Content area
[...] Buffett's answers to those questions during the April 30 annual shareholders meeting resolved little.
Berkshire Hathaway Inc. Chairman and CEO Warren Buffett entered last weekend appearing as vulnerable as he has been in recent memory.
One of his top executives, David Sokol, resigned in late March after admitting he had traded shares in a company Berkshire later agreed to acquire. The revelation put the firm's internal policies under a microscope and created questions about Buffett's judge of character and Berkshire's previously squeaky-clean reputation.
On the business side, the company's reinsurance division carried significant financial exposure to the first quarter's series of Pacific disasters, putting profits at risk.
And underlying those major concerns was the perpetual question of succession, and who was not only the most qualified but the most trusted individual to take the reins of the storied company upon Buffett's departure.
In short, Buffett's answers to those questions during the April 30 annual shareholders meeting resolved little. Berkshire and Sokol appear to be digging in for a nasty fight that could involve a federal investigation, while $1.67 billion in catastrophe losses dragged down the company's insurance underwriting results. Meanwhile, the candidates for future CEO range from everyone to no one, as Berkshire continues to keep its choice secret.
Yet when Buffett signaled the end of the question-and-answer session that serves as the main attraction at his self-proclaimed Celebration of Capitalism, he did so to raucous applause. Most of the nearly 40,000 shareholders filed out of the arena, excitedly exchanging the bits of wisdom they gained over the past few hours from their investment idol.
Buffett's reputation, it appeared, was not only intact but stronger than ever.
He accomplished this feat, in part, by wasting no time in addressing both Berkshire's disappointing underwriting performance and its dispute with Sokol.
Included in the firm's preliminary earnings was a breakdown of Berkshire's exposure to the catastrophic events in Australia, New Zealand and Japan, along with details on the $700 million in reinsurance losses it would take from an agreement with Swiss Reinsurance Co. Ltd. He also warned that the firm would likely report a full-year 2011 insurance underwriting loss.
"What was very different in the first quarter was that we had probably the second-worst quarter for the insurance industry in terms of catastrophes around the globe," Buffett said. "For the first time in nine years, we will likely have an insurance underwriting loss this year."
Buffett followed that report by speaking at length about Sokol and the circumstances surrounding his departure. He placed the blame squarely on Sokol's shoulders, calling his actions "inexplicable" and "inexcusable" and clarifying that Sokol never told him about his meetings with Citigroup Inc. investment bankers about Lubrizol Corp. He later admitted to making a "big mistake" by not asking for more detail on Sokol's trades, but added that when he learned about their close timing to the Lubrizol acquisition, Berkshire promptly reported it to the SEC and turned over "very damning evidence, in my view."
The Sokol situation, Buffett said, could spur some rule changes but would not impact his succession choice, a secret selection whom he characterized as "straight as an arrow."
The up-front approach, combined with Berkshire's previously immaculate reputation, satisfied the concerns of investors that spoke with SNL.
"He was straightforward from the beginning," shareholder Peter Pluimer said following the meeting's morning session. "It seems like it was an isolated incident."
Investor David Umbro said he trusted the firm's ability to quickly resolve the Sokol dispute.
"I was hoping he would address it and move on," he said, adding that he was more interested in topics beyond the company's performance. "It's always good to get his feedback on larger economic and political issues."
Several other investors echoed Umbro's perspective, and after a morning filled with tough questions about Berkshire, the meeting's tone shifted noticeably in the second half of the day. Lingering concerns about the firm's internal and operating challenges came mainly from investor submissions selected and asked by journalists, while those in the crowd sought Buffett's commentary on investing, broader economic issues and even techniques for speed reading.
The disparity seemed to reinforce Buffett's statement in an earlier Fox Business Network interview that it was the press, rather than shareholders, that was most worried about fallout from Sokol's resignation.
The turn toward lighter subjects allowed Buffett and Vice Chairman Charles Munger to stretch their comedic legs, with Munger generating laughs and applause by countering Buffett's lengthy answers with a mix of one-sentence responses and no comments. The loudest approval came following their criticisms of both political parties, financial and economic education and what Munger called a "disgraceful" lack of accountability for the financial crisis from large Wall Street firms.
In the end, Buffett's straightforward style combined with the crowd's eager admiration to defuse any hostile sentiment over the personnel and financial issues Berkshire must still address. Shareholders left happy and feeling a bit smarter, Buffett retained his peerless reputation and the rest of the world came away wondering what, if anything, could possibly tarnish Berkshire and its Teflon leader.
Copyright SNL Financial LC May 03, 2011