2004 Berkshire Hathaway Annual Meeting (Full Version)

Thank you. Good morning. Some of you may have noticed a stuntman was used in that Arnold just couldn't handle some of those scenes. Before we get started, I'd especially like to thank Andy Hayward, who's here today. And if we can, no way we can find him out in the crowd; it's a little hard to see from up here. But Andy runs Deke Productions. He does that cartoon for us, and I let's give him a big hand. Andy has produced a really extraordinary series telling the story of the beginning of this country called Liberty's Kids. It's been on public broadcasting for the last couple of years. It's great for kids, but it's great for adults, too. I've watched a number of sessions myself.

And this summer, in July, it will go on sale at Walmart—a very special celebration. And for those of you who want to pick out something good for your children or your grandchildren, I can't think of a better series to have them watching. And thanks again, Andy. And thanks also to Kelly Muchmore, who puts this whole production on. This is Kelly's show. She, along with that dog Dudley, who you saw in the movie, Dudley is a regular at Berkshire Hathaway. We don't count him in the 15.8, but she, along with Dudley, handle everything. I don't even give a thought to what's going to happen here, as might become evident during the meeting. And she is responsible for putting up that whole exhibition arrangement and really the whole thing. So Kelly, I don't know where you are exactly, but in any event, thank you very much.

Now we'll go through the business part of the meeting, and it may take a little longer than usual, but please be patient. And I'd like to start out by calling the meeting to order. I'm Warren Buffett, Chairman of the Board of Berkshire Hathaway, and I welcome you to this meeting. This hyperkinetic fellow next to me is Charlie Munger, the Vice Chairman, and we will have a good time, and I hope you do too. We work together because he can hear, and I can see. I mean, there are times when we can't remember each other's name, but we have a lot of fun together.

Now, any shareholder who wishes to speak regarding the shareholder proposal expected to be presented by Human Life International or any other matters germane to the shareholders' meeting should now go to microphone zones 1, which is in section 121 over on my right, or section 2, which is at section 221. I believe that's higher up on my right. Let me see if I have that right, yeah. Or go to section E, section 7, which is. Or section 105, which is Microsoft 7 on my left, or to section 205, which is microphone 8. If you're going to want to talk about anything concerning the business of the meeting—not the questions afterwards, but just that relates to the matters germane to the meeting—please go there now. Because I'm not going to be able to spot people in a crowd this size.

When it comes time to do the business, we're going to ask anybody that cares to speak up on the business to be at those microphones, and that will be in just a couple of minutes. Now, after adjournment of the business meeting, I'll respond to questions that you may have that relate to the businesses of Berkshire but that don't call for any action at the meeting. We had some complaints after last year that some people were asking six or seven-part questions. At least that's the reason I'm giving, that we're eliminating those. The bigger reason is, Charlie, I can't remember the first part by the time you get to the fifth part. So we are asking you to ask only one question and don't try to get too clever about working three or four into a single question. That will give more people a chance to get their questions asked—only one question at a time.

And we will go around from microphone to microphone and get as many in as we can. Now, we're going to do this until noon, and then we'll take a break for lunch and we'll come back about one, and we'll continue until 3:30. Anything goes on the questions. We'll answer almost anything except questions about what we may be buying or selling. And you're free, of course, to wander around, go over and buy things. You know, we have a lot of things for sale over there. As I've pointed out in the past, it's better form to leave while Charlie is speaking than when I'm speaking, but you can use your own judgment on that.

Now, I do want to remind you that any audio or video recording of this meeting is prohibited. If anybody's seen recording the proceedings, we will have to ask you to leave. So if you see anybody doing that, we would appreciate it if you just inform one of the staff personnel around. Because there is certain copyrighted material that we use, and people like Judge Judy give us permission to use a segment like that, but it's not intended to be used in any commercial way. So we do ask that no recording take place.

Now I'll first introduce the Berkshire Hathaway directors that are present in addition to myself and Charlie. Now I'll ask the directors to stand as their names are read and ask that you withhold applause, if any, until all are introduced. I don't know whether we have anybody here from Calpers, but they can register their own views as we go along. And it is difficult to see from here, so if you'll just stand as I mention your name and remain standing until the end when we will see whether you get any applause:

Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, David S. Gottstein, Sandy had a conflict today—there's a bar mitzvah, I believe, for a granddaughter—and so he's coming in tomorrow for our directors' meeting on Monday. Charlotte G. Gaiman, Donald R. Keough, Thomas S. Murphy, Ronald L. Olson, and Walter Scott Jr. And now you can go crazy.

Also with us today are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. In that regard, I wish to report that at Berkshire's audit committee meeting held on March 2, 2004, Deloitte & Touche responded to the four questions I suggested to be asked to the independent accountants by all audit committees. We're going to put these up in just a second. With respect to Berkshire, the questions and the auditor's responses will be shown on the following slides.

I might mention that I really do think these questions should be asked of all auditors at least annually, perhaps even quarterly. And I really think that if such a procedure had been followed over the years, we wouldn't need them all. Charlie, if such procedures had been followed over the years, there would have been a lot less trouble in corporate America. For many years, particularly in the '90s, I think there was a weakening of auditor vigilance. And the trick, as I've said, is really to have the auditors more worried about the audit committee than they are worried about the management. It's quite natural when they are essentially hired by management. And when they see management regularly and only see the audit committee infrequently, it's tempting to listen a little bit more to management.

The audit committee, if asked in my view, and if the answers are put on the record, I think it would have a very helpful effect on behavior. Because once on the record, it means the auditors mean they're on the line. And I've been on a lot of boards of directors, and I've seen in retrospect things go by that I wish had been called to my attention by the auditor. So we have these four questions, and if we'll put up the first one. I'd like to explain one item. Do we close them? Yeah, I'd like to explain one item. Do we close them? You can read the question, and these are the responses as we go along that the auditors have given to these questions.

Now you'll notice on the first one that there is one item that, and instantly we owe a shareholder I think is going to speak later, it was a suggestion that we actually present these at the meeting, and I think it's a good suggestion. I think if more companies did it, it would be a good idea, so I thank him for the suggestion. The major item, which is not material as auditors defined it, but the major item in which we disagree, and used a method which I will explain further, actually has been changed but concerns the purchase of life insurance policies or the reinsurance of people who are purchasing life insurance policies, their so-called viatical settlements.

We have had a business of sorts in that, and it's likely to even be a larger business in the future. What takes place there is that somebody usually elderly has a life insurance policy, and they'd rather have the money themselves than have their heirs get it later on. So they want to cash out early. And as you know, a life insurance policy typically has a cash surrender value, and sometimes those cash surrender values are quite low in relation to the actuarial value of the policy. So sometimes those people wish to sell a policy.

We had a case the other day where a 79-year-old woman had an insurance policy amounting to some 75 million dollars. I've never met her but she must be quite a woman. But the cash surrender value of that policy was two million dollars. Clearly for even a 79-year-old in the best of health that was an inadequate sum to receive, but yet she wished to have the cash herself rather than eventually die and leave it to her heirs. So we paid or we actually reinsured a transaction where somebody else did it, and we took only 50% of it, but I'm going to use 100 figures. We bought that policy for 10 million dollars, and under accounting rules, GAAP accounting, it is recommended that we write that policy down immediately to the cash surrender value of 2 million. Well, obviously we think it's worth 10 million or we wouldn't have paid 10 million for it today, but the rules, as they've become more clear, say write it down immediately.

I happen to think that rule's wrong. But last year, at the end of the year, there had been a total of 73 million dollars applicable to such policies that reflected our purchase price as opposed to the cash surrender value. In the first quarter of 2004, our activity has stepped up in this field some. The people we reinsure have stepped up their activity, so we get our 50%, and that amounts to it's going to mount in the first quarter about 30 million. So we have adopted, even though we think it's incorrect, the GAAP accounting, and you will see in the first quarter report of Berkshire the charge for the 73 million of last year plus the 30 million in the first quarter this year. That gets charged, believe it or not, to realized capital gains. So by buying these policies for X on one day and immediately writing them down substantially, that becomes a realized capital loss on our books. Now, later on, we expect to get a perfectly satisfactory return from these policies, but that is the main item referred to in the auditor's answer on question one.

Now, if we'll go to number two, time to read that. I like the idea of this question being asked. I've read many reports where the footnotes are such that even if I reread them several times, I still don't know what's happened. And we try to write everything in plain English at Berkshire, and we try to explain things within the body of the letter that might give people the wrong impression if they simply looked at the figures or that they might not be able to discern because Berkshire has gotten so large that there are all kinds of things that are lumped together in the consolidated statements that I think it's more helpful if we look at separately, and we're going to work annually at trying to disaggregate numbers and information in a way that makes it most useful without turning out something as long as the world book.

The third item is very simple, and the fourth item relates to something that became very prevalent in corporate America in the 1990s, which was moving around numbers from one quarter to another, moving from one year to another. And I have seen a lot of that. It's deceptive. I like the statement that the two fellows at Google made the other day where they essentially said that if numbers are lumpy or peculiar when they get to them, they're going to be lumpy or peculiar when they get to the public. And if there's some reason that requires explanation as to why they're lumpy, that management should explain them. But the one thing they shouldn't do is start playing games from quarter to quarter, year to year, in terms of moving numbers around, and that became very fashionable. I hope it's on the way to being moderated, and each year we will give you these questions at the meeting and we'll report on the auditor's answers.

Mr. Forrest Krutter is Secretary of Berkshire. He will make a written record of the proceedings. Miss Becky Amick has been appointed Inspector of Elections at the meeting. She will certify to the count of votes cast in the election for directors. The named proxy holders for this meeting are Walter Scott Jr. and Mark D. Hamburg. Does the Secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting?

Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 3, 2004, being the record date for this meeting, there were one million 278 thousand 436 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote. In total, there were seven million seven hundred sixty six thousand two hundred ninety three shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one two hundredth of one vote. Of that number, one million one hundred twenty one thousand two hundred thirty one Class A shares and six million four hundred seventy three thousand nine hundred four Class B shares are represented at this meeting by proxies returned through Thursday evening, April 29. Thank you.

That number represents a quorum, and we'll therefore directly proceed with the meeting. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

I move that the reading of the minutes of the last meeting of shareholders be dispensed with and the minutes be approved. Do I hear a second?

The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say aye. Opposed? The motion's carried.

The first item of business at this meeting is to elect directors. The shareholder present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors may do so. Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so if you wish to do this. Please identify yourself to meeting officials in the aisles who will furnish a ballot to you. With those persons desiring ballots, please identify themselves so that we may distribute them.

I now recognize Mr. Walter Scott to place a motion before the meeting with respect to the election of directors.

I move that Warren Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, David S. Gottstein, Charlotte G. Gaiman, Donald Keough, Thomas S. Murphy, Ronald L. Olson, and Walter Scott Jr. be elected directors.

Is there a second?

The motion has been moved and seconded that Warren Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, David S. Gottstein, Charlotte G. Gaiman, Donald Keough, Thomas S. Murphy, Ronald L. Olson, and Walter Scott Jr. be elected as directors. Are there any other nominations? Is there any discussion? Is there anybody that is at the microphones that would?

Yes, Paul Thomas, Sasic Thornton, Illinois. I like the idea of inside directors, I think they're necessary. However, I think we should have the best available, in particular I'd like you to consider the CEOs of the Berkshire subsidiaries. If you compare their qualifications to Susan Buffett's and Howard Buffett's I think you'll find that the CEOs have superior qualifications, particularly business savvy and the ability to stand up to a forceful CEO. I'd like to point out that we'll hear how many of these CEOs have become independently wealthy and could easily say, take this job and shove it. So this is why I'm withholding my votes for the directors. Thank you.

Thank you, Charlie. Do you have any thoughts on that?

I think we should go on to the next item. The nominations are ready to be acted upon. If there are any shareholders voting in person they should now mark their ballots on the election of directors and allow the ballots to be delivered to the Inspector of Election with the proxy holders. Please also submit to the Inspectors of Elections a ballot on the election of directors voting the proxies in accordance with the instructions they have received.

Azamek, when you are ready you may give your report.

My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than one million one hundred twenty three thousand one hundred eighty nine votes for each nominee. That number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes including the additional votes to be cast by the proxy holders in response to the proxies delivered at this meeting as well as any cast in person at this meeting will be given to the Secretary to be placed with the minutes of this meeting.

Thank you, Vince Hammack. Warren Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, David S. Gottstein, Charlotte G. Gaiman, Donald Keough, Thomas S. Murphy, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. have been elected as directors.

The next item of business is a proposal put forth by Berkshire shareholder Human Life International, the owner of one Class B share. Human Life International's motion is set forth in the proxy statement and provides that the company be required to publish annually a detailed statement of each contribution made by the company and its subsidiaries in various political causes. The directors have recommended the shareholders vote against the proposal.

We will now open the floor to recognize the appointed representative of Human Life International to present their proposal.

Someone here to present that?

Yes, Mr. Buffett. My name is Tom Strobar and I do represent Human Life International, and I'm here to present the shareholder resolution regarding political contributions. But before I do, I'd like to give you a little background. Some of you may remember two years ago there was a resolution asking the company to end its charitable giving program. The resolution said corporate charitable contributions should help not hinder the company and suggested certain contributions, especially those related to abortion and population control, were doing just that. This proposal was soundly defeated by the shareholders, receiving less than 3 percent of the vote. Oddly enough, a little over one year later, Mr. Buffett, in his wisdom, did terminate this program citing the adverse impact his philanthropic interests were having on the livelihoods of some employees at the Pampered Chef division. At the time of the resolution, we first learned that Mr. Buffett and Mr. Munger were directing their money to their personal foundations rather than more recognized public charities. While previous chairman's letters extol the high participation levels among eligible shareholders, no mention was made that Mr. Buffett, who accounted for 31 percent of the equity of the company, was giving away almost 55 percent of the charitable gifts.

Why, all of you, the shareholders who probably comprise a majority of the people in this audience, were excluded from giving and whose vote on this proposal was dramatically diluted down to one two-hundredth of the value of an A share, which is obviously not quite democratic. I refer you to the 1983 chairman's letter in addressing why you wouldn't split the stock. Mr. Buffett describes something he calls shareholder eugenics. Mr. Buffett laments how it's impossible to screen entering members of the shareholder club for "intellectual capacity, emotional stability, moral sensibility or acceptable dress." Splitting the stock and lowering the price, the mission to the club class B shareholders take note would attract an entering class of buyers inferior to the existing class and downgrade the quality of your present shareholder group.

All told, Mr. Buffett gave to his private foundation almost 100 million dollars, much of it other shareholders' money. This money in turn was devoted almost exclusively to population control, seeking to lessen the number of people at a time when the western nations, especially those in Europe and Japan, face economic calamity from a baby bust. How did charitable congregations relate to political contributions? It wasn't until there was a resolution on charitable contributions that we received some disclosure. So too with a resolution I'm about to present. Do we find out the company gave a very modest $200,000 to various political candidates or causes. While the charitable contributions may have been too much, the political contributions may be too little, not necessarily from the company but from other shareholders. If there are politicians or causes in which there is a legitimate business interest in supporting, why not give the shareholders the opportunity to help them also by publishing a list? The word goes out to our thousands of shareholders who may wish to do the same with their own money. It costs little to publish, provides for transparency, checks any personal abuse, and sets an example to the rest of corporate America. It also provides an opportunity for all the members of our shareholder club, even B shareholders, to get involved and help this company and help their investment.

With that, I'd like to read the actual resolution, which I'm required to do.

"Within one month after approval by the shareholders of this proposal, management shall publish in the Buffalo News a detailed statement of each contribution made by the company or its subsidiaries either directly or indirectly within the preceding fiscal year in respect of any political campaign, political party, referendum, or citizens' initiative or attempts to influence legislation, specifying the date and amount of