Monday, April 2, 2012
An Activist Letter To Warren Buffett
An April Fool Day’s joke
Baker Street Capital Management, LLC
12400 WILSHIRE BLVD, STE 940, LOS ANGELES, CA 90025
April 1, 2012
The Board of Directors
Berkshire Hathaway Inc.
3555 Farnam Street, Suite 1440
Omaha, NE 68131
Dear Members of the Board:
The Chairman’s 2011 Letter to Shareholders notes that the per-share book value of Berkshire Hathaway has compounded annually at a rate of 19.8% since present management took over 47 years ago. While these results are both impressive and encouraging, we are deeply concerned that they have not translated into strong share price performance during the first quarter of 2012. In fact, Berkshire Hathaway stock has underperformed the S&P 500 index by over 5% so far this year. Satisfactory long-term returns offer little consolation to shareholders who have purchased shares in recent months and whose timeframe is shorter than “forever.”
The causes of Berkshire’s lagging stock price are easily identifiable and, in our opinion, within the board’s power to fix. We urge you to consider several important changes that we believe will lead to greater recognition of Berkshire Hathaway in the investment community.
Berkshire clearly lacks a robust investor relations strategy. A rigorous effort to market the Company to institutional and retail shareholders is sure to have a number of key benefits, such as increased share turnover and better earnings visibility. We call on the Berkshire board to quickly implement the best practices of its peers, including quarterly conference calls, regularly updated financial guidance, frequent marketing road shows with senior management, detailed investor presentations, and a proactive outreach program to help Wall Street analysts fully understand the Berkshire story. The good news is that it is not too late to transform Berkshire from a niche “value investment” to a much more popular market darling stock.
Capital Return and Acquisitions
We also believe that the Berkshire board should immediately reassess the Company’s capital return and acquisition policies. The absence of a regular dividend makes it difficult, if not impossible, for investors to calculate the proper price to pay for Berkshire shares. A monthly cash dividend would finally reward loyal, long-term shareholders and would be much more attractive than the recent share repurchase program, which has only served to further reduce the float and liquidity of Berkshire shares.
Berkshire has historically pursued an opportunistic acquisition strategy. While this whimsical approach may have worked in the past, a more structured process would benefit shareholders in the current environment. We urge the board to immediately retain a reputable investment bank with significant experience in mergers and acquisitions to complement Berkshire’s in-house skill set. An obvious advantage would be to enhance Berkshire’s rudimentary approach to target company valuation and compensate for senior management’s lack of financial modeling experience. All Berkshire directors should take their fiduciary duties seriously and protect shareholders from Mr. Buffett’s track record of losses stemming from questionable acquisitions, including Dexter Shoes in 1993 and a Sinclair gasoline station in 1951.
We believe that the board has conveniently chosen to maintain the status quo and ignore these critical issues in order to preserve the directors’ generous board fees, ranging from $3,300 to $7,300annually. Equally disturbing is the fact that this compensation package is not tied to quarterly or annual share price performance. As a result, the board has stood by idly as the stock price has lagged the general market during the past three months. In addition, non-executive directors own, on average, only 3,171Class A shares. Our analysis shows that directors at many of Berkshire’s peers own a much higher number of voting class shares. Given the directors’ excessive board fees and lack of economic ownership in the business, it is not surprising that the Berkshire board has fought for years to maintain a dual-class stock structure, a corporate maneuver used frequently by deeply entrenched and self-interested boards.
Any criticism of Berkshire is incomplete without a discussion of egregious executive compensation practices at the company. As disclosed in the most recent proxy, Warren Buffett received a salary of $100,000 for his services as Chairman and CEO in 2011. By his own admission, Mr. Buffett has delegated management responsibilities to more talented subsidiary company executives. More recently, he has hired investment managers to direct many of Berkshire’s public market investments. In media interviews Mr. Buffett has admitted to spending a significant amount of time pursuing his bridge gambling interests. In the absence of more comprehensive disclosures, shareholders are left to wonder exactly what role Mr. Buffett really plays at Berkshire. We believe that compensation of one hundred thousand dollars represents a significant transfer of wealth from shareholders to Mr. Buffett. We urge the board to retain professional compensation consultants to perform a thorough benchmarking study of executive remuneration at Berkshire.
The Berkshire board clearly owes shareholders and the media an answer on the question of executive succession. While we seriously question Mr. Buffett’s contribution to Berkshire’s success, we feel strongly that the board should end all doubt and finally disclose its choice of Charles Munger as the successor to the Chief Executive Officer position. Mr. Munger will bring several decades of experience to Berkshire’s management team and his deep expertise in the areas of technology and solar power would be a logical expansion of Berkshire’s limited circle of competence.