Market Commentary: Berkshire Hathaway, St. Augustine, and ESG

Patron Saint of Good Works,
But Primarily Those in the Future

 Analyst Disclosures:

• Oxford Commas provided by Eton College in return for this promotional mention. 
• AA holds no investment position (either short or long) in BH. Or more precisely BRK.

Berkshire Hathaway has made what I consider puzzling (at least on their face) responses to two shareholder introduced proposals for consideration at the 2021 annual general meeting. 

Readers are invited to make their own judgments as to the motives for these responses.

You’ll find BH’s proxy materials here. 

The first proposal is that “the Company publish an annual assessment addressing how the Company manages physical and transitional climate-related risks and opportunities.” This proposal contains suggested elements in that report but gives the board “discretion” on framing the report.

Berkshire replies that:

1. The Board recognizes the importance of responsibly managing climate-related risks to both shareholders and the future of Berkshire and its operating businesses.
2. The Board regularly receives reports on the major risks and opportunities of the operating companies, including those related to climate, and discusses those risks and opportunities. 
3. Berkshire manages its operating businesses on an unusually decentralized basis. There are few centralized or integrated business functions. (At the BH level).
4. We want our managers to do the right things and we give them enormous latitude to do that; consistent with our business model, each subsidiary is independently responsible for identifying and managing the risks and opportunities associated with their business, including those related to climate change. 

As I read this, BH admits it has the requested information in one form or the other (point #2) but pleads (point #3) that they don’t have the staff at the holding company level to compile such a report. 

Apparently, hiring a third party to compile such a report would be a large and extravagant expense. Note that is my assumption. BH did not say this.

Interestingly in arguing against adoption of this proposal BH then goes on to recite the climate related achievements of some subsidiaries in some detail. 

In light of the above comments about the small size of BH’s central staff, I wonder who prepared these. 

Could it possibly be the same folks who prepare information on financial performance at the subsidiary level? Note my assumption is that it is staff at those subsidiary companies.

In point #1 BH “recognizes” the “importance” of these issues and in point #4, it “wants” the managers of its subsidiaries to do the “right things”, but as also outlined in point #4 isn’t going to interfere with the discretion entrusted to the operating company managers.

BH's position on climate issues seems to AA to be similar to St. Augustine who reportedly recognized the danger of sin, and ardently wanted to do something about his own personal situation, but not today.

AA wonders at least rhetorically, and hope you do too, if the Board takes same approach on operating company financial performance. It “recognizes” the importance of good financial performance, “wants” good performance, but lets the operating companies “independently manage” financial performance.

The second shareholder proposal requested that “Berkshire Hathaway holding companies annually publish reports assessing their diversity and inclusion efforts, at reasonable expense and excluding proprietary information 

BH’s Board responded that:

1. Berkshire’s commitment to diversity, equity and inclusion and the effectiveness of our companies’ related programs starts with our leaders, including our Board of Directors on which three female and two ethnically diverse members serve. 
2. Mr. Buffett, Berkshire’s Chairman and CEO has set the “tone at the top” for Berkshire and its employees for over 50 years. During this period of time, Mr. Buffett has a record of opposing efforts, seen or unseen, to suppress diversity or religious inclusion. 
3. All of Berkshire’s leaders – whether in our operating businesses or on our Board – are extraordinarily qualified, committed to our culture and focused on ensuring long-term success for shareholders.
4. The proposal’s supporting statement indicates that “investors seek quantitative, comparable data to understand the effectiveness of the Berkshire Hathaway companies’ diversity, equity and inclusion programs,” improperly suggesting that there is a standardized technique for each of Berkshire’s more than 60 operating businesses to address diversity, equity and inclusion. 
5. Berkshire’s operating businesses represent dissimilar industries operating in multiple locations throughout the world. It would be unreasonable to ask for uniform, quantitative reporting for the purposes of comparing such dissimilar operations in different geographic locations. 

Again, as I read points #1 and #2, BH both recognizes and supports diversity and inclusion. Though I’d guess that as outlined above in the discussion on climate, the Board really doesn’t do anything to interfere with the subsidiaries’ operations.

Also I'd like to call to your attention another demonstration of why many call Mr. Buffett the Oracle of Omaha: he apparently can see both the seen and the unseen.

Point #3 was puzzling.

AA wonders if it is designed to calm the potential worries that some shareholders might have after reading point #2. All that diversity. Is my money really safe? 

I’d also note that two of BH’s directors would qualify as senior citizens. So score a few more diversity points for the Company.

Points #4 and #5 raise a question about how BH is able to provide reporting on its financial performance. 

I mention this because BH’s 60 companies operate in “different geographic locations” and “different industries” in “multiple locations in the world”. 

As a consequence, it is highly likely they are using different languages, different accounting systems, to say nothing of accounting principles, and are subject to different laws. 

It sounds an impossible task, but if you take a look at BH’s 2020 Annual Report, you will see a rather extensive discussion on BNSF, BHE, and other of BH’s companies.

Were these prepared by the 26 central staff in Omaha who, if this is the case, might be the modern day equivalent of the 300 Spartans? 

Or were they prepared by the subsidiaries themselves?

Couldn’t that be a solution if only in part to the shareholder proposal? 

The subsidiaries prepare such reports. 

Who better prepared to put their efforts and results in the appropriate regional and industry context?

Perhaps, with the requirement that only a few of BH’s 60 subsidiaries report each year.

With the focus on the major subsidiaries.

Where there is a will there is a way or so AA was told by his parents.

On the wider topic of ESG itself, here’s a link to an interesting piece at Bloomberg from January 2020 which analyzes the differences between what investors profess and what they do.

Two salient points therein:

1. Berkshire tends to score low on ESG (even below Amazon) due to lack of reporting and its holdings of coal-fired utilities. Mr. Buffett’s Friedmanite skepticism dogmatism on ESG may also be a factor.
2. Most investors who claim that ESG is a key element in their investing philosophy do not practice what they preach. If an investment has a high return, ESG concerns vanish. Virtue is apparently not its own reward. Even more interesting those who claim they would shun an investment in Amazon because of concerns about workers’ rights, would definitely shop there. There are a lot of St. Augustines about, it would seem.