Take Heart!


  A “Notice of Annual Meeting Of Shareholders” aka proxy statement, is the bland accompaniment to large public corporations’ glossy annual reports.  Especially when economic tides rise high, the latter are filled with impressive graphs and color photos of beaming faces in far flung places.  The former are little more than ink on paper whatever the water level.

  The proxy statements carry much arcanity along with an aspect of a company’s operations under growing scrutiny – compensation.  With the nation’s unemployment well beyond 10%, bailouts, etc, it is interesting to read how pay packages in the millions and tens of millions are assembled.

  Take a big bank.  Out of the 100+ pages of one March 2010 proxy, nearly forty pages are devoted to graphs and articulation in intricate rationalization.  (The next largest section goes all the way to seven pages.)  We hear about the need for sustained leadership, peer data review, retention performance share awards, and of course TARP.

  Furthermore, generally speaking, salary plays a relatively small roll in these arrangements.  Bonuses are where the dessert is and it’s assembled from an assortment of goodies like stock and options to buy stock at a certain price.  Thus, the price of a share of a company’s stock is the determining factor in the generation of wealth for many CEOs.

  The problem is that share price performance is not necessarily directly related with the underlying trajectory of a business.  Short term actions do not necessarily accrue to long term benefit.  Conversely, in a difficult environment, a manager might execute brilliantly yet yield meager profit.

  Enter (who else) Warren Buffet.  The compensation part of the 2010 Berkshire Hathaway proxy covers but one of its eleven pages.  Buffet’s personal wealth has of course grown – but not at the expense of his shareholders.  He pays himself less than $200,000/yr.  But what is really interesting is his method for developing pay packages for his key people.

  “The Committee has established a policy that: neither the profitability nor the market value of its stock are to be considered. Factors considered … are typically subjective… he utilizes many different incentive arrangements with their terms dependent upon economic potential or capital intensity.  These prices are never related to measures over which [the person] has no control.”

  His well known results speak for themselves.  The overall gain of his company from the date of inception is 434,057% compared with the most familiar yardstick – the S&P 500 at 5,430%.  And what I’m sure he’d say was nearly as important in the evolution of his business has been the development of an incredibly strong and defensible position. 

  As he likes to say “you don’t know who is wearing swimming trunks until the tide goes out…”  Indeed, instead of being bailed out, he was in there with Uncle Sam tossing lifelines.  And taking advantage of the extremely depressed pricing of most financial instruments.  “I felt like an oversexed guy with a harem.”

   How did he get to be so smart?  He’d be the first to admit to being fortunate in having had both his brain wired up in a certain fashion as well as the unconditional love of his parents.  There was additional insight in the March 24, 2010 WSJ. 

  Buffet dearly wanted to matriculate at Harvard, but was denied admission.  “The truth is, everything that has happened in my life … that I thought was a crushing event at the time, has turned out for the better… [setbacks] carry you along.  You learn that a temporary defeat is not a permanent one.  In the end, it can be an opportunity.”*

  Take heart kids.

*WSJ 3/24/10

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