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This is the last of my notes. Cheers.

WEB/CM set compensation differently depending on business. If business doesn't need much capital – incentive will be based on profits earned. If there are substantial amounts of capital employed – then they build it in. They set the compensation system for the operating subs' CEO and then let subsidiaries design reward system for employees themselves without any directives from Omaha.

As far as they can tell, morale is unaffected by CEO tenure. As everyone knows BRK has no retirement policy. If there are people within ranks who want to be #1 they probably go somewhere else. Buffett feels that they face a management succession decision every 18 months or so.

They wouldn't dream of using EVA. The basic concept of setting hurdle rates based on opportunity cost is right. But they don't need to use the formulas – it intuitive.

Buffett is sympathetic but thinks he and Charlie have very little clout compared to power of trial lawyers. Current system imposes tremendous frictional costs. Used example of D&O liability insurance. Everyone knows that companies will pay and it becomes a kind of game. Similar to executive compensation there is a “lack of parity”. Charlie mused that D&O liability insurance should be abolished, it would be hard to find directors but after system adjusted, maybe we would get better corporate governance.

However, due to some activity in corporate America, they are glad that there are trial lawyers. There is usually some underlying wrongdoing, although eventually system maybe goes a bit too far. “Half the time they are suing someone that did something terrible but then socialize the cost.”

Munger talked about workers comp in California having terrible abuses - “institutionalized fraud”. Talked about a friend who took a plant from Texas to Utah and workers comp went from 30% to 2%. Present system “is crazy”

Buffett talked about Burlington Industries experience. BRK had made $500 million bid but bid had to remain outstanding for several months. Negotiated break-up fee of $14 million but judge tried to reduce it because he felt it was too much to charge. BRK backed out and there will be a new process and there will be another buyer.

WEB explained that in his opinion its too much of a risk to BRK to commit to a fixed price bid of $500 million for several months without adequate protection. Felt that BRK was giving up option value. Many things can go wrong in the interim (again WEB/CM are thinking six-sigma) Buffett felt that $14 million was not enough of a put option to protect BRK when compared to the premiums on similar put options available in the market place. Feels that he needs much higher break-up fee to compensate for option value he is giving up in order to make fixed price bid that has to stay outstanding for months. Came away thinking that it may be too hard for BRK to buy companies out of a Chapter 11 process.
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