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 a trio of financial journalists and from shareholders themselves (via a lottery). In an added twist, Berkshire included a panel of three analysts who cover Berkshire's stock in the Q&A segment last year. 

The panel remains in place for this year's meeting, as well, but has been tweaked a little to include one insurance analyst from the sell-side (Cliff Gallant of  Nomura Securities (NMR)), one generalist analyst from the buy-side (Jonathan Brandt of Ruane, Cunniff & Goldfarb--the investment firm behind
 Sequoia (SEQUX)), and an analyst/investor who is bearish on Berkshire (which we now know will be Doug Kass, founder of the hedge fund firm Seabreeze Partners Management). 

We continue to favor the inclusion of the analyst panel in the Q&A segment, as we believe that it helps to focus the discussion during the meeting on more company-specific topics. By inviting a bearish analyst to ask a portion of the questions this year, we think that we'll see more contrarian opinions on the firm discussed than we've seen in past periods, which should be a positive for both Berkshire and its shareholders. Although the topics can run the gamut, we've laid out some of the key issues we expect to be broached during the course of this year's annual meeting, as well as some specific questions we'd like to have answered during 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 Lubrizol, Burlington Northern Santa Fe, 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?
• Do you expect that future acquisitions will be structured similar to the  H.J. Heinz deal, where Berkshire lends its brand name to a deal and provides financing in the form of preferred shares or debt rather than taking the lead position from an equity perspective?

Excess Cash on the Balance Sheet
With the majority of the lucrative investments that were made during the financial crisis--Swiss Re (SSREY),  Goldman Sachs (GS),  General Electric (GE),  Dow Chemical (DOW), and Wrigley--having been repaid during the last couple of years, Berkshire has struggled to find investments that would match the yield produced by these holdings. Although the firm was finally able to put most of the money back to work in  Bank of America (BAC) (during the third quarter of 2011) and Heinz (during the first quarter of 2013) at rates that came close to matching those it was earning on its financial-crisis investments, Berkshire's sizable cash position continues to grow through the normal course of its business (and was likely north of $35 billion at the end of the first quarter after adjusting for the $12 billion outlay for Heinz). With yields on money market funds and short-term bonds at historically low levels, this cash is earning very little for shareholders. Even though Buffett laid out his thinking on (including his opposition to) a dividend in this year's annual letter, we expect some investors to question and/or push back on this thinking during the upcoming meeting. 

• In the past, you've alluded to liking to keep around $20 billion in cash on hand as a backstop for the insurance business. What is the level of cash Berkshire should feel comfortable holding? In your view, how much excess cash does the company currently have?
• What factors went into the decision to finally repurchase shares of Berkshire Hathaway? Does this signal to investors a relative lack of alternative investment opportunities?
• Are instituting a dividend and having internal or external opportunities to profitably invest cash mutually exclusive? Couldn't Berkshire institute a dividend in order to soak up some of the excess cash flow even if most of the cash can be used for profitable investments?

Succession Planning
With Buffett turning 83 years of age later this year, and Munger passing his 89th birthday at the beginning of 2013, succession has become an increasingly important concern for long-term investors. 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 and Ted Weschler were hired, with both men taking on responsibility for managing an ever-increasing portion of the portfolio.

• What characteristics should the ideal replacement for the CEO role 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 such large amounts to attract and retain experienced management? If not, what can be done (at this point) to reverse the trend of ever-escalating compensation for CEOs?
• Do you feel that keeping secret the names of the candidates who could succeed Buffett in an emergency is in the best interest of shareholders? What is the board doing to ensure that these candidates get the exposure they need to Berkshire's operating companies to handle the responsibilities of the job once you depart? Would you (or the board) 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?
• Will the replacement CEO be limited in the decisions he/she can make? Are certain actions likely to be completely off the table? Will he/she be allowed to break up the company if he/she feels it is in the best interests of shareholders?
• As Combs' and Weschler's responsibilities continue to grow and evolve, do you foresee a time when they will be managing the entire portfolio? Will they be allowed to touch large legacy positions such as  Wells Fargo (WFC),  Coca-Cola (KO) and  American Express (AXP)?

Thoughts on the Economy
Although not an economic prognosticator in the traditional sense, many people often ask Buffett and Munger for their opinion on the state of the U.S. and global economies. Following Buffett's well-publicized bullish stance during the depths of the financial crisis--including an editorial in The New York Times about "buying American," in mid-October 2008--the Oracle of Omaha has been solidly behind the long-term viability of the U.S. economy. Given where we are today, 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." As the global economy has improved, and equity markets have more than doubled since the market bottom in March 2009, investors seem to be both greedy and somewhat less fearful. Given where markets and the economy are today, should long-term investors be greedy or fearful?
• What is the more serious threat to long-term economic growth: inflation or deflation? Do you believe either of these states are enough of a concern in the near to medium term that investors should start taking action now to avoid a potential fallout down the road?
• Have your inflation expectations changed much during the past year? If so, has that change entered into your capital-allocation plans or the decision-making at Berkshire's operating subsidiaries?
• How do you believe the deficit-cutting proposals 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?

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 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 BNSF, MidAmerican, Marmon, McLane, and Lubrizol that may run contrary to what we're seeing in the daily headlines?

The Insurance Market
Although shrinking as the company invests in other areas, insurance is still the core of Berkshire's operations. We estimate that Berkshire's insurance operations are responsible for more than half of the company's aggregate intrinsic value. Insurance is an inherently cyclical business where the cycles are largely unrelated to the economy as a whole. There has been an abundance of capital in the industry, which has led to soft prices for a number of years, though some prognosticators have been calling for a turn in the cycle given low investment yields and artificially inflated profitability figures, while others (such as ourselves) believe it may take a large industry loss or other catalyst in order to drive a change in pricing behavior. Given his company's size in the insurance market as well as its long-term perspective, it is interesting to hear Buffett's commentary on the insurance industry.

• Where do you believe the insurance industry is in terms of pricing? What do you think will eventually drive a change from the insufficient prices we are hearing about from industry participants?
• 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?