Transparency at Berkshire

This continues a discussion with Ravi. His salient point: "One of the things that I have found frustrating over the years is that Berkshire often rolls subsidiaries that used to provide granular data into broader groups as the company grows over time.... It is a gradual trend from year to year but when you go back a decade or more, the reduction of granularity really hits you....I go back and forth [but] think we come back to needing a basic level of trust to invest in Berkshire... Charlie Munger always talks about a "seamless web of deserved trust" at Berkshire and he obviously means to include shareholders in this ... I don't think he's asking shareholders to not think critically or evaluate the reporting, but to trust that management is furnishing the data with integrity and honesty rather than using less granularity to distort the results in some way (for example, rolling an underperforming unit into a larger grouping to make it "disappear", etc... ) "

It's true that as companies get bigger, inevitably they're going to lose detail. I sympathize with your desire to trust. It would be easier to do it if Berkshire gave a normal-size financial supplement of 20 to 30 pages that was prepared on a consistent basis from year to year. Analysts are accustomed to dealing with this level of detail and indeed, expect it from every major company except Berkshire Hathaway. No company likes the bother of creating a financial supplement and will always argue that it might be competitively sensitive information. They especially don't like it because the investors' ability to compare using a similar format from period to period holds managements' feet to the fire in a way that makes it hard to hide bad news. Companies do it anyway, because investors demand it. Imagine if we had had this kind of information for NetJets instead of Berkshire going into radio silence in 1998.

I believe that Warren is doing what he genuinely believes is in the best interest of shareholders, but Warren's own interests and the shareholders are one and the same in his mind. One reason that corporate governance exists is that CEOs always believe limited disclosure is in the best interest of shareholders. Here we just have an oversized case of the same thing.

I think being an audit committee member at Berkshire would be very, very difficult. Audit committees have a grave responsibility that sometimes requires they stand up to a management and demand more disclosure or say that something being done isn't right. Imagine if the CEO is Warren Buffett, and you're trying to convince him, for example, that it doesn't make sense to combine a railroad and a public utility into one business segment. (You have got to believe there was some audit committee discussion on that one.)

Unless the case is crystal clear, black and white, how much persuasive ability are you really going to have? The audit committee has very limited leverage. None of the things we're talking about are violations of SEC regulations. Berkshire simply isn't following best practices, or even average practices, for a company of its size or prominence.

All else equal, I think most people would like to trust, but verify anyway.