Warren Buffett on Corporate Governance

Note one crucial factor allowing this record-shattering payment: Berkshire shareholders during the same 1965-2024 period received only one cash dividend. On January 3, 1967, we disbursed our sole payment – $101,755 or 10¢ per A share. (I can’t remember why I suggested this action to Berkshire’s board of directors. Now it seems like a bad dream.) For sixty years, Berkshire shareholders endorsed continuous reinvestment and that enabled the company to build its taxable income. Cash income-tax payments to the U.S. Treasury, miniscule in the first decade, now aggregate more than $101 billion . . . and counting. * * * * * * * * * * * * Huge numbers can be hard to visualize. Let me recast the $26.8 billion that we paid last year. If Berkshire had sent the Treasury a $1 million check every 20 minutes throughout all of 2024 – visualize 366 days and nights because 2024 was a leap year – we still would have owed the federal government a significant sum at yearend. Indeed, it would be well into January before the Treasury would tell us that we could take a short breather, get some sleep, and prepare for our 2025 tax payments. Where Your Money Is Berkshire’s equity activity is ambidextrous. In one hand we own control of many businesses, holding at least 80% of the investee’s shares. Generally, we own 100%. These 189 subsidiaries have similarities to marketable common stocks but are far from identical.

That sort of gap means BNSF dividends paid to Berkshire, its owner, will regularly fall considerably short of BNSF’s reported earnings unless we regularly increase the railroad’s debt. And that we do not intend to do. Consequently, Berkshire is receiving an acceptable return on its purchase price, though less than it might appear, and also a pittance on the replacement value of the property. That’s no surprise to me or Berkshire’s board of directors. It explains why we could buy BNSF in 2010 at a small fraction of its replacement value. North America’s rail system moves huge quantities of coal, grain, autos, imported and exported goods, etc. one-way for long distances and those trips often create a revenue problem for back-hauls. Weather conditions are extreme and frequently hamper or even stymie the utilization of track, bridges and equipment. Flooding can be a nightmare. None of this is a surprise. While I sit in an always-comfortable office, railroading is an outdoor activity with many employees working under trying and sometimes dangerous conditions. An evolving problem is that a growing percentage of Americans are not looking for the difficult, and often lonely, employment conditions inherent in some rail operations.

At yearend 2022, Berkshire was the largest owner of eight of these giants: American Express, Bank of America, Chevron, Coca-Cola, HP Inc., Moody’s, Occidental Petroleum and Paramount Global. In addition to those eight investees, Berkshire owns 100% of BNSF and 92% of BH Energy, each with earnings that exceed the $3 billion mark noted above ($5.9 billion at BNSF and $4.3 billion at BHE). Were these companies publicly-owned, they would replace two present members of the 500. All told, our ten controlled and non-controlled behemoths leave Berkshire more broadly aligned with the country’s economic future than is the case at any other U.S. company. (This calculation leaves aside “fiduciary” operations such as pension funds and investment companies.) In addition, Berkshire’s insurance operation, though conducted through many individually-managed subsidiaries, has a value comparable to BNSF or BHE. As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses. We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate. Additionally, our future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money. And yes, our shareholders will continue to save and prosper by retaining earnings.

I myself feel comfortable that Berkshire shares will provide a safe and rewarding investment during the disposal period. There is always a chance – unlikely, but not negligible – that events will prove me wrong. I believe, however, that there is a high probability that my directive will deliver substantially greater resources to society than would result from a conventional course of action. Key to my “Berkshire-only” instructions is my faith in the future judgment and fidelity of Berkshire directors. They will regularly be tested by Wall Streeters bearing fees. At many companies, these super-salesmen might win. I do not, however, expect that to happen at Berkshire. Boards of Directors In recent years, both the composition of corporate boards and their purpose have become hot topics. Once, debate about the responsibilities of boards was largely limited to lawyers; today, institutional investors and politicians have weighed in as well. My credentials for discussing corporate governance include the fact that, over the last 62 years, I have served as a director of 21 publicly-owned companies (listed below). In all but two of them, I have represented a substantial holding of stock. In a few cases, I have tried to implement important change. During the first 30 or so years of my services, it was rare to find a woman in the room unless she represented a family controlling the enterprise.

– and the reading of proxy material has become a mind-numbing experience. One very important improvement in corporate governance has been mandated: a regularly-scheduled “executive session” of directors at which the CEO is barred. Prior to that change, truly frank discussions of a CEO’s skills, acquisition decisions and compensation were rare. Acquisition proposals remain a particularly vexing problem for board members. The legal orchestration for making deals has been refined and expanded (a word aptly describing attendant costs as well). But I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it. And yes, include me among the guilty. Berkshire, Blue Chip Stamps, Cap Cities-ABC, Coca-Cola, Data Documents, Dempster, General Growth, Gillette, Kraft Heinz, Maracaibo Oil, Munsingwear, Omaha National Bank, Pinkerton’s, Portland Gas Light, Salomon, Sanborn Map, Tribune Oil, U.S.Financial

CEO Tim Sloan opened the Q4 2018 review against the backdrop of the February 2018 Federal Reserve enforcement action that had capped the Company's total assets at approximately $1.95 trillion until governance and risk management controls were certified as effective. Management told the call that the operating earnings power of the franchise had continued to grow despite the asset cap, that the Federal Reserve had conditionally approved the 2018 capital plan and that the Company had repurchased approximately $4.1 billion of common stock during the fourth quarter under the 2018 CCAR cycle. CFO John Shrewsberry walked analysts through the operating leverage achieved under the asset cap, indicating that net interest income had grown despite the constraint by repositioning the asset side of the balance sheet toward higher-yielding loans and away from lower-yielding securities. He flagged that the expense trajectory had been elevated by the regulatory remediation costs but that the underlying operating expense run-rate would compress once the remediation programs wound down. On the Q&A, analysts pressed on whether the Federal Reserve asset cap would be lifted in 2019. Sloan responded that the Company was executing against the consent order requirements, that an independent third-party review was under way and that the timeline for lifting the cap was ultimately at the discretion of the Federal Reserve. He also defended the operating framework, arguing that the asset cap had actually driven better capital allocation discipline by forcing the Company to grow only the highest-returning asset categories and to contract the lower-returning ones. The call closed with management framing 2019 as a transition year of expense discipline, regulatory remediation and selective asset growth, and reiterating the long-term objective of mid-teens return on tangible common equity and a return of essentially all of the operating earnings power to shareholders through the cycle.

Newly appointed CEO Tim Sloan opened the Q3 2016 review in the aftermath of the September 8 announcement of the $185 million settlement with the Consumer Financial Protection Bureau, the Los Angeles City Attorney and the Office of the Comptroller of the Currency over the cross-sell practices that had driven the creation of more than two million unauthorised customer accounts. Sloan had taken the chief executive role effective October 12, succeeding John Stumpf who had retired in the wake of the settlement; the earnings call on October 14 was his first public appearance as CEO. Management told the call that the Company had ended the product-sales goals that had driven the underlying behaviour, that an independent review was under way to identify affected customers and provide restitution and that the cross-sell model would be restructured around customer relationship metrics rather than around product-count targets. CFO John Shrewsberry walked analysts through the financial impact, indicating that the direct settlement and restitution costs were immaterial relative to the Company's earnings power, but that the indirect effects, including reputational damage, additional regulatory scrutiny and the suspension of the Branch Sales Incentive program, would weigh on the revenue trajectory through 2017. He flagged that the Common Equity Tier 1 ratio remained above the regulatory minima, that the asset quality remained pristine and that the Company's underlying operating earnings power was sufficient to absorb the reputational and regulatory costs. On the Q&A, analysts pressed on whether the cross-sell model that had defined the franchise for two decades could survive the regulatory reset. Sloan responded that the underlying customer relationships remained intact, that the cross-sell ratio would compress in the near term as the new metrics took hold and that the Company intended to rebuild the model around genuine customer outcomes rather than around product counts. He also apologised for the failures and committed to a board-led independent review, while defending the underlying unit economics of the cross-sell franchise. The call closed with management declining to provide formal quarterly guidance for the next several quarters given the unresolved regulatory uncertainty, and noting that the Board had announced the clawback of performance compensation from the senior leadership of the community banking division responsible for the cross-sell failures.

Here’s the most obvious example: Berkshire incurs nominal costs for its single board of directors; were our dozens of subsidiaries to be split off, the overall cost for directors would soar. So, too, would regulatory and administration expenditures. Finally, there are sometimes important tax efficiencies for Subsidiary A because we own Subsidiary B. For example, certain tax credits that are available to our utilities are currently realizable only because we generate huge amounts of taxable income at other Berkshire operations. That gives Berkshire Hathaway Energy a major advantage over most public-utility companies in developing wind and solar projects. Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20% to 50% premiums over market price for publicly-held businesses. The bankers tell the buyer that the premium is justified for “control value” and for the wonderful things that are going to happen once the acquirer’s CEO takes charge. (What acquisition-hungry manager will challenge that assertion?) A few years later, bankers – bearing straight faces – again appear and just as earnestly urge spinning off the earlier acquisition in order to “unlock shareholder value.” Spin-offs, of course, strip the owning company of its purported “control value” without any compensating payment.

‹ The bad news is that Berkshire’s long-term gains – measured by percentages, not by dollars – cannot be dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big. I think Berkshire will outperform the average American company, but our advantage, if any, won’t be great. Eventually – probably between ten and twenty years from now – Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both. If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice. You can be comfortable that your directors will make the right decision. ‹ No company will be more shareholder-minded than Berkshire. For more than 30 years, we have annually reaffirmed our Shareholder Principles (see page 117), always leading off with: “Although our form is corporate, our attitude is partnership.” This covenant with you is etched in stone. We have an extraordinarily knowledgeable and business-oriented board of directors ready to carry out that promise of partnership. None took the job for the money: In an arrangement almost non-existent elsewhere, our directors are paid only token fees.

BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: The per-share book value of both our Class A and Class B stock increased by 4.6% in 2011. Over the last 47 years (that is, since present management took over), book value has grown from $19 to $99,860, a rate of 19.8% compounded annually.* Charlie Munger, Berkshire’s Vice Chairman and my partner, and I feel good about the company’s progress during 2011. Here are the highlights: • The primary job of a Board of Directors is to see that the right people are running the business and to be sure that the next generation of leaders is identified and ready to take over tomorrow. I have been on 19 corporate boards, and Berkshire’s directors are at the top of the list in the time and diligence they have devoted to succession planning. What’s more, their efforts have paid off. As 2011 started, Todd Combs joined us as an investment manager, and shortly after yearend Ted Weschler came aboard. Both of these men have outstanding investment skills and a deep commitment to Berkshire. Each will be handling a few billion dollars in 2012, but they have the brains, judgment and character to manage our entire portfolio when Charlie and I are no longer running Berkshire. Your Board is equally enthusiastic about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire. (We have two superb back-up candidates as well.)

CEO Brian Moynihan opened the Q3 2011 review against the backdrop of the Berkshire Hathaway $5 billion preferred equity investment and the attached warrants to purchase 700 million common shares at an exercise price of $7.14, both announced in late August. Management told the call that the third-quarter results had been hampered by a $3.6 billion pre-tax charge tied to the legacy Countrywide mortgage representation-and-warranty exposures, but that the underlying franchise was now generating operating earnings power roughly in line with the stated objective of the Project New BAC restructuring. CFO Bruce Thompson walked analysts through the third consecutive quarter of operating expense reduction, the build of the capital ratios under the new Basel III regime and the roughly 140 basis points of tangible common equity ratio build achieved during the quarter. He flagged that the Berkshire transaction had been structured to monetise a portion of the embedded franchise value at favorable terms rather than to fill a capital hole, and that the Company remained on a path to exceed the new capital requirements ahead of the regulatory phase-in. On the Q&A, analysts pressed Moynihan on whether the Berkshire transaction implied that the Company would need to issue additional common equity to close the remaining capital gap. Moynihan responded categorically that the preferred investment had been opportunistic, that the warrants were a long-dated option rather than an equity issuance and that the Company did not intend to issue common equity to meet the new capital requirements, pointing to the asset disposition program and the operating expense trajectory as the bridge. The call closed with management reiterating the multi-year Project New BAC objective of removing $8 billion of operating expense from the run-rate by mid-decade, and with Moynihan committing to a transparent disclosure of the legacy mortgage litigation pipeline so that investors could value the franchise against the underlying consumer banking business rather than against the trailing issues.

Should we do that, we will probably have 80% of each manager’s performance compensation be dependent on his or her own portfolio and 20% on that of the other manager(s). We want a compensation system that pays off big for individual success but that also fosters cooperation, not competition. When Charlie and I are no longer around, our investment manager(s) will have responsibility for the entire portfolio in a manner then set by the CEO and Board of Directors. Because good investors bring a useful perspective to the purchase of businesses, we would expect them to be consulted – but not to have a vote – on the wisdom of possible acquisitions. In the end, of course, the Board will make the call on any major acquisition. One footnote: When we issued a press release about Todd’s joining us, a number of commentators pointed out that he was “little-known” and expressed puzzlement that we didn’t seek a “big-name.” I wonder how many of them would have known of Lou in 1979, Ajit in 1985, or, for that matter, Charlie in 1959. Our goal was to find a 2-year-old Secretariat, not a 10-year-old Seabiscuit. (Whoops – that may not be the smartest metaphor for an 80-year-old CEO to use.) Derivatives Two years ago, in the 2008 Annual Report, I told you that Berkshire was a party to 251 derivatives contracts (other than those used for operations at our subsidiaries, such as MidAmerican, and the few left over at Gen Re).

We have long invested in derivatives contracts that Charlie and I think are mispriced, just as we try to invest in mispriced stocks and bonds. Indeed, we first reported to you that we held such contracts in early 1998. The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At Berkshire nothing like that has occurred – nor will it. It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer. * * * * * * * * * * * * In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt. Twice. To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns. * * * * * * * * * * * * And now it’s confession time. It should be noted that no consultant, board of directors or investment banker pushed me into the mistakes I will describe. In tennis parlance, they were all unforced errors. To begin with, I almost blew the See’s purchase.

We also must make additional charges each year for the amount by which the premium we pay to keep the policy in force exceeds the increase in CSV. But obviously, we don’t think these bookkeeping charges represent economic losses. If we did, we wouldn’t buy the policies. During 2004, we recorded net “losses” from the purchase of policies (and from the premium payments required to maintain them) totaling $207 million, which was charged against realized investment gains in our earnings statement (included in “other” in the table on page 17). When the proceeds from these policies are received in the future, we will record as realized investment gain the excess over the then-CSV. • Two post-bubble governance reforms have been particularly useful at Berkshire, and I fault myself for not putting them in place many years ago. The first involves regular meetings of directors without the CEO present. I’ve sat on 19 boards, and on many occasions this process would have led to dubious plans being examined more thoroughly. In a few cases, CEO changes that were needed would also have been made more promptly. There is no downside to this process, and there are many possible benefits. The second reform concerns the “whistleblower line,” an arrangement through which employees can send information to me and the board’s audit committee without fear of reprisal. Berkshire’s extreme decentralization makes this system particularly valuable both to me and the committee.

The resuscitation of US Airways borders on the miraculous. Those who have watched my moves in this investment know that I have compiled a record that is unblemished by success. I was wrong in originally purchasing the stock, and I was wrong later, in repeatedly trying to unload our holdings at 50 cents on the dollar. Two changes at the company coincided with its remarkable rebound: 1) Charlie and I left the board of directors and 2) Stephen Wolf became CEO. Fortunately for our egos, the second event was the key: Stephen Wolf's accomplishments at the airline have been phenomenal.

Last spring, we offered to merge with a large, family- controlled business on terms that included a Berkshire convertible preferred stock. Though we failed to reach an agreement, this episode made me realize that we needed to ask our shareholders to authorize preferred shares in case we wanted in the future to move quickly if a similar acquisition opportunity were to appear. Accordingly, our proxy presents a proposal that you authorize a large amount of preferred stock, which will be issuable on terms set by the Board of Directors. You can be sure that Charlie and I will not use these shares without being completely satisfied that we are receiving as much in intrinsic value as we are giving.

At our annual meetings, someone usually asks "What happens to this place if you get hit by a truck?" I'm glad they are still asking the question in this form. It won't be too long before the query becomes: "What happens to this place if you don't get hit by a truck?" Such questions, in any event, raise a reason for me to discuss corporate governance, a hot topic during the past year. In general, I believe that directors have stiffened their spines recently and that shareholders are now being treated somewhat more like true owners than was the case not long ago. Commentators on corporate governance, however, seldom make any distinction among three fundamentally different manager/owner situations that exist in publicly-held companies. Though the legal responsibility of directors is identical throughout, their ability to effect change differs in each of the cases. Attention usually falls on the first case, because it prevails on the corporate scene. Since Berkshire falls into the second category, however, and will someday fall into the third, we will discuss all three variations.

If change does not come, and the matter is sufficiently serious, the outside directors should resign. Their resignation will signal their doubts about management, and it will emphasize that no outsider is in a position to correct the owner/manager's shortcomings. The third governance case occurs when there is a controlling owner who is not involved in management. This case, examples of which are Hershey Foods and Dow Jones, puts the outside directors in a potentially useful position. If they become unhappy with either the competence or integrity of the manager, they can go directly to the owner (who may also be on the board) and report their dissatisfaction. This situation is ideal for an outside director, since he need make his case only to a single, presumably interested owner, who can forthwith effect change if the argument is persuasive. Even so, the dissatisfied director has only that single course of action. If he remains unsatisfied about a critical matter, he has no choice but to resign.

When my stock is transferred to either my wife or the foundation, Berkshire will enter the third governance mode, going forward with a vitally interested, but non-management, owner and with a management that must perform for that owner. In preparation for that time, Susie was elected to the board a few years ago, and in 1993 our son, Howard, joined the board. These family members will not be managers of the company in the future, but they will represent the controlling interest should anything happen to me. Most of our other directors are also significant owners of Berkshire stock, and each has a strong owner-orientation. All in all, we're prepared for "the truck."

Chairman Harvey Golub's third-quarter 1991 review came at the moment the Salomon Brothers Treasury-auction scandal had metastasised into a broader confidence crisis across the brokerage arm American Express still controlled through its Shearson Lehman Holdings subsidiary. Management told the call that the Company's core Travel Related Services franchise had continued to grow billings business across both the green-card and the Optima revolving credit product, but that earnings would be obscured in the near term by the additional capital and reserve actions required at Shearson. CFO Michael Mortella walked analysts through the planned $1.4 billion charge to restructure the brokerage arm and to recapitalise the leasing portfolio that had been the source of recurring credit losses. He framed the actions as a deliberate decision to surface the worst-case loss expectations in a single quarter, so that the underlying TRS franchise could be valued on its own merits going forward rather than against the dragging uncertainty of the brokerage book. On the Q&A, analysts pressed on whether the Salomon crisis and Shearson losses would force the Company to issue equity to defend its capital ratios. Golub responded that the dividend on the common stock would be maintained, that the Company would continue to buy in shares opportunistically and that the charge had been sized to remove the optionality of further equity issuance from the brokerage subsidiary. He argued that the Optima revolving product was the more important strategic variable for the long-term value of the Company and would receive disproportionate investment in 1992. The call closed with management declining to provide formal quarterly guidance but committing to a multi-year trajectory of restoring return on equity to the mid-to-high teens, anchored on the durability of the card-fee and discount-revenue economics that had defined the Company's brand strength for a century.

Additionally, the fiduciary sensitivities of the executives managing the typical fallen angel were often, though not always, more finely developed than were those of the junk-bond-issuing financiopath. Wall Street cared little for such distinctions. As usual, the Street's enthusiasm for an idea was proportional not to its merit, but rather to the revenue it would produce. Mountains of junk bonds were sold by those who didn't care to those who didn't think - and there was no shortage of either. Junk bonds remain a mine field, even at prices that today are often a small fraction of issue price. As we said last year, we have never bought a new issue of a junk bond. (The only time to buy these is on a day with no "y" in it.) We are, however, willing to look at the field, now that it is in disarray. In the case of RJR Nabisco, we feel the Company's credit is considerably better than was generally perceived for a while and that the yield we receive, as well as the potential for capital gain, more than compensates for the risk we incur (though that is far from nil). RJR has made asset sales at favorable prices, has added major amounts of equity, and in general is being run well. However, as we survey the field, most low-grade bonds still look unattractive. The handiwork of the Wall Street of the 1980s is even worse than we had thought: Many important businesses have been mortally wounded. We will, though, keep looking for opportunities as the junk market continues to unravel.

Myron C. Taylor, Chairman of U. S. Steel Corporation, today announced the long awaited plan for completely modernizing the world's largest industrial enterprise. Contrary to expectations, no changes will be made in the company's manufacturing or selling policies. Instead, the bookkeeping system is to be entirely revamped. By adopting and further improving a number of modern accounting and financial devices the corporation's earning power will be amazingly transformed. Even under the subnormal conditions of 1935, it is estimated that the new bookkeeping methods would have yielded a reported profit of close to $50 per share on the common stock. The scheme of improvement is the result of a comprehensive survey made by Messrs. Price, Bacon, Guthrie & Colpitts; it includes the following six points: 1. Writing down of Plant Account to Minus $1,000,000,000. 2. Par value of common stock to be reduced to 1¢. 3. Payment of all wages and salaries in option warrants. 4. Inventories to be carried at $1. 5. Preferred Stock to be replaced by non-interest bearing bonds redeemable at 50% discount. 6. A $1,000,000,000 Contingency Reserve to be established. The official statement of this extraordinary Modernization Plan follows in full: The Board of Directors of U. S. Steel Corporation is pleased to announce that after intensive study of the problems arising from changed conditions in the industry, it has approved a comprehensive plan for remodeling the Corporation's accounting methods.

Hence, instead of the present depreciation charge of some $47,000,000 yearly there will be an annual appreciation credit of 5%, or $50,000,000. This will increase earnings by no less than $97,000,000 per annum. 2. Reduction of Par Value of Common Stock to 1¢, and 3. Payment of Salaries and Wages in Option Warrants. Many corporations have been able to reduce their overhead expenses substantially by paying a large part of their executive salaries in the form of options to buy stock, which carry no charge against earnings. The full possibilities of this modern device have apparently not been adequately realized. The Board of Directors has adopted the following advanced form of this idea: The entire personnel of the Corporation are to receive their compensation in the form of rights to buy common stock at $50 per share, at the rate of one purchase right for each $50 of salary and/or wages in their present amounts. The par value of the common stock is to be reduced to 1¢. The almost incredible advantages of this new plan are evident from the following: A. The payroll of the Corporation will be entirely eliminated, a saving of $250,000,000 per annum, based on 1935 operations. B. At the same time, the effective compensation of all our employees will be increased severalfold.

In setting up this arrangement, the Board of Directors must confess regretfully that they have been unable to improve upon the devices already employed by important corporations in transferring large sums between Capital, Capital Surplus, Contingency Reserves and other Balance Sheet Accounts. In fact, it must be admitted that our entries will be somewhat too simple, and will lack that element of extreme mystification that characterizes the most advanced procedure in this field. The Board of Directors, however, have insisted upon clarity and simplicity in framing their Modernization Plan, even at the sacrifice of possible advantage to the Corporation's earning power.viz:

*Given a Stated Value differing from Par Value, in accordance with the laws of the State of Virginia, where the company will be re-incorporated. It is perhaps unnecessary to point out to our stockholders that modern accounting methods give rise to balance sheets differing somewhat in appearance from those of a less advanced period. In view of the very large earning power that will result from these changes in the Corporation's Balance Sheet, it is not expected that undue attention will be paid to the details of assets and liabilities. In conclusion, the Board desires to point out that the combined procedure, whereby plant will be carried at a minus figure, our wage bill will be eliminated, and inventory will stand on our books at virtually nothing, will give U. S. Steel Corporation an enormous competitive advantage in the industry. We shall be able to sell our products at exceedingly low prices and still show a handsome margin of profit. It is the considered view of the Board of Directors that under the Modernization Scheme we shall be able to undersell all competitors to such a point that the anti-trust laws will constitute the only barrier to 100% domination of the industry. In making this statement, the Board is not unmindful of the possibility that some of our competitors may seek to offset our new advantages by adopting similar accounting improvements. We are confident, however, that U. S.

It depends upon their personalities and, to an extent, upon their own personal relationship with me. If you should decide to do business with Berkshire, we would pay in cash. Your business would not be used as collateral for any loan by Berkshire. There would be no brokers involved. Furthermore, there would be no chance that a deal would be announced and that the buyer would then back off or start suggesting adjustments (with apologies, of course, and with an explanation that banks, lawyers, boards of directors, etc. were to be blamed). And finally, you would know exactly with whom you are dealing. You would not have one executive negotiate the deal only to have someone else in charge a few years later, or have the president regretfully tell you that his board of directors required this change or that (or possibly required sale of your business to finance some new interest of the parent's). It's only fair to tell you that you would be no richer after the sale than now. The ownership of your business already makes you wealthy and soundly invested. A sale would change the form of your wealth, but it wouldn't change its amount. If you sell, you will have exchanged a 100%-owned valuable asset that you understand for another valuable asset -- cash -- that will probably be invested in small pieces (stocks) of other businesses that you understand less well.

But the CEO's boss is a Board of Directors that seldom measures itself and is infrequently held to account for substandard corporate performance. If the Board makes a mistake in hiring, and perpetuates that mistake, so what? Even if the company is taken over because of the mistake, the deal will probably bestow substantial benefits on the outgoing Board members. (The bigger they are, the softer they fall.)

o We rarely use much debt and, when we do, we attempt to structure it on a long-term fixed rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet. This conservatism has penalized our results but it is the only behavior that leaves us comfortable, considering our fiduciary obligations to policyholders, depositors, lenders and the many equity holders who have committed unusually large portions of their net worth to our care.

Apparently the owners of our corporation like both possessing and exercising the ability to determine where gifts of their funds shall be made. The 'father-knows-best' school of corporate governance will be surprised to find that none of our shareholders sent in a designation sheet with instructions that the officers of Berkshire - in their superior wisdom, of course - make the decision on charitable funds applicable to his shares. Nor did anyone suggest that his share of our charitable funds be used to match contributions made by our corporate directors to charities of the directors' choice (a popular, proliferating and non-publicized policy at many large corporations).

Though he was already 71 years of age when he sold us the Bank, Gene subsequently worked harder for us than he had for himself. He never delayed reporting a problem for a minute, but problems were few with Gene. What else would you expect from a man who, at the time of the bank holiday in 1933, had enough cash on the premises to pay all depositors in full? Gene never forgot he was handling other people's money. Though this fiduciary attitude was always dominant, his superb managerial skills enabled the Bank to regularly achieve the top position nationally in profitability.