Opinion: Why Berkshire Hathaway Would Be Hurt by Changes These Big Shareholders Propose

Corporate powers season is here. This is the time of year when companies hold annual meetings where shareholders can make and vote on various proposals. Good comments and dialogue often result. But some shows test the logic of corporate law, which puts boards of directors rather than shareholders in charge. Boards focus on the economics of their particular company and are more familiar with its culture, while some shareholders promote parish goals or political agendas.

Take the two shareholder proposals to be voted on at the Berkshire Hathaway BRK.A annual meeting, + 1.33% BRK.B, + 1.73%, one related to climate change and the other to workforce diversity. If the proponents have their way, the company would worsen the very goals that horseflies defend. That perversity can be explained as a result of a Berkshire misunderstanding, unlikely given the size and sophistication of the proponents, or as a tactic of using Berkshire to further private interests. The climate change proposal, from the California Public Employees Retirement System (CalPERS), Federated Hermes and Caisse de dépôt et location du Québec (CDPQ), is based on the desire to “promote the long-term success of Berkshire.” . The three institutional fund managers propose that the Berkshire board annually evaluate climate risk management policies, publishing summaries for each of Berkshire’s more than 60 subsidiaries. The trio say this “would show” that Berkshire “is concerned about the long-term viability of the companies it owns.” They argue that another 1,440 public company boards are now doing something similar. While climate change is an important issue that requires solutions, this proposal is not one of them. The proposal misses three distinctive features of Berkshire culture that reveal parochialism and doom the proposal to failure. First, Berkshire has a reputation for being long-term, having owned virtually all of its businesses on a permanent basis for 50 years. You don’t need new ways to “promote” or “show” your long-term horizon. Second, Berkshire and its iconic leader, Warren Buffett, are idiosyncratic and march at their own pace against fads and fashions. Buffett has repeatedly demonstrated the fallacy of “social proof,” the proponents’ form of argument that if 1,440 other companies are doing something, it‘s the right thing to do. Above all, as the Berkshire board explains in advising other shareholders to reject this proposal, Berkshire is a decentralized organization with each subsidiary operating autonomously. There are no operations at the Berkshire level where such climate risk management occurs or where any centralized assessment can be performed. Contrary to conventional belief, these trust-based cultures produce superior decisions on everything from productivity to compliance, including climate risk management, compared to centralized organizations. As examples, Berkshire’s energy subsidiary, one of its largest companies closely related to climate issues, has supported the 2015 Paris Agreement from the beginning by investing in renewable energy and is a major partner in Third Derivative, a coalition global business promoting cleaner technologies. Berkshire’s huge rail subsidiary, BNSF, is an industry leader in efficiency and carbon reduction. Nothing in the shareholders’ proposal would improve such innovations and could delay them. The workforce diversity proposal, from the powerful advocacy group “As You Sow” on behalf of a small Berkshire shareholder, suggests that Berkshire subsidiaries report “diversity, equity and inclusion” (DEI) efforts throughout Berkshire’s workforce of 400,000, and they report on the Berkshire Board-related Processes, Assessments and Goals. The proponent again fallaciously cites the herd effect – that “everyone” is doing this today – and again ignores the Berkshire culture and how its existing policy is more likely than the proposal to achieve the desired goals of promoting DEI. Under Berkshire’s decentralized and trust-based culture, Berkshire subsidiaries promote opportunities for DEI by spontaneously creating senior positions and employee-driven committees to support such efforts in each business. That fosters a culture and practices that best promote values ​​such as diversity and inclusion in the unique circumstances of each subsidiary around the world. In contrast, the As You Sow proposal reflects a misconception that there is only one way for each of Berkshire’s various companies to measure or adopt DEI. The imposition of such a system from headquarters is more likely to harm DEI’s objectives than progress. There is almost no chance that any of these proposals will receive a significant level of support from Berkshire’s other shareholders. Shareholder proposals at Berkshire have always failed by wide margins, even after excluding Buffett’s stakes of around 30%. Most decisively defeated were proposals that Berkshire begin paying a dividend, rejected in 2014 by 98% of the votes cast, and that the board publish a succession plan, rejected in 2012 by 95%. The closest margin, defeated by 88%, was last year’s proposal to require diverse membership in external candidate pools for Berkshire’s board or CEO. That is still well below the overall average for American businesses, which is about 30% of the votes cast. Less than 10% of all receive the most, often after several stabs at the subject. But shareholder horseflies seem less interested in winning the Berkshire vote than using the company and its other shareholders as a platform to advance parish interests. They even suggest that the climate change proposal is more of a tool to pressure Berkshire’s external financial auditor to push the boundaries from financial audit to environmental audit than a genuine effort to make Berkshire a better company. While shareholder proposals during proxy season can be a cheap and convenient platform for advocating for social change, they can also be a disservice to certain companies, as well as to the causes themselves, as these two illustrate. For Berkshire, these proposals would erode its culture based on trust that has been of great value to its shareholders for six decades. Fortunately, the Berkshire board made them an opportunity to praise their culture and showcase successful efforts to remedy climate change, as well as promote inclusive and diverse workplaces. Get one for corporate America this season. Lawrence A. Cunningham is a professor at George Washington University, a longtime Berkshire Hathaway shareholder, and the editor, since 1997, of The Essays of Warren Buffett: Lessons for Corporate America. To receive updates, including an invitation to your exclusive webinar during the Berkshire Hathaway 2021 Annual Meeting, register here. More: Why the long-term shareholders Buffett nurtured are a big part of Berkshire Hathaway’s success Read also: These smart investors were ESG-friendly long before it was in vogue