For years, Lubrizol filed annual reports with securities regulators that ran 80 pages or more, detailing everything from inventories to pension obligations. Today, investors won’t find its earnings in public filings. The reason: Warren Buffett’s Berkshire Hathaway (BRK/A) bought the chemical maker in 2011 for about $9 billion and now lumps together its results with those of several other manufacturing businesses.
Buffett, 83, has long highlighted his candor and desire to give equal access to information about the company. The billionaire Berkshire chairman and chief executive officer often includes self-critiques in letters to shareholders and takes hours of questions at an annual meeting in Omaha. Yet the $280 billion company, which is poised to post a record full-year profit on March 1, has become less transparent during Buffett’s five-decade-long acquisition spree. “It’s a critical issue,” says Meyer Shields, an analyst at Keefe, Bruyette & Woods (KBW), who has a hold rating on the stock. “You don’t really know what you’re getting within Berkshire Hathaway.”
Buffett’s annual letter usually runs 20 to 25 pages and is written with investors such as his sisters, Roberta and Doris, in mind, because they don’t work in finance. “They’ve got a lot of their money in Berkshire,” the CEO told PBS’s Charlie Rose in a 2012 interview. “I want to tell them what I think is important to them.”
In recent years that’s meant covering topics such as capital spending, dividends, and an investment of more than $10 billion in IBM (IBM). He’s also given updates on the work done by the board in selecting his eventual replacement as CEO. The letter is followed by about 70 pages of data and discussion of Berkshire’s investments and dozens of operating units. Some of the larger subsidiaries such as railroad Burlington Northern Santa Fe and auto insurer Geico have their own sections. Others such as Fruit of the Loom, with more than 26,000 employees at the end of 2012, are hardly mentioned.
The Securities and Exchange Commission last year asked Berkshire for more information about claims from natural disasters at insurance and reinsurance units, which account for about 30 percent of profit. Competitors routinely provide such claims data. “The fact that they wouldn’t on their own reflects an attitude of very, very limited disclosure,” says Shields.
“With Berkshire, you have a long history of conservative accounting.”—Richard Cook
The SEC also has pushed Berkshire to explain more about derivative contracts in which Buffett bet on long-term gains in stocks and the creditworthiness of borrowers. Liabilities on the contracts ballooned during the 2008 financial crisis and have caused swings in profit. In 2011 the SEC requested that Berkshire identify the securities tied to a $1.02 billion markdown. Berkshire responded that the reduction was related to bonds from a unit of Energy Future Holdings, a Texas power company. Buffett later accepted responsibility for the loss, calling it a “major unforced error.” Buffett did not respond to a request for comment.
Berkshire stands alone among the 50 largest companies in the Standard & Poor’s 500-stock index in not holding quarterly calls to discuss results. Instead, Buffett and Vice Chairman Charles Munger host a five-hour question-and-answer session at annual meetings, which typically attract tens of thousands of attendees. The company prohibits the use of recording devices and doesn’t publish a transcript.
There’s no bright line in the law about what qualifies as material information that companies must disclose, says David Martin, a partner at Covington & Burling who from 1999 to 2002 led the SEC’s division that reviews corporate filings. Instead, he says, there are rules of thumb, such as whether a subsidiary contributes more than 10 percent of total revenue. For Berkshire, that threshold for a unit would be more than $16 billion, based on 2012 results. That year, Lubrizol posted $6.1 billion in revenue, according to its website.
KBW’s Shields said he’d like to see earnings statements and a balance sheet for all Berkshire subsidiaries that contribute 5 percent or more of revenue. Richard Cook, co-founder of Cook & Bynum Capital Management, says he has enough data to value the company and thinks Buffett is telling investors what they need to know. “He deserves that trust,” says Cook, who helps manage about $290 million that includes shares of Buffett’s company. “With Berkshire, you have a long history of conservative accounting.”
Such goodwill could fade once Buffett is no longer leading the company. Many of the largest investors have personal ties to the billionaire, and the CEO himself owns about 20 percent of the stock. The disclosure is “sufficient for his shareholder base at the moment,” says Jeff Matthews, a Berkshire investor and author of books about the company. “Once he’s gone, people are going to say, ‘What’s here? What do I really own?’ ”