This coming weekend, Warren Buffett hosts his famed annual meeting of Berkshire Hathaway
shareholders in Omaha, Neb. The event is expected to draw tens of thousands live and a million more online. To paraphrase an old line about General Motors: As goes Berkshire, so goes America.
That is, like other great American companies, Berkshire is a magnet for controversial shareholder proposals. Too often, these proposals have degenerated into distracting rituals rather than opportunities for real engagement on corporate topics.
This year is no exception, with Berkshire hosting copycat votes on contentious matters from greenhouse gas emissions to workforce diversity that will certainly fail. The doozie this year, however, is a proposal before shareholders at many companies to split the jobs of chairman and CEO — in Berkshire’s case, effectively firing Warren Buffett.
Initiating this proposal is the National Legal and Policy Center, an activist organization that happens to be a Berkshire shareholder and which, under federal law, can require Berkshire to include its proposal in the company’s proxy.
In support of its proposal, the Center makes a simple argument, mainly citing “good governance” gurus who say the board’s job is to oversee the CEO, and a board chair can’t oversee him or herself. They state that the chair should be independent and having the CEO as chair results in “weakening a governance structure.”
That argument is common but superficial, applicable to some companies but not others. Ideal personnel arrangements depend on the personalities involved. Enron, an elaborate fraud, split the functions; Berkshire, progenitor of legions of millionaire shareholders, combines them. Public companies today are mixed, half splitting and half combining, proving the most appropriate rule for this topic: it depends.
But the author of this proposal thinks it knows best and that there should be one rule for all companies. That’s why it has put the same proposals this year to Coca Cola Co.
Mondelez International Inc.
Goldman Sachs Group Inc.
Home Depot Inc.
The Berkshire board’s response to the proposal was as ritualistic as the proposal itself: The board says it believes that, as long as Buffett is CEO, he should continue as chair. The board added that once Buffett leaves the CEO role, it intends to separate the CEO and chair functions. Maybe that’s all the explanation this proposal deserves, but the issue is worth more examination.
“ At companies with iconic leaders and unique cultures, like Berkshire, it can pay for a single person to be the company’s face and voice. ”
At companies with iconic leaders and unique cultures, like Berkshire, it can pay for a single person to be the company’s face and voice. For instance, Buffett is famous for doing business differently than rivals, especially when it comes to acquisitions.
Compared to other companies, Berkshire acts quickly on acquisition opportunities, often within hours, and offers its best- and-final price upfront rather than haggle. The company conducts scant due diligence and promises autonomy and permanence post-acquisition. This process arguably works best when Buffett alone is at the helm, meaning it pays for him to hold both positions.
Critics might counter that splitting the functions can provide a short but healthy step towards Buffett’s looming succession, now that he is in his nineties. Rather than wait until he departs to replace him in both roles, it may be wise to replace him in one now and the other later. After all, continuing Berkshire’s prosperity beyond Buffett will require transferring those institutional commitments to new managers. The board would likely reject this argument if made, but it’s an argument that properly focuses on Berkshire’s specific circumstances rather than all-purpose governance-guru generalities.
The lack of back-and-forth points out the poverty of shareholder proposals today. Corporate gadflies roam from company to company merely repeating the same nostrums. They present themselves as knowing which arbitrary rule is best for all companies and shareholders. The practice of ignoring company specifics induces boards to deliver the same rote response the proposal deserves.
When shareholder proposals take this uniform shape, their value erodes. Votes become meaningless rituals, better ignored than studied, let alone adopted. If activists persist in this bad habit, they will forsake a wonderful tool of shareholder democracy, ruining it for the rest of corporate America and its shareholders.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of “The Essays of Warren Buffett: Lessons for Corporate America.” Cunningham owns shares of Berkshire Hathaway. For updates on Cunningham’s research about quality shareholders, sign up here.