Tags: warren buffett | berkshire hathaway | Management | Ownership

Management Ownership Matters

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Friday, 06 May 2016 07:03 AM Current | Bio | Archive

I’m traveling to visit family and friends this week. And while it was tempting to stop by Omaha for the annual meeting of Berkshire Hathaway (BRK-B), I declined.

Going to an annual meeting is something every shareholder should try to do at some point.

It will give you a far better understanding of a company’s top leadership than reading written statements or listening to quarterly earnings. It’s one of the best chances you’ll have to interact directly with management.

While Berkshire’s annual meeting gets the most media attention, every company has one.

It’s just that every other company’s meeting is more businesslike. And there’s no media circus surrounding other firms. Granted, Berkshire’s meeting gets around 40,000 attendees.

Most big-name companies get maybe a few hundred.

The focus on Berkshire’s meeting, the Q&A with Warren Buffett and Charlie Munger, isn’t the actual operational part of the annual meeting. While thousands are slipping out following the Q&A, Buffett’s folksy image takes a backseat to an auctioneer as he quickly rattles through all the corporate proposals. Owning nearly half the shares, and with the directors present, the real Berkshire meeting is a fascinating exercise in corporate management. But don’t even blink—it’s over in the space of 3-5 minutes.

Seeing that part of an annual meeting is a great reminder that when you buy a company, you’re stuck with the management. So it had better be good. Buffett still controls nearly half of Berkshire’s outstanding shares, so his views are aligned with those of shareholders.

Most other companies aren’t so lucky. Only a handful of companies have CEOs or other senior executives with a meaningful stake in the firm, say at least 1 percent of outstanding shares. It’s not a financial metric, and it’s not a technical measure, but it’s one that speaks to how management is willing to operate. Find a company with a large ownership stake among its top executives, and you’ll see a company that’s likely being run for the benefit of the long term.

Find a company with nearly no executive ownership, and anything can happen since management has no long-term stake in its success. Luck may end up playing a role.

The problem is exacerbated with stock options. A high amount of stock options will dilute existing shareholders over time. But that’s hidden by the short-term drive to make sure those options are worth something. It means that strategic blunders are more likely to occur in the quest to hit quarterly numbers. It’s not a red flag, but it’s a yellow one.

Finally, there’s the super-manager. Everyone knows and follows Buffett, but other super-managers get a fair amount of attention to. That includes other billionaire investors whose names make headlines like Carl Icahn or Bill Ackman.

Both have publicly-traded vehicles, or you could follow the individual companies that they invest in. But all super-managers are fallible. They get it wrong from time to time. Yes, even Buffett. Don’t treat the super-managers as supermen.

For investors, finding management with a large stake in the company is usually better than the alternative. But remember, nobody’s perfect.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report. To read more of his work, GO HERE NOW.

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For investors, finding management with a large stake in the company is usually better than the alternative. But remember, nobody’s perfect.
warren buffett, berkshire hathaway, Management, Ownership
Friday, 06 May 2016 07:03 AM
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