CalPERS, a public pension fund with a 20-year track record one-third as good as Warren Buffett’s, wants Buffett out as Chairman of Berkshire Hathaway. Why?
The World’s Greatest Investor
Over the last 57 years, Berkshire Hathaway has generated compound average annual gains of 20.1%. This compares to 10.5% for the benchmark S&P 500 index.
This performance makes Warren Buffett the world’s greatest investor.
CalPERS owns a $2.3 billion (0.3%) stake in Berkshire. CalPERS posts a 20-year compound average annual return of 6.2%. $100 invested with CalPERS 20 years ago would have added $233 in value. By comparison, Buffett would have added $637, nearly three times as much.*
At the upcoming 2022 annual meeting of Berkshire shareholders, CalPERS will vote to strip Buffett of his chairmanship while retaining him as CEO.
This sounds dumb, even for government.
Why would CalPERS do this?
Losing His Fastball?
Like any investor, Buffett has good years and bad years.
With success come two other factors. The first is a tendency for outliers to revert to the mean. Therefore, to the extent Buffett has been unusually lucky, that luck will eventually turn.
The second factor is the law of large numbers: as Berkshire gets bigger, it must generate larger and larger absolute returns to generate the same percentage returns.
So has Buffett lost his fastball? A January 2021 CNBC article described Buffett’s “losing battle against the S&P 500,” which had outperformed Berkshire Hathaway over 5-, 10-, and 15-year periods.
That was then.
Over the past 12 months, Berkshire has “trounced” the S&P 500, posting 30% returns to the index’s 8%. Year to date 2022, Berkshire has gained 15% while the S&P 500 has lost 7%.
Maybe Buffett still got game.
More to the point, the recent numbers bear out Buffett’s conservative investment approach. This includes keeping a giant hoard of cash and cash equivalents.
Buffett’s current pile approaches a Smaug-like $150 billion.
Buffett’s conservatism not only lets him ride out storms. It also gives him the liquidity, in hard times, to gobble up bargains like so many tasty dwarves.
This approach may cause Buffett’s returns to lag during multi-year bull markets when others overpay for stocks. But, it may also let him race ahead when the bears come out.
Separation of Powers?
CalPERS is not alone in seeking Buffett’s ouster as Chairman.
According to Reuters, “In proposing to install an independent chair at Berkshire, the nonprofit National Legal and Policy Center said the roles of CEO and chairman are ‘greatly diminished’ when one person holds both.”
This view begs the question of what the CEO’s and chairman’s roles should be.
Confusing Business With Politics
The CEO manages the company on a day-to-day basis. The chairman oversees Board functions such as the guiding strategy formulation, approving transactions outside the ordinary course of business, and hiring, mentoring, and assessing senior managers.
For better or worse, corporate and securities laws over the last two decades have assigned the Board increasingly prescribed roles in overseeing certain compliance functions. Assignment often takes place in the name of “separation of powers.” Many extend this rationale to automatically splitting the Chairman and CEO roles.
This view may be common, but it is incorrect.
“Separation of powers” comes from political theory. To prevent tyranny, the argument goes, core governmental functions should be separated into distinct branches and levels that will monitor and counterbalance each other.
This concept does not apply to business, which instead concerns itself not with prevention of tyranny but with performance. Performance rests on alignment of interests between the company and its directors and agents, as well as on their accountability for discharge of their duties.
To this end, there may be cases where splitting the chairman and CEO roles makes sense. For example, where a professional manager is brought in as CEO, that manager might not have sufficient sweat equity or actual equity to align with the interests of shareholders. Such manager will also lack a track record as the company’s CEO. In such case, Board oversight through a non-executive chairman helps mentor the CEO while strengthening accountability.
Another case for splitting the Chairman and CEO roles involves bandwidth. At a time of accelerating technological change, Bill Gates of Microsoft retained the chairmanship while voluntarily ceding to Steve Ballmer the position of CEO. This move freed Gates to serve as chief software architect, in which role he felt he could better help the company.
Imagine, on the other hand, a company with a founder who has dedicated his life to the company and performed brilliantly. The founder has the bulk of his or her wealth still invested in it. The founder retains the skill and will to excel, with no better use of his/her energies and experience. In such case splitting the chairman and CEO roles looks not only unnecessary but foolish.
By analogy, if you have Michael Jordan on your team, and he wants the damn ball, give it to him.
In the present situation, Buffett still wants the damn ball.
Why wouldn’t CalPERS want to give it to him?
Confusing Politics with Business
Buffett is a notoriously hands-off investor. He foreswears meddling with or micro-managing his portfolio-company executives.
He also runs a lean-and-mean holding-company headquarters.
These practices can place him at odds with shareholders and stakeholders wanting Berkshire Hathaway to pressure portfolio companies on particular matters — either directly, or by gathering certain data from them and publishing it.
2021 Shareholder Proposals
In 2021, Buffett specifically drew fire from CalPERS for opposing shareholder proposals that Berkshire Hathaway gather and publish information on diversity and inclusion efforts among its various portfolio companies, as well as on their responses to climate change.
Berkshire argued in part that while the proposals dealt with important matters, the company delegated such issues to the portfolio companies themselves. Berkshire also noted that Berkshire’s spare staffing at the holding-company level prevented it from gathering and disseminating the data sought.
This stand didn’t please CalPERS. As reported in The New York Times, Simiso Nzima, the fund’s head of corporate governance, said that CalPERS would protest by voting to remove directors then serving on Berkshire’s audit and governance committees.
Sticking To Business?
In 2018, Buffett opposed a proposal banning Berkshire portfolio companies from doing business with gun manufacturers. Buffett stated at the time, “I don’t believe in imposing my political opinions on the activities of our businesses.”
This politically incorrect view probably underlies his 2021 position.
The view may also better frame the current dispute with CalPERS, as well as the fund’s motivations for stripping Buffett of his chairmanship.
At the 2021 meeting, Ms. Nzima stated, “We are not going to shy away from holding Berkshire accountable just because it’s run by Warren Buffett.”
In 2022, CalPERS signaled that it won’t shy away from holding Warren Buffett accountable by having him not run Berkshire Hathaway.
Fighting For The Future
Through its proposals and votes, CalPERS has fired shots across the bows of Buffett’s potential successors.
CalPERS has said, in effect, “We may not have the votes now, but when Buffett is gone and his controlling stake parceled out, beware.”
Buffett’s 2018 statement holds that proposals like the ones supported by CalPERS have nothing to do with running a publicly traded, for-profit corporation that invests in other businesses.
Assume for the sake of argument that Buffett’s 2018 view has some merit. CalPERS has a track record one-third of Buffett’s, that also trails the S&P 500.
Maybe Buffett’s not the one who needs to be held accountable.
Perhaps someone should ask CalPERS what its efforts regarding Berkshire have to do with running a pension fund.