The Loneliness of the Long-Run Director
from Summer 2000
by William S. Rukeyser
It sounds simple enough: A company`s directors are there to represent the interests of the shareholders. But which shareholders? Widows and orphans-or day traders?
Boards have always had to strike a balance between providing resources to build the company`s future wealth and generating cash now. But the pressures to grab the cash and let the future take care of itself multiply as companies are pummeled in the stock market for offenses like missing quarterly "whisper numbers" by a penny a share. On many boards, directors who strive to take the long view of the shareholders` interests have never felt lonelier.
Until lately, at least, they could take strength from the example of the pre-eminent long-term investor, Warren Buffett, who spectacularly benefited his shareholders by shunning business fads and market forecasts. Whether buying parts of companies in the stock market, negotiating acquisitions of whole companies, or reinvesting in existing properties, Buffett rigorously weighed the assets and long-term business prospects against the price. He looked for unusual opportun-ities where the math wasn`t a close call, where the numbers indicated a wide margin of safety. Unglamorous, perhaps, but effective: A share of Berkshire Hathaway Inc., available for $15 in 1965 when Buffett took over, reached a high of $81,100 in 1998.
Not a bad hero for any conscientious board member. So Buffett`s recent stumbles-and the troubles of other legendary "value" investors, including Julian Robertson of the Tiger hedge funds-threaten to further isolate value-oriented directors. That raises the odds that their companies will stumble, too.
Whom the markets would destroy, they first make gurus? In Buffett`s case, destruction is still a long way off, but without doubt, the ability of the mere mention of his name to quiet boardroom arguments has been greatly reduced. In 1999, Berkshire`s earnings per share fell 55%, thanks to sagging performance by its insurance business and by some of its big stock holdings, including Coca-Cola and Gillette.
Other embarrassments have surfaced, too. The odd accounting practices at Coca-Cola Co. that are detailed on page 70 have been in use while Buffett, a vocal critic of other companies` misleading accounting techniques, has been a Coke director. And Berkshire`s reputation for lofty ethics was challenged last fall by a Wall Street Journal front-page story describing high-pressure door-to-door sales tactics of the Kirby vacuum cleaner company, part of Berkshire Hathaway`s Scott Fetzer unit.
By last March, amid a spreading dismay at Buffett`s avoidance of tech stocks, Berkshire Hathaway shares had dropped almost 50% from their 1998 high, prompting an eruption of Buffett-bashing. Internet message boards, never citadels of patient, value investing, were especially merciless. A posting on the Motley Fool`s board: "Buffett is done. Toast. Used up. Nada. History." A market timer who took such comments as "bottom talk"-a buy signal-would have looked smart, at least in the short term. Seven weeks later, as 10,000 Berkshire Hathaway shareholders gathered in Omaha for Buffett`s annual love-in, the stock was 45% higher, while many of the tech stocks Buffett eschewed had tumbled.
Whether Berkshire can regain its edge is, of course, anybody`s guess, though I have no plans to sell the odd lot that I happily own. Buffett has made it clear that he will continue to manage his portfolio of businesses and securities more like a forward-looking corporate board than a conventional money manager. He evaluates investments as businesses, not as pieces of paper to be flipped. When he buys, he normally does so because he wants to profit from the business`s anticipated success over the long term.
Buffett feels his techniques of security analysis give him no advantage in judging which tech companies are likely to thrive over 10 years or more. Those who urge him to start trading tech stocks anyway are in essence urging him to stop being Warren Buffett and guess with the crowd.
One guess that`s increasingly heard is that the biggest winners in the Internet revolution may be established companies that wholeheartedly adopt technology. If so, Berkshire Hathaway could do fine. Many of its units, ranging from Geico to See`s Candy, are at the forefront of their industries in embracing the Internet.
Meanwhile, board members elsewhere don`t have to share Buffett`s powers and quirks to see the benefits of doing their homework and prizing value. In a world of accelerating change, everybody can use a margin of safety, and even the shareholders may come to appreciate it.
