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Questions We'd Like to Hear at Berkshire's Annual Meeting

We believe the Sokol debacle has set the stage for a somewhat more contentious question-and-answer session at this year's annual meeting.

Drew Woodbury, 04/29/2011

The main focus of Berkshire Hathaway's BRK.A BRK.B annual meeting is the question-and-answer segment that Warren Buffett and Charlie Munger hold, where the two men take questions from a trio of financial journalists and from shareholders themselves (via a lottery).

Although the topics can run the gamut, we've laid out some of the key issues we expect to be broached during the meeting, as well as some specific questions we'd like to have answered over the course of the weekend.

Future Acquisitions and Investments
Historically, acquisitions have been a major part of Berkshire's business and value creation, a trend we expect to continue. Given that the company has a significant amount of cash on its balance sheet, which is currently generating near-zero return, we believe it is imperative that Berkshire put capital to work in profitable investment opportunities. Furthermore, as the firm grows ever larger, future acquisitions will need to be large enough to move the needle in terms of cash position and profitability.

  • Where are you seeing the most value right now? Do you expect to keep diversifying away from insurance? Is your trend of acquiring more cyclical businesses (like Burlington Northern and MidAmerican Energy) going to continue?
     
  • Do you still prefer acquiring privately held business over public companies? Are private owners looking to sell their businesses now that the economy has stabilized and credit and capital are more easily available? And are private companies large enough to move the needle at a company as big as Berkshire?
     
  • Given the stated need to put the large amount of capital generated by the businesses of Berkshire to work, is capital intensity a requirement for future purchases? If the company acquires more capital-heavy businesses, won't (by definition) returns on companywide capital decline?
     
  • Given the difficulties that you (or your successors) may face finding deals that not only add value but are also large enough to be meaningful, should Berkshire be broken up at some point?

Excess Cash on the Balance Sheet
With the majority of the lucrative investments that were made during the financial crisis--Swiss Re SWCEY, Goldman Sachs GS, General Electric GE, Dow Chemical DOW, and Wrigley--in the process of being repaid, Berkshire's sizable cash position is likely to grow even larger this year (even after subtracting the cash that will be paid out for the Lubrizol LZ acquisition). With yields at historically low levels, this cash is earning very little for shareholders.

  • In the past, you've alluded to liking to keep around $20 billion in cash on hand. What is the level of cash that Berkshire feels comfortable holding? In your view, how much excess cash does the company currently have?
     
  • Will you consider returning capital to shareholders if Berkshire cannot find economically profitable investment or reinvestment opportunities? And if Berkshire were to consider returning cash to shareholders, which would be more preferable--a dividend or share repurchases?

The Sokol Affair
In the press release announcing David Sokol's resignation, Warren Buffett revealed that Sokol had purchased shares of Lubrizol prior to pitching it as an acquisition target for Berkshire. Buffett stated that Sokol's shareholdings totaled approximately $10 million, a not insignificant amount.

At the time Buffett noted that he did not believe Sokol or Berkshire did anything illegal, though this statement has since been questioned. Berkshire's board of directors has since come out and stated that Sokol violated the company's trading policies (and its code of conduct) by purchasing shares of Lubrizol "while serving as a representative of Berkshire Hathaway in connection with a possible business combination," and that his "misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor" that he owed to the firm, but we don't believe that this issue is going away anytime soon.

Buffett may be able to deflect a handful of questions about the Sokol affair at the annual meeting, but neither he nor the board will be able to ignore the clamor that has arisen about succession planning at Berkshire, nor the concerns that have emerged about the limitations of the decentralized nature of the company's business model.

  • Do you have any regrets over how you handled the Sokol situation in light of the strong negative response that followed the announcement of his departure? Looking back, what would you have done differently?
     
  • Has the Sokol affair caused you to rethink the amount of leeway you've given your managers? Do you believe that tightening the operating structure by moving away from decentralized management would help avoid these situations in the future?

Succession Planning
Buffett has stated that he wants his three roles (chairman, CEO, and investment manager) to be split upon his retirement from the firm. He has previously announced that his son, Howard, would likely become nonexecutive chairman, and we gained a little more clarity into the plan for the investment side of the business when Todd Combs was introduced.

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