Berkshire Hathaway Inc., the Omaha investment company that attracts investors from New Zealand to Germany and from Florida to Seattle, is designed for the long haul.
And not just because it recently bought a railroad with thousands of miles of track.
Rather, it's because Berkshire has become what CEO Warren Buffett believes is a lasting model that makes the most of the American economic system and will continue to prosper long after he's gone.
The American system unleashes human potential like none other in the history of the world, he told a record 37,000 Berkshire shareholders at their annual meeting Saturday at the Qwest Center Omaha.
Berkshire taps into that U.S. economic advantage, he said, from its method of compensating top executives of its 75 subsidiary companies to the whistle-blower hot line that encourages ethical conduct by its 257,000 employees.
As thousands of shareholders sampled the products and services of Berkshire companies in the adjacent convention center, Buffett told those in the arena that Berkshire is “the premier insurance company in the world,” with advantages that will serve it well into the future.
Berkshire's operating principles include owning businesses that have long-term advantages over competitors, he said. Those principles are so “ingrained” in the companies and Berkshire's board of directors that they will continue, he said.
Berkshire not only can withstand large claims, it actually seeks out insurance policies that cover natural disasters, which have the potential for large claims, Buffett said.
Berkshire accepts policies that are virtually sure to produce huge losses at some point, as long as the premiums it collects are adequate, he said. For example, Berkshire had claims of $3 billion from 2005's Hurricane Katrina and $2 billion from the 9/11 terrorist attacks.
By accepting “lumpier” financial results from one year to the next, Buffett said, Berkshire can generate more revenue to use for other investments while it waits for claims.
That's a long-term advantage, said Charlie Munger, the company's vice chairman.
He and Buffett spent their customary five hours-plus answering questions on a stage in the Qwest arena. The apparent record number of shareholders alternated between listening to the two men and cruising booths in the adjacent convention hall to buy Berkshire-related products and services, from leather work gloves to auto insurance.
Munger said Berkshire has a business “culture” that will bring long-term success.
“I am not the most optimistic of the two people up here,” he said. “I think it's going to work.”
If an earthquake, hurricane or other catastrophe caused $250 billion in insurance claims, with Berkshire's share about 4 percent or $10 billion, Berkshire could have substantial earnings if its other companies were healthy, he said. “We are prepared,” but “every other insurance company would be gasping.”
Asked whether any event could bring Berkshire to its knees, Buffett said it would have to be a total meltdown such as nuclear, chemical or biological attack. “We can survive anything any other business might.”
Another advantage, Buffett said, is that Berkshire compensates the top executives of its companies by rewarding them fairly for the work they do to improve their companies. Some make tens of millions of dollars a year, he said, and none have left Berkshire over compensation issues.
By keeping those executives happy and motivated to improve their businesses, he said, Berkshire benefits.
During the international credit crisis of 2008, Buffett said, Berkshire invested in large U.S. companies such as General Electric because it believed the government would recognize the dire nature of the problem and do what was necessary to prevent a collapse.
The government would do the same again if necessary, he added.
Buffett turned to Munger to answer the question about what would upend Berkshire, and Munger said, “I'm not worried about it.”
Buffett also discussed Berkshire's succession plan.
A new CEO would be appointed within 24 hours, and Berkshire's board of directors knows who that would be, Buffett said.
The person's name has not been publicly disclosed, although David Sokol of Omaha, who heads Berkshire's utility and aircraft leasing company, is widely believed to be a possible successor.
Buffett said Sokol successfully trimmed expenses at the NetJets subsidiary after excessive costs caused a $711 million loss.
But Buffett added that he just had a physical exam. “I came out fine.”
Other comments by Buffett and Munger:
• After a “sputtering recovery” in 2009 and early 2010, the economy “picked up steam” in March and April, even though “it's a long way from what it was a few years ago.”
• Berkshire earned $3.63 billion in the first quarter of 2010, compared with a $1.5 billion loss a year earlier. Operating earnings were $2.2 billion, up from $1.7 billion in the first quarter of 2009.
• Inflation could become a serious problem if governments do not begin to match taxation with spending.
• Buffett said he supports Goldman Sachs CEO Lloyd Blankfein. Munger said he knows some CEOs who shouldn't have their jobs, but Goldman Sachs CEO Blankfein “isn't one of them.” Buffett said he was relieved to go on to the next topic. “I was afraid he was going to start naming names.”
• Berkshire director Don Keough, a former Omahan and Coca-Cola executive, missed Saturday's meeting because of a “serious operation,” Buffett said, but he will be back next year.
• Buffett said he loaned money to Harley-Davidson but didn't buy its stock because he knew that the company would be able to repay its debt but he didn't know where its stock price would go.
• Berkshire holds $60 billion from insurance premiums in case of future claims.
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