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Part - V

On Wall Street

Q: Do you think the 90s was a scam more than it was anything else? We use the phrase bubble but every headline that we get these days seems to smack of fraud and nothing less. Was that the whole experience?

A: No. Some remarkable things happened in the 90s. The whole Internet thing developed in that period. Very important things happened. And we made progress in this world. American business made progress. More scams happen during a bubble than in during a non-bubble. Because people are more believing. It's much easier to start a chain letter when people are in the mood for chain letters. This time, they were in the mood for scams. But that doesn't mean that any high percentage of what took place were scams.

Q: There has been however, a rather decided loss of investor confidence. Main Street looks at Wall Street and again believes, as it has on previous occasions, that the casino was rigged and they all went to the table and got taken by a crooked dealer.

A: Main Street's expectations were too high. Who do you blame for that? You can blame Main Street itself, you can blame the people who were promoting stocks, and you can blame Wall Street. But the basic problem was that expectations were just too high. And people thought that you could make a lot of money without knowing anything. By just riding along on hot items. So, who do you blame for that? There is probably plenty of blame to go around. It is particularly blame worthy when people who ran certain businesses made tremendous amounts of money and walked away and their shareholders ended up poor. I think that fits the definition of a scam or something close to it. But people's enthusiasm ... they just got carried away with it. And Wall Street aided them in it. The fans were flamed in a whole variety of ways, analyst reports, or whatever it may be. But that's what happens when the world goes crazy.

Q: What should be done now? Is it not unique that we have periods of reform and retribution on Wall Street? But what do you think would be the most sensible to do at this point, to restore investor confidence?

A: I don't think it will be easy to restore confidence. Because I think investors have been very disappointed in the returns they have achieved. And it is human nature to blame somebody else when you don't do well. They have a good right to be disappointed in those situations where people walked away with hundreds of millions while their investors were left with losses.

Over the last 10 years, corporate America has shown a leaning towards somewhat over reaching compensations. The latter point could be addressed if institutional investors simply took a stronger stand about what they would approve of in that arena. If you look at the percentage of rewards that go to management from a successful business versus what goes to the owners, it has changed in the last 15 years. It won't revert to a more moderate situation unless owners do something about it. And the truth is, the only owners who can do that is big institutional owners. Far that could accomplish more, than by statuettes. Statuettes don't really work very well.

Q: That's funny. People will say, here's a guy with $35 billion who thinks CEO's make too much money. What's the difference in the way you made your money running a company and the way these CEOs managed to make hundreds of millions, even billions of dollars in the 1990s, and still not provide performance?

A: I have made my money by being an owner. But that took a long time. I bought my first stock when I was 11, almost 60 years ago. Sometimes I wonder why I waited so long. I've always had an owner mentality. A number of our managers make a great many multiples of what I make. But they make it based on the performance of their units. And we tie all the top executives compensation to the performance of what's under their control. We don't tie it to the price of Berkshire stock. Because we own 10 plus billion of Coca Cola stocks. Well, the manager, given a business like ours, has nothing to do with what the Coca Cola stock is going to do. It can swamp their particular results. We do hold them responsible for their own businesses. And we pay them accordingly. And we pay well. Many of our executives earn well in seven figures and some of them even hit eight figures.

Q: But you don't give options? Why not?

A: We don't give options because it would be a lottery ticket. If I gave an option to somebody who is running our brick business in Texas or the candy business in California, they would be getting something whose value will depend 99.9% on extraneous factors that they have no control over and maybe they would contribute one tenth of one percent to it. That's kidding yourself. Why should they go out and change their behavior in a huge way for something where they are gonna get swamped by all these other factors. So we tie the pay of those people to how they perform with their own businesses. Otherwise, in passing, everybody would take lottery ticket. When I was running Solomon, everybody wanted options. They wouldn't have paid a dime for the options. But they look at them as free. They are free to everybody except the shareholders.

Q: In fact, you see some problem with the way they get accounted for, don't you?

A: Oh, I think the accounting is shameful. The way CEOs have behaved to essentially lobby and strong-arm Congress in very aggressive ways to avoid having them counter this compensation. I bought a number of companies that had option programmes. And believe me, if we hadn't done something as a substitute for those option programmes, those employees would have been very happy, because they were the part of that compensation. If they are the part of that compensation, I have never heard anybody say that compensation isn't an expense. And I never heard anybody saying that the expenses don't belong in a profit and loss statement. But CEOs don't want it that way. They are the only group that doesn't want it that way. But they have a lot of muscle in Congress. And so far they've kept it from happening.

Q: Any of your friends who do that? Bill Gates?

A: Bill doesn't take any options himself. He has never taken an option himself. I would say that it's clear that the distribution of rewards at Microsoft through options has been exceptionally capricious. Because if you were there very early, you got unbelievably rich, whether you contributed to the place or not. If you were there very recently, no matter how much you were contributing to the place, you haven't made anything to speak off. It's a lottery ticket. And it would pay to be very early at Microsoft, or a place like that. I don't begrudge anybody that. If I had been there myself, I'd have been there scooping up every option I could have. But I think it's a silly way to pay people. But I don't have any objection if people want to do it. But I think that if they do it that way, it certainly is compensation. Compensation is certainly an expense and an expense certainly belongs in the income statement.

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