Editors note: In a follow-up to our recent article on beta and shareholder activism, and as we enter the annual shareholder proxy season, we will profile three poster companies of old-style American capitalism: Berkshire Hathaway, JP Morgan and Chevron.
As you know, annual general meetings (AGMs) of shareholders are opportunities to elect directors, ask questions and make business requests, on myriad matters, like executive compensation, governance, climate, capital allocation, racial justice and more. The “proxy season” refers to that cluster of AGMs which occurs in April, May and June. As it is impractical for most shareholders to attend in person, instead they fill out a “proxy” which then is voted on their behalf at the AGM.
Value-based investor Warren Buffett says it’s no time to change how we govern and manage investment portfolio risk.
It is becoming an increasingly important spring ritual. Once a rubber-stamping exercise in corporate governance, the annual shareholder meeting held during proxy season was a carefully staged theater where a corporate secretary would push through a series of votes on people and policy as dictated by the reigning CEO. There was little dissent and little doubt of the outcome. The CEO and Board always got their way.
That is changing fast. The annual proxy season ritual has turned nasty. It is now hunting season. Weaponized stakeholder groups are holding board and management’s feet to the fire demanding stronger governance and stewardship oversight.
In the race to save humanity from the effects of climate change, it is the “G” of Environmental, Social and Governance (ESG), which may be most critical to our future. Well-governed companies are better equipped to better manage risk and turn the growing threat of external systemic risks — like climate change, war or pandemics — into sustainability opportunities that will benefit all.
It is not without a certain irony that America’s favorite shareholder — lover of Coke for breakfast and Dairy Queen for dinner, wants nothing to do with newly empowered shareholders. Warren Buffett, the Oracle of Omaha, is of the old old school.
Warren Buffett, the Oracle of Omaha, is of the old old school.
Born in 1930 Mr. Buffett is famous for picking winning companies. He is the creator of vast personal and shareholder wealth via Berkshire Hathaway, his industrial and financial conglomerate. It is the eighth largest company ($650 billion) in the S&P 500. He is chairman and CEO, controlling shareholder 36% and 16% economic owner.
For decades Buffett’s earnest “I was a newspaper delivery boy,” and his love for classic American companies made him the much-beloved value investor from Omaha, a stark contrast to Wall Street’s Barbarians at the gate.
But he did not become a billionaire because he lives in a modest suburban house and loved a DQ Blizzard. He governs Berkshire Hathaway in the old fashion way, with an iron fist, and his folksy chuckle is more disarming than charming.
Born of a different generation, he understands growing global systemic threats like climate change, but the primacy of profit rules his brain. Buffett was born in the Depression, never studied science and believes his annual shareholder meeting is all the governance his shareholders need. Their role is to be seen but not heard.
The media loves it. His shareholders love it. But increasingly it is out of step with the revolutionary changes underway in long-term investing.
His energy subsidiary Berkshire Hathaway Energy (BHE) is infamous as one of America’s largest carbon polluters. Buffett is secretive about its climate and energy data, which he will only disclose in a “partial and selective” manner.
Can you hear me now? Focus on governance
When it comes to both the “G” and the “E” of ESG, Emperor Buffett listens only to what he chooses to hear. He stubbornly rejects best practices governance. Last year, he ignored shareholder requests to set science-based greenhouse gas reduction targets and report granular emissions data at the subsidiary level.
It will be no different this year. Buffett will undoubtedly prevail at the upcoming April 30 AGM on all four proxy resolutions.
He still has the golden capitalist halo and the votes in his pocket. His annual shareholder meetings are held in a vast arena in Omaha, Nebraska and broadcast on CNBC like a sort of Burning Man for capitalists. It is a gathering of enriched shareholders to drink cherry coke, suck on Sees Candies, bay at the moon and celebrate the success of the Sage of Omaha.
When it comes to both the “G” and the “E” of ESG, Emperor Buffett listens only to what he chooses to hear.
Berkshire April 30 annual meeting: Burning Man for capitalists
The annual meeting is increasingly seen as lacking the governance substance that has made other AGMs gauntlets of fire. Last year ExxonMobil was torched when Engine No. 1 unseated three board directors in a rare and dramatic vote to “throw the bums out.” Game on!
Buffett is out to avoid a similar fight at the Berkshire Hathaway AGM at all costs.
In the Kingdom of Berkshire Hathaway, he who has the gold makes the rules. Buffett has the gold –– because he practically mints it in shareholder wampum –– and he controls a block of insider votes including Bill Gates and therefore exercises majority control. Last year he defeated two resolutions: one on audit, one on climate.
However, Buffett and Berkshire Hathaway are swimming against an increasingly powerful tide of shareholder activism. Last year a substantial majority of non-insiders voted against management on the two resolutions. Even more could do the same this year, thereby sending fresh and powerful signals.
The smoke and fire signals sent are increasingly about more than any single company. This year’s results will swell the growing chorus of beta activism where shareholders and stakeholders are focused on bigger systematic risks, which can feed into global crises. Think bank loans to coal companies, the soaring cost of insurance because of extreme weather, disproportionate amounts of air pollution in underserved neighborhoods, pandemic-related supply chain disruptions or the specter of a food crisis because of the war in Ukraine.
The endless highway to the golden valley
None of this fits into Buffett’s American capitalist dream. For him, it is an endless skyway of possibility toward a golden valley of profit and shareholder goodwill. From the slender ribbon of a modest insurance operation, he built a sprawling conglomerate in insurance, energy, transport and more in an era where conglomerates were often torn apart. Berkshire has over 60 separate operating businesses including GEICO insurance, the railroad subsidiary BNSF and a top 10 energy company BHE, plus an enormous long-term investment portfolio with stakes in household names companies like Apple (5% stake, worth $157 billion), BankAmerica (12% worth $44 billion), Coca-Cola (9% worth $23 billion) and Kraft Heinz (26% worth $11 billion).
Buffett is about as dreamy as you get: The American Dream.
As a Berkshire shareholder, if you hitched your wagon to his compounding freight train, you became rich. Just think of that BNSF anthem every night on PBS with images of endless railcars filled with black coal rolling through the wheat fields of America’s heartland, to power plants on the New York island and the Gulfstream waters, ready for combustion or export. This land was made for you and me as long as you were a shareholder.
Buffett is about as dreamy as you get: The American Dream. But now that dream is being challenged in proxy resolutions at AGMs and on the streets of America. Three of four resolutions — two on climate: one for the energy business, the other for insurance and one on pure governance where it is proposed that he give up his Chairman role — tell a powerful story about the man, the myth and these very times.
Granular data for investor risk management: Not necessary?
Over two decades, Berkshire assembled a climate-busting portfolio of fossil fuel and transportation interests, via the acquisition of companies like MidAmerican Energy and Dominion Energy. BHE holdings transport 20% of the nation’s natural gas and have large power generation and distribution businesses.
Despite such a massive fossil fuel portfolio, Buffett refuses to set science-based emissions targets or disclose detailed climate and emissions data for BHE.
Shareholders are pushing back. This year, “so investors can manage risk more effectively,” the proxy statement Item 3 requests a comprehensive annual assessment of how the Company manages climate, at both the parent and BHE subsidiary levels. Supporting statements from such long-term investors as Brunel Pension Partnership Limited via EOS, CalPERS, Caisse de Dépôt et Placement du Québec and State of New Jersey Common Pension Fund strongly call out poor governance and non-transparent disclosure practices at the company and its energy subsidiary.
Counter to global norms, Mr. Buffett is swimming petulantly against the tide. “More than 2,600 companies globally support the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations, and 98 of the Climate Action 100+ companies already report in line with this framework.” The company response is coolly profit-seeking: “In assessing the individual and collective greenhouse gas emissions footprint of the Berkshire operating companies, it is also important to consider each company’s contributions to net income.”
Berkshire Hathaway recommends voting against all resolutions because they are “not necessary,” sending a clear message: Profit, not purpose, trumps all.
The proxy statement Item 4 is directed at the heart of the conglomerate, its insurance operations. It requests a report “addressing if and how it intends to measure, disclose and reduce the GHG emissions associated with its underwriting, insuring and investment activities, in alignment with the Paris Agreement’s 1.5 C goal, requiring net zero emissions.”
Berkshire Hathaway recommends voting against all resolutions because they are “not necessary,” sending a clear message: Profit, not purpose, trumps all.
The G is central to Investing: The imperial American CEOs
It’s also a strong signal that Buffett is not about to walk away from his 1950s-inspired “father knows best” approach to corporate governance. And this matters. Strong governance is core to responsible investing, in fact to all investing.
This year investors are asking the merely thinkable, namely to engage in a best governance practice which is to “split” the roles of chair and CEO, both of which Mr. Buffett currently holds. It has been proposed that he shed his chair role in favor of an independent chair. Investors want to avoid conflict of interest and smell problems.
It’s not just happening at Berkshire Hathaway. Conservative organizations have filed proposals this year demanding chair and CEO splits at Goldman Sachs and Coca-Cola. According to the mainstream Council of Institutional Investors (CII), “[s]eparating the chair and CEO positions reduces this conflict, and an independent chair provides the clearest separation of power between the CEO and the rest of the board.”
Yet in the U.S., few CEOs and not all shareholders support such a break and still prefer all-powerful imperial CEOs who often are also the company Chair. It is a very different picture in Europe and the U.K. where almost 97% of companies split the roles, with the practice of independent Chairs being the norm. The trend is catching on in the U.S with 43% of S&P 500 companies now doing so.
But not, for example, at Berkshire Hathaway or JPMorgan or BlackRock. The cult of the charismatic CEO is strong at these iconic American institutions.
But this love of corporate strongmen runs counter to a growing trend among investors to seek “climate-competent” corporations.
This governance resolution by the National Legal and Policy Center is driven by Berkshire’s poor governance and disclosure practices. While it is a foregone conclusion that all four proxy votes on the ballot will fail to get a majority, what instead matters is what percent of non-insiders will vote against management. What Mr. Buffett will say in answer to shareholder questions? What will his legacy be?
Let’s start with carbon pollution. The allocation of investment capital beloved by Buffett is headed smack into a science-based brick wall of rising heat. What does Mr. Buffett have to say about that?
At $125 billion Mr. Buffett is one of the richest men in the world, yet he eats breakfast at Mcdonald’s every day. He is 91 years of age and will be damned! He wants to remain chair and CEO.
But his source of profit comes from companies that are coming under scrutiny for promoting a deteriorating quality of life. Increasingly, Buffett will be judged by more than profits and his ability to spin the media. Carbon pollution, diabetes –– think cherry coke and DQ delights –– and air pollution spewing from power plants in poor neighborhoods may be his central legacy. Only when he leaves office does he promise to split the role of chair and CEO. He is Emperor Buffett. In the meantime, his message to shareholders: Let them eat Big Macs.
Photo by Duncan Rawlinson
