Berkshire Hathaway 2003 Annual Report Download - page 11

10
The downside for Berkshire directors is actually worse than yours because we carry no directors
and officers liability insurance. Therefore, if something really catastrophic happens on our directors’
watch, they are exposed to losses that will far exceed yours.
The bottom line for our directors: You win, they win big; you lose, they lose big. Our approach
might be called owner-capitalism. We know of no better way to engender true independence. (This
structure does not guarantee perfect behavior, however: I’ ve sat on boards of companies in which Berkshire
had huge stakes and remained silent as questionable proposals were rubber-stamped.)
In addition to being independent, directors should have business savvy, a shareholder orientation
and a genuine interest in the company. The rarest of these qualities is business savvy – and if it is lacking,
the other two are of little help. Many people who are smart, articulate and admired have no real
understanding of business. That’ s no sin; they may shine elsewhere. But they don’ t belong on corporate
boards. Similarly, I would be useless on a medical or scientific board (though I would likely be welcomed
by a chairman who wanted to run things his way). My name would dress up the list of directors, but I
wouldn’ t know enough to critically evaluate proposals. Moreover, to cloak my ignorance, I would keep my
mouth shut (if you can imagine that). In effect, I could be replaced, without loss, by a potted plant.
Last year, as we moved to change our board, I asked for self-nominations from shareholders who
believed they had the requisite qualities to be a Berkshire director. Despite the lack of either liability
insurance or meaningful compensation, we received more than twenty applications. Most were good,
coming from owner-oriented individuals having family holdings of Berkshire worth well over $1 million.
After considering them, Charlie and I – with the concurrence of our incumbent directors – asked four
shareholders who did not nominate themselves to join the board: David Gottesman, Charlotte Guyman,
Don Keough and Tom Murphy. These four people are all friends of mine, and I know their strengths well.
They bring an extraordinary amount of business talent to Berkshire’ s board.
The primary job of our directors is to select my successor, either upon my death or disability, or
when I begin to lose my marbles. (David Ogilvy had it right when he said: “Develop your eccentricities
when young. That way, when you get older, people won’ t think you are going gaga.” Charlie’ s family and
mine feel that we overreacted to David’ s advice.)
At our directors’ meetings we cover the usual run of housekeeping matters. But the real
discussion – both with me in the room and absent – centers on the strengths and weaknesses of the four
internal candidates to replace me.
Our board knows that the ultimate scorecard on its performance will be determined by the record
of my successor. He or she will need to maintain Berkshire’ s culture, allocate capital and keep a group of
America’ s best managers happy in their jobs. This isn’ t the toughest task in the world – the train is already
moving at a good clip down the track – and I’ m totally comfortable about it being done well by any of the
four candidates we have identified. I have more than 99% of my net worth in Berkshire and will be happy
to have my wife or foundation (depending on the order in which she and I die) continue this concentration.
Sector Results
As managers, Charlie and I want to give our owners the financial information and commentary we
would wish to receive if our roles were reversed. To do this with both clarity and reasonable brevity
becomes more difficult as Berkshire’ s scope widens. Some of our businesses have vastly different
economic characteristics from others, which means that our consolidated statements, with their jumble of
figures, make useful analysis almost impossible.
On the following pages, therefore, we will present some balance sheet and earnings figures from
our four major categories of businesses along with commentary about each. We particularly want you to
understand the limited circumstances under which we will use debt, since typically we shun it. We will
not, however, inundate you with data that has no real value in calculating Berkshire’ s intrinsic value.
Doing so would likely obfuscate the most important facts. One warning: When analyzing Berkshire, be