Warren Buffett, CEO of the legendary Berkshire Hathaway (NYSE:BRKa)(NYSE:BRKb), rightfully sits among the most respected and highly regarded business leaders in American history. When Buffett talks, it matters: his opinions can shape minds and drive business practices. Buffett’s influence and potential for tremendous good turn Berkshire’s annual shareholder meeting into a mega-event.
This year’s mass migration to Omaha, Nebraska was broadcast and streamed live for the first time by Yahoo Finance. Honestly, I was never interested in following this meeting or the commentary that came out of it until Yahoo advertised this momentous occasion. The video stream caught my attention, and I was riveted. The investor meeting was entertaining, educational, sobering, and inspirational all at the same time.
Yet, there was at least one moment that stirred me from my blissful admiration. That moment arrived around the 4:05:00 mark when Buffett and Vice Chairman Charlie Munger answered a shareholder question on diversity. Their collective response was so disappointing, so rambling, so underwhelming, and so misdirected that Berkshire sounded completely tone deaf on the diversity issue. At one point, Buffett even sounded stubbornly insensitive.
The whole display seemed out of character within the context of Berkshire’s desire to have a positive impact on the world. I had to conclude that Buffett and Munger are not quite clear on the “diversity issue” when applied in the corporate and organizational context.
I need to quote the full specifics of the discussion before proceeding with my critique.
Andrew Ross Sorkin from CNBC asked the question on behalf of Arits Galdoz (spelling?). Sorkin indicated that several other shareholders had asked similar questions. I transcribed the conversation as accurately as possible: my disbelief motivated me to confirm exactly what I think I heard…
From Sorkin:
“About two dozen men and women work with you Warren at our corporate office. I see from last year the quality of the picture in the annual report has been improved so congratulations on that. However, looking at it, there is something that comes to anyone’s attention, and it is the lack of diversity among the staff.
A 2015 analysis by Calvert Investments found that Coca-Cola Company (NYSE:KO) was one of the best companies for workplace diversity while Berkshire Hathaway was one of the worst. You’ve explicitly stated that you do not consider diversity when hiring for leadership roles and board members.
Does that need to change? Are we missing any investment opportunities as a result? And do you consider diversity, however defined, of company leadership and staff in the value of a company that you may want to purchase?”
Source: Berkshire Hathaway, Inc. 2015 Annual Report
For reference, here is a relevant quote from the summary of the 2015 Calvert Report titled “Examining the Cracks in the Ceiling: A Survey of Corporate Diversity Practices of the S&P 100“:
“Based on the 10 diversity criteria in the Calvert report, the overall highest-rated companies are: Bristol-Myers Squibb Company (NYSE:BMY), Citigroup (NYSE:C); Dow Chemical (NYSE:DOW), Eli Lilly and Company (NYSE:LLY); Lockheed Martin (NYSE:LMT); Merck (NYSE:MRK); Microsoft (NASDAQ:MSFT); PepsiCo (NYSE:PEP); Target; and Wells Fargo (NYSE:WFC). (ten companies tied for first place.)
The four lowest-rated companies are: Berkshire Hathaway; Simon Property Group (NYSE:SPG); National Oilwell Varco Inc (NYSE:NOV).; and Twenty-First Century Fox Inc (NASDAQ:FOX). Companies that achieved the most improvement: Philip Morris International (NYSE:PM); Schlumberger NV (NYSE:SLB); and Occidental Petroleum (NYSE:OXY).”
Buffett’s response to the diversity question:
“The answer to the last question is no. What was the one before it? [audience laughs and Sorkin repeated the question].
We will select board members, and we lay it out, we’ve done so for years. And I think we have been much more explicit than most companies. We are looking for people who are business savvy, shareholder-oriented, and have a special interest in Berkshire. And we found people like that. As a result, I think, I think we’ve got the best board that we could have. They’re clearly not in it for the money.
I get called by consulting firms who’ve been told to get candidates for directors for other companies. By the questions they ask it’s…clearly they’ve got something other than the three questions we ask in terms of Directors in mind. They really want somebody whose name will reflect credit on the institution which means a big name. One organization recently – the one that did the blood samples with small pricks – they got some very big names on their board.
And Theranos [got verification from Munger on pronunciation], the names are great, but we are not interested in people that want to be on the board because they want to make 200 or 300,000 dollars a year for 10% of their time. And we’re not interested in the ones for whom it’s a prestige item and who want to go and check boxes and that sort of thing.
So I think we’ve got…we will continue to apply that test: business savvy, shareholder-oriented, and with a strong personal interest in Berkshire.
And every share of Berkshire that our shareholders own is bought just like everybody else in this room. They haven’t gotten them on option. I have been on boards where they’ve given me stock. I get it for breathing. Maybe half a dozen places, maybe 3 or 4 places, where I was on the board of.
We want our shareholders to walk in the shoes, I mean Directors to walk in the shoes of the shareholders. We want them to care a lot about the business. And we want them to be smart enough so that they know enough about business; they know what they should get involved in and what they shouldn’t get involved in.
The people in the office – I’m hoping that when we take the Christmas picture again this year, they’re exactly the same 25 that were there last year although we might have added 30,000 employees elsewhere. Maybe $10B of sales or something like that. It’s a remarkable group of people.
And they, just take this meeting..virtually every one of the 25…they have been doing job after job connected with making this meeting a success and a pleasant outing for our shareholders. It’s a cooperative effort. The idea that you would have some department called annual meeting department. You’d have a person in charge of it and she or he would have an assistant that would go to various conferences about holding annual meetings and they hire consultants to come in and help them run the meeting.
We just don’t operate that way. It’s a place where everybody helps each other [audience applauds].
Part of what makes my job, well my job is extraordinarily easy, well the people around me really make it easy. And part of the reason it is easy is because we don’t have any committees. Maybe we have some committee I don’t know about. I’ve never been invited to any committees – I’ll put it that way – at Berkshire. We may have a Powerpoint someplace, I haven’t seen it and I wouldn’t know how to use it anyway. We just don’t do, we don’t have make-work activities. We might go to a baseball game together or something like that. I’ve seen the other kind of operation, and I like ours better. I’ll put it that way. Charlie?”
Munger’s response:
“Well years ago I did some work for the Roman Catholic Archbishop of Los Angeles. And my Senior Partner pompously said you don’t need to hire us to do this. There some plenty of good Catholic tax lawyers. And the Archbishop looked at him like he was an idiot and said ‘Mr. Peeler, last year I had some very serious surgery. And I did not look around for the leading Catholic surgeon.” [Audience laughs]. That’s the way I feel about board members. [Audience applauds. Warren pops open a can of Coke.]”
If not for Munger’s curt response, a listener could be excused for having forgotten Buffett just responded to a question about diversity. Buffett never uttered the word “diversity.” Buffett barely even confirmed his lack of interest in policies of inclusion – like the mere mention of diversity and inclusion insult his business intelligence.
His response was defensive at times as if the question accused Buffett of favoritism, or even worse, some kind of bigotry. The unfortunate meandering missed a GREAT opportunity for Buffett to affirm his laudable intentions to establish principles of fairness and meritocracy. This miss was worsened by the misplaced laughter and applause of the audience that surely reinforced the trench Buffett dug with his heels.
The question on diversity did not ask or require Buffett to fire anyone to meet a diversity quota. The question did not ask Buffett to lower his standards. The question certainly did not ask Buffett to introduce self-interested gold prospectors onto his board. The question simply asked Buffett to open his eyes wide and free his mind sufficiently enough to ask why his workforce does not reflect the diversity we should expect in an American company.
The diversity question tried to speak the language of business in pointing out that the company is likely forgoing valuable business opportunities by behaving in such an insular manner. We should no longer accept that fairness among friends, associates, and others who look and think like the leader equates to fairness in the absolute. Not in America.
In other words, the diversity question looks beyond active discrimination to ask corporate leaders to commit to ensuring their companies are proactively reaching out to a diverse pool of qualified candidates. This question has hung in America’s atmosphere for DECADES now. Those of us looking forward to a truly inclusive country suffer from a dream deferred.
The diversity question seeks to break the self-reinforcing dynamics of building a workforce out of personal familiarity. Berkshire seems locked into an entrenched workplace dynamic. I fully understand the benefits of retaining a core group of proven talent. No responsible manager would intentionally let such a team dissolve or contract.
However, Buffett’s defense of his dedicated crew of superstars missed the core question: when it comes time to hire someone new, for whatever reason, is Buffett willing to look beyond the limited recommendations born out of personal familiarity? A simple “yes” could have put to rest a lot of concerns.
Buffett demonstrated a similar tone deafness when talking about the extended tenure of Berkshire’s managers. In responding to an earlier question, Buffett proudly proclaimed that his managers have had very long tenures because they enjoy their jobs and do not work for the money. Buffett also quipped that he constantly reminds the board that the lack of a retirement age has contributed to this low turnover.
So why not in response to the diversity question simply assure the audience that the selection process for replacing the few departing managers includes the broadest practical pool of qualified candidates. Instead, Buffett insisted on demonstrating that he rewards this loyalty with a related commitment to managerial stasis. The lack of change at the top comes through loud and clear in the following quote from the end of the 2015 letter to shareholders in the annual report:
“Can you imagine another very large company – we employ 361,270 people worldwide – enjoying that kind of employment stability at headquarters? At Berkshire we have hired some wonderful people – and they have stayed with us. Moreover, no one is hired unless he or she is truly needed. That’s why you’ve never read about ‘restructuring’ charges at Berkshire.”
Mr. Buffett, you need more diversity.
The diversity question recognizes that opportunity suffers when leaders lack the vision to understand the potential improvement from an expanded search for talent. This quest does not require consultants, but it does require a fundamental dissatisfaction with a status quo of benign neglect. This quest requires an expanded appreciation for what it means to exercise concern for the health and economic well-being of the country. This quest requires tonal sensitivity.
Munger’s response to the diversity question was particularly unfortunate. Munger refocused the audience back to the original question of diversity, but he blanketed the issue with a myopic, sub-optimal viewpoint. His recount of the insulted Archbishop implied that seeking diversity requires lowering standards in order to benefit one’s chosen group of identification or affinity. Munger’s Senior Partner was not talking about diversity. A diversity question would have asked the Archbishop to give the legal firm a fair and equal opportunity at winning the business even though the leadership did not belong to the Roman Catholic Church. By twisting the story around, Munger proved himself to be as tone deaf as Buffett.
Perhaps the most unfortunate reference in the response appeared when Buffett struck a glancing blow at the now maligned Theranos. Theranos is a biotech firm founded and led by Elizabeth Holmes. Holmes dropped out of Stanford and rose to fame by pursuing her vision of democratizing medicine by making lab testing accessible to everyone. Over the past year or so, the company has faced increased scrutiny from the Wall Street Journal and regulators for its medical practices. The Department of Justice is even investigating Theranos for fraud. Regulators may ban Holmes (and her CEO) from owning or running a lab for two years – a move that would surely end her career in the medical field and completely destroy her credibility.
By choosing the big name, “celebrity” board of Theranos as a presumed example where diversity does not work, Buffett implied to the discerning listener Theranos is also an example of what happens when a woman is allowed to run the show without proper supervision. Now, I am pretty sure Buffett did NOT intend that we make such an inference; I believe he was singly targeting the incompetence of a board that was not selected for the right reasons. However, a modicum of understanding of the question at hand with diversity would have helped Buffett steer clear of this unnecessary and questionable diversion.
I cannot say it enough: diversity is not about stuffing boards with self-interested, unqualified egomaniacs or about removing people from their jobs and replacing them according to some prescribed formula. The diversity question is about understanding the necessary link between the health of American business with the health of the pipeline of opportunity for the broad spectrum of America’s people. I fundamentally refuse to believe that comprehension of the true meaning and value of diversity is beyond the grasp of a man like Warren Buffett who has otherwise proven himself dedicated to doing the right thing, to promoting confidence and optimism in the strength of America, and to singing the praises of hard work and clarity of thought.
My heart-felt claim for Warren Buffett: you are NOT out of options!
The performance of Berkshire Hathaway (BRKB) surely speaks for itself. Yet, should that success also seal the company from the diversity question?
Full disclosure: long YHOO