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THE ESSAYS OF WARREN BUFFETT
47
Nevertheless, Burlington has lost sales volume in real dollars
and has far lower returns on sales and equity now than 20 years
ago. Split 2-for-1 in 1965, the stock now sells at 34-on an adjusted
basis, just a little over its $60 price in 1964. Meanwhile, the CPI
has more than tripled. Therefore, each share commands about
one-third the purchasing power it did at the end of 1964. Regular
dividends have been paid but they, too, have shrunk significantly in
purchasing power.
This devastating outcome for the shareholders indicates what
can happen when much brain power and energy are applied to a
faulty premise. The situation is suggestive of Samuel Johnson's
horse: "A horse that can count to ten is a remarkable horse-not a
remarkable mathematician." Likewise, a textile company that allo-
cates capital brilliantly within its industry is a remarkable textile
company-but not a remarkable business.
My conclusion from my own experiences and from much ob-
servation of other businesses is that a good managerial record
(measured by economic returns) is far more a function of what
business boat you get into than it is of how effectively you row
(though intelligence and effort help considerably, of course, in any
business, good or bad). Some years ago I wrote: "When a manage-
ment with a reputation for brilliance tackles a business with a repu-
tation for poor fundamental economics, it is the reputation of the
business that remains intact." Nothing has since changed my point
of view on that matter. Should you find yourself in a chronically-
leaking boat, energy devoted to changing vessels is likely to be
more productive than energy devoted to patching leaks.
D.
An Owner-Based Approach to Corporate Charity
10
A recent survey reported that about 50% of major American
companies match charitable contributions made by directors
(sometimes by a factor of three to one). In effect, these represent-
atives of the owners direct funds to their favorite charities, and
never consult the owners as to their charitable preferences. (I won-
der how they would feel if the process were reversed and share-
holders could invade the directors' pockets for charities favored by
the shareholders.) When A takes money from B to give to C and
A is a legislator, the process is called taxation. But when A is an
officer or director of a corporation, it is called philanthropy. We
continue to believe that contributions, aside from those with quite
10
[Divided by hash lines: 1987; 1981 (reprinted 1988); 1981; 1990-93; 1993.]
48
CARDOZO LAW REVIEW
[Vol. 19:1
clear direct benefits to the company, should reflect the charitable
preferences of owners rather than those of officers and directors.
On September 30, 1981 Berkshire received a tax ruling from
the U.S. Treasury Department that, in most years, should produce
a significant benefit for charities of your choice.
Each Berkshire shareholder-on a basis proportional to the
number of shares of Berkshire that he owns-will be able to desig-
nate recipients of charitable contributions by our company. You'll
name the charity; Berkshire will write the check. The ruling states
that there will be no personal tax consequences to our shareholders
from making such designations.
Thus, our . . . owners now can exercise a perquisite that,
although routinely exercised by the owners in closely-held busi-
nesses, is almost exclusively exercised by the managers in more
widely-held businesses.
In a widely-held corporation the executives ordinarily arrange
all charitable donations, with no input at all from shareholders, in
two main categories:
(1) Donations considered to benefit the corporation directly
in an amount roughly commensurate with the cost of the donation;
and
(2) Donations considered to benefit the corporation indirectly
through hard-to-measure, long-delayed feedback effects of various
kinds.
I and other Berkshire executives have arranged in the past, as
we will arrange in the future, all charitable donations in the first
category. However, the aggregate level of giving in such category
has been quite low, and very likely will remain quite low, because
not many gifts can be shown to produce roughly commensurate
direct benefits to Berkshire.
In the second category, Berkshire's charitable gifts have been
virtually nil, because I am not comfortable with ordinary corporate
practice and had no better practice to substitute. What bothers me
about ordinary corporate practice is the way gifts tend to be made
based more on who does the asking and how corporate peers are
responding than on an objective evaluation of the donee's activi-
ties. Conventionality often overpowers rationality.
A common result is the use of the stockholder's money to im-
plement the charitable inclinations of the corporate manager, who
usually is heavily influenced by specific social pressures on him.
Frequently there is an added incongruity; many corporate manag-
1997]
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