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

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 have, for a number of years, fielded questions from shareholders. 

That format was changed in 2009, when several journalists were selected to participate in the question-and-answer period. Further changes were made this year, with Buffett and Munger agreeing to take questions from analysts who cover Berkshire's shares. The new format means that this year one third of the questions will be coming from shareholders, one third from the three journalists, and one third from three industry analysts.  This is presumably to help focus the discussion toward more company-specific topics, which we believe better serves all shareholders.

Although the topics up for discussion this weekend are likely to run the full 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 a near-zero return, we believe it is imperative that Berkshire put capital to work in profitable investment opportunities. Furthermore, as the firm continues to expand, 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 (such as Lubrizol, Burlington Northern, and MidAmerican Energy) going to continue?
  
  
• Do you still prefer to acquire privately held businesses over public companies? Are private owners looking to sell their businesses now that the economy has stabilized and credit is more readily available? Are private companies large enough to move the needle for a firm as big as Berkshire?
  
  
• Given the stated need to put the large amount of cash that is generated at Berkshire to work, is capital intensity a requirement for future purchases? If the company acquires more capital-intensive 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 many of the lucrative investments that Berkshire made during the financial crisis--such as Swiss Re,  Goldman Sachs (GS), and  General Electric (GE)--having been called away by their issuers last year, the firm had to rely on substantial investments in  Bank of America (BAC), Lubrizol, and  International Business Machines (IBM) to keep its cash balance from getting too high. Berkshire's sizable cash position (which was north of $37 billion at the end of 2011) is likely to grow even larger this year through the typical course of business. With yields at historically low levels, this cash is earning very little for shareholders.

• In the past, you've stated that you'd like to keep around $20 billion in cash on hand. What is the level of cash (beyond that amount) that Berkshire feels comfortable holding at any given time? In your view, how much excess cash does the company currently have on its books?
  
  
• What factors went into the decision to finally repurchase shares last year? Does this signal to investors a relative lack of alternative investment opportunities? Would you consider instituting a dividend if Berkshire cannot find economically profitable investment or reinvestment opportunities?

Succession Planning
The issue of succession has again been placed in the front of investors' minds with Buffett's recent announcement that he has stage-1 prostate cancer. Although the cancer (at this point) appears to be manageable and is assumed to not be life-threatening, it serves as yet another reminder to shareholders that Buffett is, in fact, mortal and will not lead Berkshire forever. As we have noted on countless occasions, both Buffett (at age 81) and Munger (88 years old) are octogenarians, raising the importance of succession for long-term investors in the firm.

As many investors may recall, succession was not formally addressed by Buffett until his 2005 annual letter to shareholders, where he noted that his three main jobs--chairman, chief executive, and chief investment officer--would likely be handled by one chairman, one CEO, and three or more external hires (reporting to directly to the CEO) that would manage the investment portfolio, once he retired. Although the Oracle of Omaha's son, Howard Buffett, has been identified by Buffett as his choice for nonexecutive chairman, ultimately serving as a guardian of the company's values, and adding "one extra layer of protection" for shareholders, the decision ultimately rests with the board of directors.

Looking more closely at the efforts aimed at filling the role of chief investment officer, Berkshire continues to make strides toward hiring three or more external managers to oversee the firm's investment portfolio. Following up on the hiring of Todd Combs in late 2010, Berkshire announced in the third quarter of last year that it had hired Ted Weschler, bringing the total number of outside managers up to two, which means we could still see one or more additional hire(s) at the firm as we move forward.

With all of Berkshire's operating businesses managed on a decentralized basis, eliminating the need for layers of management control and pushing responsibility for each business down to the subsidiary level, Buffett has had the freedom to focus on managing the investments in the firm's portfolio and making capital-allocation decisions. By insisting that the outside managers Berkshire hires to run the investment portfolio report directly to the CEO, he is signaling, in our view, that the primary job of any incoming CEO will be one of capital-allocator-in-chief.

Despite announcing in his annual letter to shareholders that Berkshire's board of directors has a candidate in mind to replace him as chief executive, and that this person is "an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire," Buffett has been far from transparent about the details of the firm's succession plan. We don't believe that Berkshire has handled the question of succession in a forthright manner and think that the firm needs to be much more transparent about its plans for Buffett's eventual succession, especially given the age of Berkshire's two top managers.

• Could you provide us with more details about your diagnosis and treatment? What have the doctors told you is the typical outlook for people in a similar situation as yours?
  
  
• What characteristics should the ideal replacement for the CEO job at Berkshire possess? Which of your operating managers do you feel currently possess these attributes?
  
  
• What are your thoughts on the multi-million-dollar compensation packages that large companies use to pay their top executives? Do you think it's necessary to pay these large amounts in order to attract experienced management? If not, what can be done (at this point) to reverse the trend of ever-escalating compensation for CEOs?
  
  
• What is the board doing to ensure that the firm's internal candidates are getting the exposure they need to Berkshire's operating companies in order to handle the CEO responsibilities upon your departure? Would you (or the board of directors) ever consider an outside candidate for the job?
  
  
• What is the timeline for CEO succession? Will the next chief executive be named before you step down or be announced concurrently with your departure?
  
  
• Do you feel that keeping secret the names of the three potential candidates who could succeed Buffett in an emergency is in the best interest of shareholders?
  
  
• Will the replacement CEO be limited in the decisions that he/she makes? Are certain actions likely to be completely off the table? Will the replacement CEO be allowed to break up the company if he/she feels that it is in the best interest of shareholders?​

Thoughts on the Economy
Although not an economic prognosticator in the traditional sense, many people often ask Warren Buffett for his opinion on the state of the economy. After his well-publicized bullish stance at the depths of the financial crisis--including an article about "buying American" in the New York Times in October 2008--and his articles since (most notably the excerpt from this year's annual letter to shareholders that was published in Fortune magazine in early February), we'd like to see if his thesis has evolved.

• In your now famous op-ed in the New York Times, you encouraged people to "be greedy when others are fearful." With the economy continuing to improve, people might not necessarily be greedy, but they are, at the very least, less fearful. Do you think long-term investors should be, in general, greedy or fearful as we move forward?
  
  
• What is the more serious threat to long-term growth: inflation or deflation? Do you believe either of those are enough of a concern that investors should start taking actions now in order to avoid the potential fallout?
  
  
• With investors throwing so much money at fixed-income funds during the last three years and avoiding actively managed domestic-stock funds like the plague, what will it take to bring them back to equities?
  
  
• How do you believe the deficit-cutting being discussed in Washington will be resolved? Do you agree with politicians that fixing the deficit is the top priority for our national economy?
  
  
• How do you view the prospects for the domestic economy versus international markets? How does that view change when we split the discussion between developed and emerging markets?
  
  
• Have your expectations for inflation changed much over the past year? If so, has that change entered into your capital allocation plans or the decision-making at Berkshire's operating subsidiaries?

Berkshire's Operating Subsidiaries
Berkshire's noninsurance subsidiaries run the gamut from brick manufacturing and railroads to energy companies and diamond stores. The operations represent a wide sample of the domestic economy and, to different extents, are affected by cyclical ebbs and flows.

There is no common theme running across the subsidiaries except the fact that Buffett believes he acquired them for a reasonable price and that their businesses benefit from long-term competitive advantages. That said, questions about Berkshire's subsidiaries can reveal further details about Buffett's opinion of the markets, possible future acquisition targets, and the economy more generally.

• Can you summarize your view of the current economic climate based on the results you're seeing from Berkshire's operating subsidiaries? More specifically, what are you hearing from managers at firms such as Burlington Northern, Marmon, McLane, Shaw Industries, Benjamin Moore, Clayton Homes, and Acme Brick?
  
  
• How has business at Lubrizol been? Have the results been in line with your expectations when you bought the company last year? Have there been any surprises (positive or negative)?

The Insurance Market
Although its contribution to pretax earnings has shrunk on a percentage basis as Berkshire has moved into other businesses, the firm's insurance operations are not only a big generator of cash for Berkshire but account for more than half of the company's aggregate intrinsic value, in our view.

Insurance is inherently cyclical, though the cycles are largely unrelated to the economy as a whole. Given the abundance of capital that has existed in the industry for a number of years, which has led to soft pricing, some prognosticators have been calling for a turn in the cycle, which has been exemplified by low investment yields and artificially inflated profitability figures. Others, ourselves included, believe it may take a large industry loss or some other catalyst to drive a meaningful change in pricing behavior. Given Berkshire's size and influence in the insurance market, as well as the long-term perspective that is taken by Buffett, it is always interesting to hear his comments on the insurance market.

• Where do you believe the insurance industry is in terms of pricing? What do you believe it will take to eventually see a change in the "insufficient" prices we hear about from industry participants?
  
  
• How are you viewing the Japanese insurance market now that we are more than a year past the earthquake/tsunami disaster? Has your appetite increased there?
  
  
• For the large individual contracts you write through National Indemnity--recent examples include reinsuring the asbestos businesses of  American International Group (AIG) and  CNA Financial (CNA)--how do you evaluate risks and pricing? Given that you can't build up enough mass for the law of large numbers to hold, what factors into your maximum-loss calculations?

A version of this article appeared April 29, 2011.