Investing. Executive Pay. Leadership Development. Notes from the 2009 Berkshire Hathaway Meeting.

I was once again privileged to be able to attend the Berkshire Hathaway Annual Shareholders Meeting and absorb the wisdom of Warren Buffett and Charlie Munger. As I have previously stated, this is more than a shareholders meeting - it is both an investment seminar and business conference and in my opinion, the best out there. Attendees can learn more about management, leadership development and growing a business than by attending any other event. I really mean that.

Because many of the themes are repeated each year and I have already blogged about them, I'll just summarize what I found to be the most interesting (excluding topics on economy, health care, personal investing, etc.) topics of discussion for this audience. For all the other stuff here is a pretty detailed transcript of this year's meeting.

At it's core, Buffet says, investment involves putting out cash now to get more back in the future. Period. Buffet criticized so called financial experts - and business schools - for over complicating this fact saying if you need to rely on a computer to tell you whether or not to buy a business or invest in a project/company you probably should not do the investment. In fact, he said, the worst business decisions are made when you rely on complex future cash flow projections involving algorithms nobody understands. "Beware of geeks with formulas" says Buffett.

Both Munger and Buffet also criticized flavor of the day type thinking. This came up when discussing how so many banks got into trouble with sub prime mortgages. Buffet said "he did not ever want to here from a manager that the reason they propose doing something is because everyone else is doing it. If that's the only sound reason a manager can give for wanting to do something, it's not good enough. I think all of us in the HR technology marketplace have been guilty of this at one time or another in our careers. I know I have. Especially when making cash allocation and marketing decisions. We should constantly challenge our beliefs.

Buffet and Munger once again were extremely critical of executive pay and in particular, compensation consultants. Munger quipped that CEOs have a vested interest in irrational compensation packages (recommended by compensation consulting firms) because they pay more. Buffet said figuring out how to pay people is not difficult and you don't need outside consultants. He claims not a single Berkshire manager has ever hired a compensation consulting firm and no manager/executive has ever left Berkshire due to compensation issues. Nor, Buffet claims, do you need a "100 page proxy statement to describe your executive pay plans."

How do Buffett and Munger propose fixing it?

Outside of personal responsibility of the executive, both Munger and Buffet agreed on the need for truly "independent boards". Munger believes the best way to get independent boards is not to pay board members (I believe Berkshire pays their directors less than any other Fortune 500). It's hard to be independent when a major chunk of your income comes from being a board member. Munger also suggested that instead of boards subbing the work to a comp committee they should make it a general board discussion.

In response to a succession question on Berkshire, Buffet would not name his successor but he did confirm the next CEO would come from within Berkshire and three candidates have already been identified by the Board; and each could assume the role tomorrow if necessary. As far as how to groom a potential CEO Munger stated that the best ones are executives who already run businesses. He used Johnson & Johnson as an example of how to groom leaders saying Berkshire and J&J are a lot a like in this regard by giving heads of operating companies the autonomy to run their units. Munger believes that it is better training for candidates to run their own operating subsidiaries than to be at headquarters.

Finally, for those who did not read Mr. Buffett's annual letter to shareholders (a must read for anyone in business), I'd like to paraphrase what Buffett considers his four goals for managing Berkshire (in good times and bad) into four rules for building a successful business (which incidentally should never include the phrase "exit strategy" according to Buffett):
  1. Work toward achieving and maintaining a strong financial position. IOW, a good balance sheet.
  2. Widen the moats around your businesses to give them durable competitive advantages.
  3. Acquire and/or develop new and varied streams of earnings.
  4. Expand and nurture your outstanding managers.
Good stuff. Brilliant in its simplicity but complex in its execution.

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