Buffett Buffet: A Pricey Meal

Salida Capital, a small Canadian fund, will pay $1.68 million (which goes to charity) to dine with the Oracle in New York. But who picks up the tab?

07/15/09 - 12:54 PM EDT

WMT , DELL , BRK-A

Eric Jackson

For months, some of the brightest financial minds in the world have been debating whether there is imminent threat of inflation thanks to the monetary easing and other programs sponsored by the Federal Reserve in response to the economic crisis.

Until now, we've yet to see rampant inflation take hold, except in one corner of the economy: How much it costs each year to take Warren Buffett of Berkshire Hathaway(BRK.A Quote) to lunch where the proceeds go to the Glide Foundation of San Francisco helping the homeless in that city.

Last week's winner, Salida Capital -- a small Toronto-based fund whose performance dropped 66.5% last year -- won the annual auction to pay $1.68 million -- or about 0.6% of its total assets currently under management -- for eight people to lunch with Buffett at the Smith & Wollensky steakhouse on Third Avenue in Manhattan in the next eight months.

The Buffett Buffet

Year Winner Winning Bid
2000: Anonymous, $25,000
2001: Anonymous, $18,000
2002: Edward Jones Co. and 2 Anonymous, $25,000
2003: David Einhorn, Greenlight Capital, $250,100
2004: Jason Choo, Singapore, $202,100
2005: Anonymous, $351,100
2006: Yongping Duan, California, $620,100
2007: Mohnish Pabrai, Guy Spier, Harina Kapoor, $650,100
2008: Zhao Danyang, China, $2,110,100
2009: Salida Capital, Canada, $1,680,300

Source: Bloomberg.com

That large tab was 20% less than what last year's winner paid, Zhao Danyang - a Chinese hedge fund manager. However, Salida's winning bid was 67x more than the $25,000 paid in 2000 by the first winner of lunch who chose to remain anonymous.

It's remarkable how rapidly and steadily the price of this lunch has gone up in the last decade:
There are a few striking things about this list:

• As the media coverage has grown over time covering the winner, the price paid has gone up exponentially.
• With the exception of David Einhorn winning in 2003 - when he and his fund Greenlight Capital had a much lower profile than today - and the broker Edward Jones in 2002, you've likely heard of none of the winners.
• Until this year, a company had never won the charity auction (with the exception of Edward Jones in 2002 -- although this was split three ways -- so Edward Jones itself only spent $8,333). This year, the winner was clearly identified as the firm Salida Capital and not its individual fund managers.

If you're Buffett, what's the harm in all this? After all, it's all benefitting the Glide Foundation. Since 2000, $6 million has been raised for the charity. Buffett must find it ironic that lunch with the greatest value investor in the world is now the subject of such speculation. The only concern I would have, if I were him, was being associated with a "winner" who used the lunch for questionable purposes.

Last year's winner, Zhao, was questioned by some after he mentioned to the press that he had recommended a stock (WuMart) to Buffett during their conversation. He touted it as the Wal-Mart(WMT Quote) of China and was reported to make a $14 million profit after the stock jumped 25% based on its association with Buffett's name. Zhao denied that he had been pumping the stock.

This year's winning firm, Salida Capital, describes itself as following a top-down global macro strategy, meaning that it invests based on macroeconomic themes, rather than following a bottom-up value investing approach that Buffett is famous for.

Its president, Courtenay Wolfe, was hired about a year ago with a mandate to better market the firm and raise assets. Her background is sales and marketing, with her biggest career achievement according to her bio being launching Dell's (DELL Quote) Web-based sales effort in Canada in 1996 at the beginning of the first tech bubble.

When Wolfe was asked about the questions she planned to ask Buffett during the lunch, she said she didn't know: "We have eight months now to figure that out."

Asked about what her fund's investors thought about spending almost $2 million on the lunch, Wolfe said she believed that they thought it would make Salida's managers make wiser investment decisions -- sort of like taking a two-hour off-site training course with good food.

What's clear is that Wolfe figured out winning the Buffett lunch auction was a great way of getting the name Salida Capital in front of potential investors globally. Whether the media exposure will actually lead to more assets for the company remains to be seen. According to Canada's national newspaper, the Globe & Mail of Toronto, the company is eligible to write off the $1.7 million expense as a charitable donation.

There have been conflicting reports on whether the firm's managing directors will pay the $1.7 million themselves or whether the firm will pay. If it's the firm, Salida's existing investors are footing the bill either through their management fees or as an actual operating expense of the firm (e.g., if the firm's managers designated the cost as "research" to help make its managers better investors). I contacted Courtenay Wolfe earlier this week and asked her to clarify which of these scenarios best described how Salida would pay for the lunch. She responded that it was "personal partner capital" paying for the event.

If I were an investor in Salida, and I found out that I was even partially paying for this lunch -- even through management fees, which technically would still be "partner capital" -- I would be upset, as I would interpret the managers' actions as seeking to raise the firm's profile and its assets (not make them smarter managers -- although Wolfe argues that the "firm, funds, and therefore investors will benefit from" the lunch -- or to simply help a charity, which they admitted they didn't know before bidding).

I would see part of investment being spent with the purpose of growing the firm's assets, which will benefit the firm's managers but have no impact on the future performance of my remaining assets under management with them.

It's undeniable that the winner of these lunches will continue to get at least a day of heavy media exposure. Neither Buffett nor some regulator is going to stop that. However, as the purpose of the lunches is to benefit the Glide Foundation, Buffett should require all future winners to pay personally for winning bids and refrain from mentioning any stocks discussed during the lunch to avoid questions like these in the future.

Hedge fund investors (or the due diligence consultants they hire to examine potential managers) should also educate themselves more on just how a fund charges for its expenses. For example, are they charging a “training session at a glamorous resort with spouses” as “research” or “training” which is intended to benefit investors but appear more like boondoggles. Sometimes it’s not black or white but gray. However, if you see recurrent evidence of fund managers taking liberties in how the charge certain expenses to investors, it should be a big red flag to potential investors.

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Best in Class: America's Top Boards

07/07/09 - 09:11 AM EDT

AMZN , JNJ , BRK-A , C , GE , IBM , GIS

Eric Jackson

It seemed an easy-enough question last week when someone asked me: What's the company in America with the best corporate governance? Yet, in trying to answer it, I was sent on a frustrating journey and a disappointing conclusion that there's no obvious winner. However, I'll name three good companies and look to address why it's so tough to answer the question.

In preparing this article, I reached out to some of the people I most respect in the world of corporate governance today: consultants, writers, bloggers, corporate secretaries and academics. Most of them were stumped by the question of what company is the best when it comes to corporate governance. It's certainly much easier to list 20 companies with bad governance for every company with good governance, which says a lot.

But three really good ones are Berkshire Hathaway(BRK.A Quote), Amazon.com (AMZN Quote) and Johnson & Johnson(JNJ Quote).

I'll revisit them later after I explain how I arrived at my conclusion.

To help spark my thinking, I searched the Web for recent corporate rankings of the best boards in corporate America. I came across a list from BusinessWeek from 2000. The top board on the list was General Electric (GE Quote), which unseated Campbell Soup(CPB Quote). Others near the top were IBM(IBM Quote), Home Depot(HD Quote), Intel (INTC Quote) and Cisco(CSCO Quote).

Since this ranking was issued, the combined stock returns of this group has been down 60% vs. negative 37% for the S&P 500. Three of the worst boards in 2000 in the rankings -- Walt Disney(DIS Quote), Rite Aid (RAD Quote) and Waste Management (WMI Quote) -- actually have slightly outperformed the best boards in the nine years since, but still returning on average negative 54% .

Ten years ago, GE's board was lauded for having a high number of outside directors who owned large amounts of stock in the company, which is worth 77% less today than it was back then. The board's largest move since 2000 was appointing Jeff Immelt as Jack Welch's successor rather than Bob Nardelli. It's hard to fault the board for that pick, given Nardelli's travails since then, but GE's shareholder base was frustrated with the stock's flat performance for the majority of this decade -- and that was before the wheels fell off last year with the concerns about GE Finance and its commercial real estate holdings.

Campbell Soup, the No. 1 corporate board of 1999 according to BusinessWeek, has lagged its peers like General Mills (GIS Quote) and Heinz(HNZ Quote) for a decade and barely treaded water with the S&P 500 over that time. Its stock is down 30% from 1999.

Finding the link between governance and performance has often vexed academics researching the link. At larger firms, with so many moving parts, it's often difficult to find the long-term performance effects of, say, separating the chairman and CEO roles.

''You are never going to be guaranteed total success,'' says Charles Elson, head of the Weinberg Governance Center at the University of Delaware. ''But good governance gives you protection when things go wrong. In the long run, that will play out.''

I spoke to Elson last week about the problem which many governance ratings have had in subsequently predicting company performance. He told me, in his view, that there were two critical governance factors which clearly showed a relationship to performance: (1) equity ownership of directors and (2) independence of directors.

I think he's right. Back in 2000, I was involved in a major research project which sought to link governance-related factors to subsequent company performance. The one factor which stood head-and-shoulders above any other was director stock ownership. And, by the way, owning stock through stock options or stock grants (the equivalent of "found money") didn't predict future company performance compared to when directors actually dug into their own pockets and purchased stock.

Board "independence" has been talked about often since the Enron and Worldcom scandals. We take it for granted that having a board stacked with family members or lawyers, accountants, and consultants who are paid by the company as directors is likely to produce more rubber-stamping boards than ones with more independent-minded people. However, there's still a lot of work to do in linking specific types of independent directors and company performance.

For example, I strongly believe having an independent director with industry experience is going to be more valuable in the long run compared with an independent director without that experience who doesn't want to speak up for fear of looking like a fool in front of the group. I also think too many boards lack diversity, in terms or ages, backgrounds or tenure on the board, which makes them collectively less independent thinkers than boards with such diversity. (However, adding a director for diversity's sake, without required business or industry experience, won't result in any new benefits for the group because such directors, again, will likely be too afraid to speak up.)

There's one more dimension I would add to the mix as being critical to finding a clear link between board governance and future company performance, and that's time to serve. If you go back and review the boards of the big failures from last year -- Lehman, AIG(AIG Quote) and Citigroup(C Quote) - all had a large number of directors who were too busy with other commitments to effectively serve as directors.

You had people like Anne Mulcahy and Andrew Liveris (CEOs of Xerox(XRX Quote) and Dow Chemical(DOW Quote), respectively) on Citi's board, who also served on Citi's audit committee, which is the most time-intensive of any board committee). When their own companies were seeing their stocks drop like stones last year, both Mulcahy and Liveris participated in 25 Citi board meetings and 12 audit committee meetings. In my view, they were stretched too thin from their day jobs to flag Citi's problems early enough.

Directors also can serve on too many other boards. Roland Hernandez who, in addition to serving on the board of Lehman and its "risk" committee (which failed if ever a board committee did), also served on the boards of MGM Mirage(MGM Quote), Ryland(RYL Quote), Vail Resorts (MTN Quote)and Wal-Mart(WMT Quote). Maybe if Hernandez hadn't been so over-committed he might have asked more questions about Dick Fuld's assumptions about Lehman's real estate

So, if equity ownership, independence, and time are the criteria for "good governance," along with evidence of sustained outperformance relative to peers, what are America's best boards? Like I mentioned earlier, the standouts are Berkshire Hathaway, Amazon.com and Johnson & Johnson.

Even as Berkshire Hathaway has taken its hits from the fall in financials and insurance companies, the stock still has beaten the S&P 500 in the last one, five and 10 years by a greater margin as you go back further in time. Investments made in Goldman Sachs(GS Quote), GE, and Harley-Davidson (HOG Quote) in the dark days of six months ago, look shrewd today. From a governance perspective, Berkshire is the gold standard for shareholder openness through its two to three-hour question-and-answer sessions at the annual stockholders' meeting and in its annual letter to shareholders. In terms of stock ownership, with the exception of Sue Decker who joined the board last year, each director owns at least $6 million in stock, with the median holding being $106 million. I also smile every year when I read how much Berkshire directors are paid to serve on the board. The majority of them get $2,700 a year, with a couple of special folks taking home $6,700, which is far less than the $300,000 to $400,000 a year some bank and tech directors take home.

The biggest problem I have with the Berkshire board is its average age. A third of the board is above the age of 80. These directors will have to face board succession issues, as well as CEO succession issues, over the next few years. They seem to recognize that they could benefit from some new perspectives on the board, judging from the most recent appointment of Sue Decker, formerly president of Yahoo!(YHOO Quote) and in her 40s.

Amazon.com also has been a standout performer for the last one, five and 10 years. Although consistently criticized by some for its sky-high valuation, it continues to succeed operationally and in its moves into new categories (most recently with the introduction of the Kindle electronic book reader). CEO Jeff Bezos gets the lion's share of the credit, but the company's board also is deserving. The stock ownership among the directors is high, with the median around $4 million.
But what I love most about this board is that every director has relevant tech or consumer experience which they bring to the group. Bezos didn't waste a seat around the table with the former ambassador to Ireland, buddies from the Seattle business community with no consumer background, former bosses, or the general manager of the Oakland A's baseball team. There's also a good range of ages and length of time served on the board across its eight members. A couple of the directors serve on two other boards besides Amazon's, and three have been on the board more than 13 years, which is getting a little long in the tooth, but these are very minor infractions when compared with most boards.

Johnson & Johnson's long-term corporate performance also has stood out compared with other "Big Pharma" players, and its governance has stood out as well. Unlike many New York-area boards of S&P 500-listed companies, J&J doesn't boast a board replete with active CEOs. In fact, it doesn't have any current CEOs (although disgraced former Citi CEO Chuck Prince was appointed to the board before he was ousted).

The board is a blend of retired CEOs and people from academia or with a specific health care background. The median stockholdings of directors is good at just under $900,000. My concerns with this board are that a few of the ex-CEO directors hold several other directorships -- including chair of JNJ's audit committee, James Cullen, who serves on four other boards. It's also odd that the finance committee didn't hold any meetings in 2008.

If I had to pick one of these as the best corporate board, I would say it's the board of Amazon.com. It's done things right on the most important governance factors of equity ownership, independence and time. Given this, I expect the company's positive stock performance to continue in the next 10 years. More importantly, Amazon's good governance means it's far less likely to suffer a Lehman-like shock that could destabilize or kill the company.

At the time of publication, Jackson had no positions in the companies mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Buffett's Free Pass

I was intrigued by two articles this morning reviewing the Buffett/Berkshire (BRK) shindig over the weekend by Doug Kass and David Morrow.

Both point out that Buffett gets a free pass at these get-togethers over the years (as well as from the press in general). Neither says this out of malice. They are stating fact.
Buffett himself did not conjure this reality up. He has simply done his job over the years with his colleagues at Berkshire and is living with the widespread media interest around him and the firm.

Yet if we've learned anything from the last year, it's that investors and the media need to do a much better job at being skeptical of conventional wisdom, of not being afraid to skewer a few sacred cows here and there.

I recall in 2004 the tempest in a teapot over whether Buffett should continue to serve on Coke's (KO) board of directors because he was on the audit committee who authorized their auditors at the time do some non-audit work. There were howls at the time against CalPERS and others who supported Buffett's removal from the board. The counterargument went something like: "It's Warren Buffett. How could you possibly oppose his re-election?" That's not a fair argument in my view.

I'm not suggesting a smear job of Buffett or Berkshire, or that he shouldn't have been re-elected to KO's board. I'm suggesting we not worship false idols. I'm suggesting we ask tough questions when they deserve to be asked, no matter who's being put on the spot to answer them. When there are legitimate questions to ask, investors and the press should ask them. The press shouldn't be afraid of losing their access to future interviews.

No one deserves a free pass after what we've witnessed in the last 18 months in the capital markets -- and Warren Buffett would be the first to agree.

Position: None.

Originally published in RealMoney.com on 5/4/2009 9:34 AM EDT

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Sue Decker's Next Move

Remember Sue Decker? She was formerly the next CEO of Yahoo! (YHOO). That was until a tough 18 months following Terry Semel's abrupt departure after shareholders voted against his re-election in large numbers at the 2007 annual meeting.

Decker came to Yahoo! from DLJ, as the Internet analyst who used to throw tough questions at Tim Koogle and Jerry Yang. She took over as CFO and, by all accounts, did a great job in that role.

When she got promoted to president, the problems started. She's very bright, but seemed to not grasp the technology as well as she might have and didn't manage the business as well as was required. She left under a cloud a few months ago when Carol Bartz was given the top job.

She's taken on a number of directorships over the years: Intel (INTC), Costco (COST) and Berkshire Hathaway (BRK-A). She'll be in Omaha this weekend for that annual fiesta. She got on to the Berkshire board, after serving with Charlie Munger on the Costco board and getting to know him.

She's serving time in the penalty box now after her Yahoo! experience, but there's no question she'll be back at a firm soon. However, I believe (and stated so after her departure from Yahoo!) that she's more likely to end up in a financial role (or financial firm) next than a tech firm.

I think Berkshire would be a good fit for her -- not to take over for Warren, but for an important senior role. Omaha's a little different from NYC or the Bay Area but I think she would love the opportunity to be part of the Berkshire team and prove to the world how good she is. I expect some kind of announcement in the next six months.

Position: None.

Originally published in RealMoney.com on 5/1/2009 4:39 PM EDT

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