entirely smooth, with some intermittent glitches and goofs being worked out in real time.
Opening monologue
The pre-game show went until 4:45 p.m. EST, at which time Buffett opened the meeting, sitting at a table next to an open can and glass half full of Coca-Cola. He started by lamenting the absence of Berkshire Vice Chairman Charlie Munger and assuring us that Munger is in good health. Joining Buffett at the table were Greg Abel, Berkshire Hathaway Vice Chairman of Non-Insurance Operations, and Mark Hamburg, Senior Vice President/CFO. While Berkshire’s Proxy Statement says “Directors are encouraged but not required to attend annual meetings of the Corporation’s shareholders,” there was no mention at the meeting of whether Munger and the other directors were attending online.
Buffett then launched into a lengthy discussion about the current pandemic and economic consequences, along with a history of the United States, beginning with our founding days and focusing on significant events that have adversely impacted our population, economy, and stock market up until the present. The message of his unscripted monologue, which lasted about an hour and a half, was an optimistic one from an old wiseman who had seen it all: “Never bet against America.” After the history lesson, Buffett took twenty minutes to walk through the company's Q1 financial performance released earlier in the day.
Buffett then turned to the formal part of the meeting (i.e., the part that’s actually legally required). Before he called the meeting to order, he told people that this part of the meeting was “not too exciting” and that they should feel free to take a sandwich break and come back for the Q&A!
Virtual shareholder participation experience
As far as how virtual annual meetings are held, Berkshire’s was missing a number of important elements:
You did not need a control number to enter the virtual meeting site. You only needed to register with two-factor email authentication, so anyone could get in without indicating whether or not they were a shareholder.
There was no way to vote, despite the proxy statement having said, “Shareholders who send in proxies but attend the meeting in person may vote directly if they prefer and withdraw their proxies or may allow their proxies to be voted with the similar proxies sent in by other shareholders.” Now that the meeting was being held virtual-only, this appeared to be impossible. Whoa! Section 211 of the Delaware General Corporation Law says that for virtual-only or hybrid annual meetings (emphasis added):
(i) the corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (ii) the corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the corporation.
So, was this a valid annual meeting? Not in my book. (Just to make sure I'm not off-base here, I bounced this off five other corporate lawyers, all smarter than me, and they unanimously agreed this was not a valid annual meeting, which is a Delaware law requirement.) But, is that really a big deal? After all, the voting outcomes were foregone conclusions, especially when there was a controlling shareholder. Only one of the items of business was contested, and that was just precatory shareholder proposal that ended up with only 12% support. The most that could happen now is a shareholder asking the Court of Chancery to force a do-over. Is there any realistic chance the voting outcomes would be different at a do-over meeting? Obvious answer. However, that's not really the point. I may be geeking out on this technicality, but not giving shareholders the ability to vote at a shareholders meeting is the actual definition of disenfranchisement! Voting is the fundamental shareholder right that shareholder advocates covet and protect, and a company not giving shareholders the ability to vote at a virtual-only annual meeting is the nightmare scenario they warn about. If it happened at Berkshire Hathaway, then all of a sudden it doesn't seem far-fetched.
Berkshire and Buffett tend to get a pass on their corporate governance deficiencies, of which there are many (future blog post on this to come), so I doubt anyone will make vociferous arguments that the board disenfranchised shareholders, but any other company that did this would (and should!) face investor backlash, if not challenges to the validity of the meeting.
There were no proxy materials, agenda, or rules of order posted on the virtual meeting site. But, I guess if you weren't able to vote, you didn't need any of this. Still, if this is supposed to be the annual meeting of shareholders, not just adoring fans, there are certain shareholder materials you'd expect to be provided.
The virtual meeting site did not provide a space for questions. Instead, questions were solicited for submission in advance, and people wishing to ask a question during the meeting were shown an email address on the screen to send questions to Becky Quick of CNBC, who would be running the Q&A session after the formal part of the meeting. (More on the Q&A below.)
I don’t know if they announced how many people were on the webcast because I didn’t listen to every minute of the four and a half hour affair. Assuming they didn't, I'm sure it will eventually be publicized by Yahoo.
“Boilerplate resolutions”
Once he called the formal meeting to order, Buffett ran through a written script of what he referred to as the “boilerplate resolutions.” He announced that all director nominees were elected (with the newest director, Ken Chennault, receiving the highest vote, according to Buffett); the Say on Pay vote passed; and the shareholders voted to have the Say on Pay vote take place once every three years. (Unlike most large public companies, Berkshire does not ask its shareholders to ratify the appointment of its independent auditors, as it’s not a legal requirement, so that was not an item of business.) The secretary announced the voting figures, but did not provide any percentage breakdowns of the votes “For” or “Against” or abstentions for these items of business.
Shareholder proposal
The way Berkshire handled the one shareholder proposal it had was presenting the proposal on behalf of the proponent and reading a statement that the proponent had submitted in advance. Buffett explained that they extended an invitation for a representative of the proponent to come in person, but the proponent understandably declined due to the quarantines. The company was going to give the proponent five minutes to present the proposal, which is very generous.
The shareholder proposal was submitted by the New York City Comptroller’s office as part of its broader Boardroom Accountability 3.0 campaign targeting many large public companies. In general, the proposal was for the board, as a matter of policy, to “include qualified female and racially/ethnically diverse candidates” for searches for outside directors and CEOs. (This is a variation of what is known in the National Football League as the “Rooney Rule” for head coaching and certain other senior positions of NFL franchises.)
Berkshire has flat-out said for years that they do not consider diversity when looking at the composition of their board. Per the SEC rule that requires companies to address in their proxy statements how they consider board diversity, this is what Berkshire’s Proxy Statement says:
Berkshire does not have a policy regarding the consideration of diversity in identifying nominees for director. In identifying director nominees, the Governance Committee does not seek diversity, however defined. Instead, as previously discussed, the Governance Committee looks for individuals who have very high integrity, business savvy, an owner-oriented attitude and a deep genuine interest in the Company.
At the meeting, Buffett said that this subject of board diversity is “important” and “serious” and that he would have liked to have a good discussion about it at the meeting, were it not for the Covid-19 quarantine. However, other than repeating, in so many words, what the Proxy Statement says, he didn’t give a thought-out response to the proponent’s prepared statement, which was recited by Hamburg on behalf of the proponent. He did say that he personally is “in sync” with the ultimate end objective, but not the means to achieve it outlined in the proposal. (I have a lot to say about the mixed messages Buffett has given about board diversity over the years, but I’ll save that for a future blog post.) They then announced that 11.9% of the votes were cast in favor of the proposal and 87.4% of the votes were cast against, with 0.7% abstaining.
Q&A session
The formal part of the meeting, which lasted 20 minutes in total, was then adjourned, and Becky Quick of CNBC joined by video from her home to march through the Q&A, always long, freewheeling, and packed full of wisdom. Questions from shareholders had been collected and selected in advance by Quick, New York Times business reporter Andrew Ross Sorkin, and retired Fortune magazine senior editor Carol Loomis. This is how they do it every year because of the heavy volume of questions that get submitted. I’ve never heard anyone accuse the board of silencing the shareholders they don’t like. Basically, everyone understands that there are too many questions for these guys to answer, even sitting up there for hours (this year's Q&A session lasted two hours and 20 minutes), and these particular reporters are ones we know and trust not to just give them the easy ones and filter out the tough ones. Buffett and Munger say that don’t see any of the questions before they are asked. This is another instance of the Berkshire annual meeting being completely different from those of other companies and not something to be used as a benchmark.
See You in Omaha Next Year!
What will happen next year? The March 13 letter said, “Charlie and I will miss you, but we will see many thousands of you next year.” Buffett closed the meeting with a similar promise, “We’ll see you next year, and we’ll fill this place.” That’s great news! I’m going to start making my travel plans now.