By Laura Rittenhouse – Originally Posted on Forbes.com.
Over the past 18 years, I’ve attended Berkshire Hathaway annual meetings in Omaha and have written three books about Warren Buffett and Berkshire’s culture of candor. Usually, I can predict what questions will be asked at the meeting and often how they will be answered.
This year was different. During last weekend’s six-and-a-half hour Q&A, Buffett and Vice-chair Charlie Munger revealed innovations that challenge our views on capitalism and corporate governance. If you couldn’t be in Omaha last Saturday, here are five big ones:
1. Enduring Earnings Power: Lots of companies measure success by current stock price, PEs and total return – the components of “creating shareholder value”. Buffett focuses first and foremost on building businesses that generate “enduring earnings power”. As a result, Berkshire now has leading franchises in railroads and energy, services both essential to maintaining our quality of life and economic vitality. His insurance float has grown from $39 million in 1970 to just over $77 billion today. This cash is available to Buffett to add to Berkshire’s earning power. Berkshire’s new partnership with Brazil’s 3G Capital adds more capability to acquire more enduring businesses, like the H.J. Heinz Company in 2013.
2. Over-trusting Culture: Berkshire aspires to create an over-trusting culture. The 300,000+ Berkshire employees are advised not to do anything they would not want to find on the front page of their local paper. Buffett and Munger set moral examples. They prefer not to micro-manage behavior and weaken individual initiative and good common sense. Such rules can breed mistrust. Buffett is the first to admit that this strategy poses risks. Surely, at least one Berkshire employee is doing something wrong. And any consequences from this will be swiftly addressed. On balance, he and Charlie expect the benefits of over-trusting – dedication to getting a job done right, teamwork and creativity – outweigh the risk of bad apples.
3. Centrist Capitalism: Investors were vocal in their disappointment that Buffett chose to “Abstain” rather than vote “No” on [entity display=”Coca-Cola” type=”organization” subtype=”company” active=”true” key=”coca-cola” exchange=”NYSE” natural_id=”fred/company/1020″]Coca-Cola[/entity]’s controversial executive compensation plan. His vote straddled positions of both admiring management and disagreeing with their plan. It allowed him to continue conversations with CEO Muhtar Kent (after the voting) about how to change the plan. Buffett’s unpopular decision offers a model to our polarized government and other embattled CEOs to find a middle ground – before declaring war.
4. Destructive Transparency: When asked if Berkshire would publicly disclose the compensation paid to its managers in the future, Munger said, “No.” Over the years, he and Buffett have warned that transparency in disclosing executive pay ignites CEO envy and sets compensation levels that other CEOs feel driven to match or exceed. It’s human nature. We measure our worth relative to what others achieve and acquire, regardless of whether we need, want or even deserve this. Buffett announced that he will write more about Berkshire’s compensation policies in his 2014 shareholder letter.
5. Abominable No Man: Lots of shareholders wanted to know who might eventually replace Buffett. He agreed with an investor that finding a successor to Charlie Munger was equally important. Buffett values Munger’s no-nonsense approach to decision-making. Calling his long-time partner, the “Abominable No Man,” Buffett praised Munger’s ability to assess choices from multiple perspectives. This has saved Berkshire money over the years. Even when disagreeing with a “No” vote from Munger, his straight talk allows Buffett to say “Yes” with greater confidence. Buffett hopes his successor develops a similar truth-telling relationship.
Asked about his failure to beat the S&P over the past five years, Buffett turned to Munger for a comment. Admitting that Buffett has chosen a difficult apples-to-oranges benchmark comparing Berkshire’s growth in book value including taxes with the S&P 500, Munger mused: “If underperforming the S&P 500 in just 10 of the last 49 years is failure, I want more of that.”