A. Full and Fair Disclosure
All the important facts about current operations as well as the CEO’s frank view of the long-term economic characteristics of the business. We would expect both a lot of financial details and a discussion of any significant data we would need to interpret what was presented.
3 Suggestion for Investors
1. Beware of companies displaying weak accounting.
2. Unintelligible footnotes.
3. Be suspicious of companies that trumpet earnings projections and growth expectations.
B. Boards and Managers
Charlie and I have seen make us thankful that we are linked with the managers of our permanent holdings. They love their businesses, they think like owners, and they exude integrity and ability. We now have eleven directors and each of them, combined with members of their families, owns more than $4 million of Berkshire stock. We want our managers to think about what counts, not how it will be counted.
C. The Anxieties of Business Change
a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad).
Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
D. Social Compacts
We see a “social compact” existing between the public and our railroad business, just as is the case with our utilities. It is inconceivable that our country will realize anything close to its full economic potential without its possessing first class electricity and railroad systems. We will do our part to see that they exist.
E. An Owner-Based Approach to Corporate Charity
Shareholders will name the charity and Berkshire will write the check. There will be some years, perhaps two or three out of ten, when contributions by Berkshire will produce substandard tax deductions—or none at all. In those years we will not effect our shareholder-designated charitable program. This idea was conceived by Charlie Munger.
F. A Principled Approach to Executive Pay
At Berkshire, they use an incentive-compensation system that rewards key managers for meeting targets but not for average performance. There’s no cap on bonuses, and the
potential for rewards is not hierarchical. The manager of a relatively small unit can earn far more than the manager of a larger unit if results indicate he should.
G. Risk, Reputation and Oversight
CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. Berkshire’s top priority, to guard it’s reputation. Culture matters a lot.
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