Berkshire Hathaway
If a Tree Falls

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By EliasFardo
April 24, 2003

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If a tree falls in the forest, and there is no one there to hear it, will the stockholders still be told that their company lost $99 billion last year?

That is the question that begs for an answer in the AOL Time Warner 2002 annual report. I love annual reports. Some are keepers. I was looking forward to the 2002 annual report for AOL Time Warner. I was, and am, going to keep it forever. In my will, I will pass it down to little investors. My interest? How would management address a $99 billion annual loss?

I was expecting something like this: "This was a disappointing year for your company. While our financial results were not up to our expectations, your company met many challenges and is stronger today than a year ago."

I would have liked to see something like this: "What do the following three statements have in common? Beethoven wrote music. Michael Jordan played basketball. AOL Time Warner lost money in 2002. Answer: They are all understatements of historical proportions. In fact, your company lost $99 billion last year, and more disappointed and embarrassed I cannot be."

Or, in my most unrealistic dreams: "Folks, what can I say? We blew it. We blew it big time. Ninety-nine freaking billion dollars! After you stop hyperventilating, let me take you through the numbers."

Let me now reproduce the total discussion of the annual financial results in the letter to shareholders in the 2002 annual report of AOL Time Warner.

Did you miss it? Here it is again.


Did anything even slightly distasteful, marginally disconcerting or remotely troubling occur in 2002? You would not know it from the letter to shareholders. Instead, things sound to be just fine, thank you. Or at least that would be your impression from reading the following:

though we faced significant challenges, we'd emerge stronger than ever ... we're on the right track ... we're gaining new momentum every day ... The resources at our disposal are formidable and , in many cases, unmatched.

And then, my personal favorite:

The progress we've made so far is encouraging. But it's only a beginning. Much hard work is still ahead. Going forward, I want you to know the basic principles that will guide everything we do:

scrolling down to number 2:
2. Transparency and Integrity - Short-term results matter. But if they're achieved at the cost of our reputation, they're not just worthless, but counterproductive. In all our interactions, whether with consumers, investors or one another, we'll be direct, candid and aboveboard.

Maybe it is just me. But if you are going to be direct, candid and aboveboard in your interactions with investors, this investor would like for you to at least reference the existence of a $99 billion loss when it occurs.

I know that the loss is not hidden; it is there for everyone to see. But I do expect management to acknowledge what happened, good or bad, in the prior year. It is a way of indicating ownership. It is a way of taking responsibility for the financial results of the company. Management is not a disinterested third party, as surprised and dismayed as any once else when major failures occur. In this case anyway, management was the architect of the failure.

I know it is my own fault for expecting management to act in a mature and responsible manner. But every parent would demand that their teenager face up to a blunder such as this. Why should we expect any less of the managers of one of the largest companies in the world?

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