In this episode of Industry Focus: Wildcard, Nick Sciple is joined by Motley Fool analyst Buck Hartzell, and they interview Professor Lawrence Cunningham about his book Quality Shareholders: How the Best Managers Attract and Keep Them. He also provides his insights on Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) and talks about some changes going on there. In addition, they discuss environmental, social, and corporate governance investing, and much more.

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This video was recorded on September 2, 2020.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple, joining me today is Motley Fool analyst Buck Hartzell, our special guest is Lawrence Cunningham. Professor Cunningham is the author of two dozen books with his latest book being Quality Shareholders: How the Best Managers Attract and Keep Them. In addition to his writing, he serves as a faculty member at the George Washington University School of Law, as well as consulting on corporate governance and serving on the Boards of Directors of numerous public and private companies, including Constellation Software, where he currently serves as Vice Chairman. Lawrence Cunningham, welcome to Industry Focus.

Lawrence Cunningham: Wonderful to be here.

Buck Hartzell: Thanks for joining us, Larry, we appreciate you taking the time.

Cunningham: Always a pleasure to be with you, Buck, and The Motley Fool crowd.

Hartzell: Yeah.

Sciple: Larry, we mentioned your writing, you've been writing about Warren Buffett and compiling his letters for a number of years, he just turned 90 over the weekend, you know him personally. Just kind of a fun question off-the-bat, what birthday present do you buy for a guy like Warren Buffett, a guy who has everything?

Cunningham: An A. share. [laughs] I'm just kidding, he's trying to get rid of his A. shares. But you know, I think he appreciates substance, so I sent him a book, and I think just a little note about the legacy of intelligent investing that he's handing down, you know, which is widely followed; probably still not by enough people. But I think that's probably -- the thing that's been most important to him is that he's provided education for people. I think that's the thing that's nearest and dearest to his heart. I mean, other people think he's a great investor, a great manager, a great philanthropist. I think all those things are true, but I think he's probably most proud, really, of having been an educator. And so, I'd give him a book and just remind him of the legacy he's created.

Hartzell: That sounds like a great idea. I might get him a PowerPoint person to help him out with the next annual meeting. [laughs] It was clear he's somebody to put those PowerPoints together by himself.

Cunningham: Those slides were great. My favorite one was, I think it was an estimate of the national debt in 1812 or something like that, that said, estimate W. Buffett, [laughs] as the source.

Hartzell: Had to get the source in there, pretty sure. Oh, that's great. So, let's talk a little bit about, there's been some great things that are going on at Berkshire Hathaway and some changes that are going on. I guess, the most recent one is, around his 90th birthday he announced the deal, he is investing in Japan. So, he's got, kind of, a basket approach going into a bunch of these Keiretsus in Japan. Any thoughts on that investment? We know he said in his release that he borrowed some money in Japanese currency there, about 1%. If you're looking across those stocks, they're yielding about 5% or so, 4% to 6%; what do you think, what got him interested, and is this classic Buffett looking in an out-of-favor sector or is there something else we should read into this with inflation?

Cunningham: That, and the thing that jumped out at me is, Berkshire historically has focused almost exclusively on the United States, some exceptions in Germany in the insurance sector, exception for Israeli manufacturing business. They bought a small German motorcycle supply business five or seven years ago, and obviously the subsidiaries tend to operate globally, but this is really the first significant investment that Omaha has, that is, Warren's portfolio has been done outside of the United States. That's what struck me as most significant about it. And Warren has always attributed that domestic bias to his circle of competence, saying, look, I don't know enough about the economic context of European or Asian businesses or the governance systems. And so, I thought it was a remarkable pivot or signal that he's become comfortable, he's learned about a different business culture.

And I have to say, you know, the Japanese business culture is radically different from the North American culture. As you said, the five companies are all members of Keiretsus, these complex conglomerates with interlocking ownership. The culture of business in Japan itself, it's a very inward-looking, very domestic kind of culture. So, he's obviously saying, you know, he's not violating his circle of competence, he's signaling that he's learned a lot about that economy, that culture, the set of businesses. And so, I think that's quite important about it, but obviously your points about there being value here and being able to even leverage a little bit is interesting.

And I get the feeling these are Warren's moves. You know, many of his recent moves have been attributed to Todd Combs to Ted Weschler, especially the Apple position. But it sounded to me -- and they're not always entirely clear about who's making what decisions, but it sounded, in this release, that this is something that he has been involved with and thought about. So, I think that's -- you know, and there's much more to say about that aspect of it, that you know, Berkshire goes abroad, goes to Asia; that's bold, I think.

Hartzell: It is something that I don't think most of us that follow Berkshire would have suspected. If you had us write down five or six stocks that Warren Buffett was buying after COVID or even before and during, we probably wouldn't have picked Japanese companies. So, that's great, 90 years old, he's still surprising us. And I'm sure it will turn out to be a pretty good value. He knows a thing or two about investing in financial companies. So, yeah, it should turn out OK.

Let me ask you quickly. Bill Ackman is a guy who's a well-known investor, kind of a swing for the fences guy. He had a big stake in Berkshire Hathaway, but only briefly, and he sold out of it pretty quickly. You wrote an essay about that, and maybe it ties in well with the book that you're coming out this Fall. But what are your thoughts on Bill Ackman selling out of his Berkshire Hathaway stake? And was Warren really crying at home when he heard that Bill Ackman had left the fold? [laughs]

Cunningham: Well, I should first say that I know Bill and like him, I've known him for a long time. He was present at the symposium that I did with Warren on his letters 25 years ago. So, I admire him and I think he and his brand of investing can play a useful role in promoting managerial accountability, and so on. So, my comments on his position in Berkshire are not personal at all.

But I do think that as a style, it's not the Berkshire style of investing, either the kind of shareholders Berkshire wants to attract or the kind of shareholder Berkshire wants to be. Berkshire wants to attract and wants to be a long-term committed shareholder, that is, one that loads up, that doesn't diversify widely but focuses on individual companies. I mean, Berkshire has gotten pretty diverse in its portfolio just because of the amount of money it has, but it's still pretty concentrated in, you know, its huge bets on six or seven companies. That kind of conviction is something Warren has always practiced and always wanted in his shareholder basically. [laughs] And he brags a lot about how concentrated his largest Berkshire shareholders are, that is, the Berkshire holdings are their largest position by far compared to the second and the third. And very many of those shareholders have owned Berkshire for 10, 20 or 30 years.

So, that's the kind of shareholder he wants, that's the kind of Berkshire Buffett wants, that's the kind of shareholder he's always been. And you're right, I call that the quality shareholder is distinguished, both, from the indexers who may be long-term but are totally diversified on the one hand, and the short-termers who may load-up but never stick around.

And Bill, in this case, will very often be that latter category. Now he's doing something else, he's usually trying to act on his position, trying to nudge or push management to a new direction. So, he's adding a different kind of value. But I knew Bill was a Berkshire shareholder, I've seen him in meetings and everything, but Bill is not the typical, quintessential Berkshire shareholder. So, the fact that he sells out, again, no offense to Bill, but I think that increased the average quality of the shareholder base rather than decreased it. So, I considered it [laughs] positive for Berkshire.

Hartzell: Okay. Yeah, and one thing, you mentioned, kind of, long-term shareholders, and there's certainly people that have owned Berkshire for decades; three, four decades or more. But the people that are kind of relatively new, I'm saying in the last decade or so, Berkshire hasn't performed that well, certainly relative to the S&P 500. And I think for those of us who follow pretty closely, you know, the S&P 500 has been on a tear, technology stocks have done unbelievably well. You mentioned Apple, probably the single biggest investment gain on one stock, I think probably in the history [laughs] of the world. I mean, he's probably up $85 billion $90 billion on one stock position. Pretty good for an 89-year-old, I guess at the time, or 88 when he made the deal.

But what are your thoughts on those long-term shareholders that haven't been there for 40 years, but they've been the last decade, and have seen relative underperformance, do you think that changes going over the next 5 years or 10 years, how do you think about that?

Cunningham: Well, flash has never really been Berkshire's strong suit, you know, Buffett is a very folksy, conservative guy, very little leverage, very little shuffling of assets. You know just a permanent quality-oriented guy looking for well-run businesses. You know, he's never looked for the stratospheric returns, he's always wanted a modest return. And you're right, earlier decades were the best for Berkshire and have just steadily gone to average or close. And part of that's a matter of size, it's just much more difficult when you're investing hundreds of billions of dollars to outperform. Nevertheless, it's been a solid run. [laughs] You know I think you sleep well at night that decade, you certainly earned the S&P a little better without much risk. And so, it remains, I think, rewarding for that cohort.

As for the next 5 or 10 years, we can be almost certain that the company will change significantly, because Warren will almost certainly leave the scene, whether because he'll step back or worse. And so, you'll have a succession and will get to witness the effectiveness of the succession plan, which is a really elaborate plan, I think it's the best possible plan they could have. You'll have Greg Abel probably take over as CEO, who's overseeing all the other CEOs in the operating companies. Todd and Ted taking over as CIO, managing a portfolio and making equity investments. Howard Buffett will become Chairman of the Board, as a steward of the traditional cultural features of Berkshire, like, permanence, autonomy, and trust.

And then in the shareholder piece, you'll see a gradual sale of Warren's holdings over a period of about 12 years, where his estate will transfer about 5% of his shares to the Bill & Melinda Gates Foundation, which will then be required to liquidate it and make gifts, so over a 12-year period you'll see the company go from having a controlling shareholder to not having a control shareholder.

So, all of that, by design, gives that team -- Greg, Todd, Ted, and Howard and everybody else -- a little bit of a runway, a little bit of time to prove that they can manage Berkshire to those values and with at least the solid returns, the reasonable returns that have been achieved in the last 10 years. And maybe they'll do better.

Greg is a savvy investor, a savvy manager. He's done a very good job investing capital at the energy companies for 20 years. You know, one of Berkshire's biggest acquisitions in the past several years was the recent one at Dominion, that's Greg's baby. He's trained excellent successors at the energy companies, some of whom have moved around within Berkshire. The CEO of See's Candies appointed a year or two ago as a former Greg prodigy. So, I have a lot of confidence in Greg. But that's where the proof will be, can Greg -- and obviously, Ted and Todd have to help deliver too, but that leadership, I think, is mostly going to become of Greg, can he do it? I have confidence he will.

And I think that structure will give him the time. If he has a bad first year, I think he'll get the benefit of the doubt, but he will have to deliver over five or seven or else you'll start to see some of those quality shareholders drift away, and some of the activists, maybe even Bill, start creeping in. So, I'm bullish, I'm optimistic on Greg and on Berkshire, on the value of this special culture Warren has built up, but obviously I need a crystal ball [laughs] that none of us have.

Hartzell: Yeah, I think those must fall long and I'm glad Greg was involved in this year's annual meeting. And both him and [...] in the previous ones a little bit, you know, those guys being promoted to Vice Chairman and giving them some facetime with shareholders, I think, is really important at this level. I was happy to see it.

I think one of the headlines that's out there a lot is, Buffett is holding so much cash with whatever, $128 billion, $130 billion or whatever else. When you look at it historically though, as a percentage of assets and in some other ways, it's not really out of line with the amount of cash that Berkshire has held, it's just the business has grown in size. I doubt, though, the successors will get that pass. I think there's probably going to be a little bit more pressure on them.

Do you see Berkshire ever paying a dividend while Buffett is in charge or do you even see them doing it after he's gone?

Cunningham: Almost certainly not while Warren is in charge. And that's been part of the cultural motif of the company, partly because shareholders are almost all taxpaying shareholders. So, there is not a strong appetite among quality shareholder base for a dividend. In fact, Warren told the shareholders twice, once in the mid-90s, I think it was, once in around 2012 or so, saying, I don't think we ought to distribute cash dividends, but what do you think? And he got overwhelming support for opposing a dividend. So, I don't think there's a strong appetite. There may be, there are obviously some people or some shareholders and activists that may like that kind of liquidity, but most of the holders don't have the appetite, and it's not been part of Berkshire's culture. And Warren has kept that powder, kept it dry and found uses for a lot of it, and I think Greg would do the same. And you're right, in terms of the relative scale, it's not wildly high.

And the other footnote I'd add is that Berkshire has always said that it maintains a significant cash balance to assure having liquidity to meet significant insurance claims if catastrophe strikes. In the past bunch of years that number has been $20 billion. And the signals I got from his presentation at the annual meeting is that in light of COVID and potential second order effects that we still haven't seen, that number might need to be higher. So, I think, certainly in the near-term Warren's tenure, I wouldn't expect a dividend out of Berkshire. I do expect to see increasing share buybacks ...

Hartzell: Yeah, we've seen that. Yeah, finally. And I think people have kind of -- I think that was one of the things Ackman anticipated that was going to happen when the share price was below $300,000. And it really didn't happen to any big degree last year. But we've seen a little bit of pick-up with that, and it seemed to be around 1.2X book value or so. Which seemed to be the area that there's a little bit of interest there in buying back shares.

Why do you think -- he loves investing in companies like Apple, even IBM prior to that, they buy back lots of their stock. Yet he's been reticent to do it at Berkshire Hathaway. Even Washington Post, when he directed the buybacks there and added a lot of value, back in the 70s. Why do you think, is it part of the partnership trust thing, is that the reason he hasn't bought them back? Because he clearly likes investing in companies that do that.

Cunningham: Yeah, that's what, he's always said that he's conflicted about buybacks as a strategy at Berkshire, because if it's an attractive investment for Berkshire, so that the price is below value, that means the sellers on the other side are not getting that kind of [laughs] great deal. So, he's got some conflict around that partnership aspect of his view of the holders. On the other hand, his remedy for that is disclosure, this clarity and appreciates that there are times when even quality shareholders, as I call them, have to sell. Estate planning, death in the family, generational problems, the health problems. So, I'd say, I think he ends up being prepared to do it as long as fair disclosure has been made.

But I think it is important to notice, as you just did, that in 2020 the level is significantly higher than in all of the past several years. So, I think that's notable as a part of Berkshire's internal capital allocation.

Hartzell: Yeah, it'll be interesting to see what happens. And the price has gone up too since then; you know, since it was below $300,000. So, quality shareholders, I want to ask about that one more time to just make sure that people listening at home can understand. How do you define a quality shareholder? We know that's people for the long-term. Do you look at the turnover in the stock, the annual turnover, what's a way that somebody at home is looking from the outside can say, I'm looking at this company, but I want to know if they have a quality shareholder base or not?

Cunningham: Excellent question, Buck. So, I drew a matrix, a sort of a 2-by-2, and looked at conviction and duration. And so, conviction, I'm looking for high conviction, high duration, and so conviction is measured by the relative concentration of a portfolio, an investor's portfolio. A concentration of, at one extreme be zero where, you know, it's fully diversified; an index fund like Vanguard or [...] trust or something like that. At the other extreme concentration of close to one will be only one stock, hardly anybody [laughs] does that, but a lot of firms and funds own 20, 30 or 40. And that's a fairly highly concentrated position. And when you look at who does that?

So, I did empirical research to identify which shareholders do that? You know, this is based on public filings. So, I don't have it for individual human beings. And you see Neuberger Berman, Capital World, Franklin, Fidelity and some, mostly smaller firms, $100 billion or $300 billion assets under management. But so those are, I call it, high conviction shareholders. They do a lot of research, they study, they understand, they may even participate a little bit behind the scenes in shaping management.

The other quadrant in there is duration. And here I look at average holding periods, turnover of the portfolio, a number of different metrics to try to identify which of those firms tend to have the longest horizon, the most patience, the greatest patience. And again, you see there are lots of firms that are momentum traders and day traders, arbitrageurs, you know, whose average holding period is extremely short, months, maybe a year. And others that are more than four, five or seven, [laughs] it doesn't get much longer than that most of the time.

And these may have large positions, they may buy big blocks but over a short period of time. So, I'm looking at the shareholder base that does both of those; high conviction, high concentration. So, it's not the indexers, it's not the momentum guys, and I'll leave the act [...] one side. And so, I identify who those firms are, and I discuss a little bit about their investment philosophy. And then I turn around, I look at which companies attract that sort of shareholder in the highest density. And so again, I ran a huge series of empirical tests around the Russell 3000, basically, and then had 2,200 companies that I ranked in order of quality shareholder density.

And Berkshire is way up there at the top. You'll see the listing in the book. I don't publish the whole thing because I don't want to make any of these companies sticky, [laughs] I'd like to see them try to be more nimble. And also, just as a matter of the data that, obviously it changes day-to-day. So, I don't want to put it in a black box, but I identify a lot of them. And then I try to figure out what it is about these companies that attracts this cohort. And some of it is unsurprising. They tend not to do quarterly forecasts, they tend not to do quarterly conference calls, they tend to have very high quality annual meetings, annual shareholder letters, they talk a lot about capital allocation, they themselves emphasize the long-term in their strategy, in their discussion, in their accounting measurements and on and on. We've got a lot of different -- so, that's the method and that's what I try to reveal.

For us sitting at home, The Motley Fool constituents, you know, I've done it. I mean, I did a pretty heavy lift, there's a lot of data in this, and I had experts, PhDs crunch the data. But you can identify which are the highest quality shareholders with little bit of poor man's research. And then you can identify in which companies do they tend to invest, just as an additional filter, and then you think harder about, well, why Danaher, why Markel, why Graham Holdings? And then just add that to your analysis, you still have to do [laughs] fundamental analysis.

But that's, I think, an underappreciated feature in investing. I think people have an intuitive sense that -- and let me just add one thing. So, the other question is performance. And we crunched the data again and saw that the evidence supports the idea that a quality shareholder strategy can systematically outperform, and that a portfolio composed of the top, you know, high density attractors outperforms. So, not every company, not every fund, but it's not a bad tool to add to your investor toolkit. And again, the intuition is, you know, it ought to be the case that the quality of the shareholder matters to the performance of a company, there's got to be some influence. If you've got a bunch of short-term traders; as a manager, you're going to be catering to the short-term traders, so you're going to miss out on a lot of long-term strategic initiatives and so on. But if you've got patient, high conviction shareholders, you've got a runway and you can execute on those strategies.

So, I think there's a lot of intuition around this idea. And what we've done is really try to put as much data behind it as we can and then explain it.

Hartzell: Yeah, that's great. And I think one of the things at The Fool that we've seen over the years, is that, most people, there's a lot of false dichotomies out there, and one of those is that people thought if you invest in tech, you need to turn over and switch in-and-out of shares a lot more because there's disruption and things happen. And what we've actually seen, and David Gardner is really kind of a pioneer for this at The Motley Fool is, he's done the exact opposite of that. He's found really great companies led by people that think in decades, like, Jeff Bezos' Amazon, and he's held them for the long-term. And it's crazy to me, but we see this from people all the time, they have a stock that does well, it goes up 20%, 30%, 50%, they're like, I've got to sell this. And we're like, what? You don't want to sell out of what's doing really well, if it's led by great people and the company is executing on that, let them roll. And if they happen to stumble or something happens temporarily, go ahead and add to that position, you know what I mean? And it's just a hard thing innately for investors to do, is to hold on to their winners, they kind of want to sell them off to lock-in those gains, but...

Cunningham: I think Dave does deserve a lot of credit for that. And it takes a lot of discipline what he has done, and I think he's been proven out, he's been vindicated by his strategy. And I think you mentioned Jeff Bezos, and I think Amazon, and Jeff in particular, exemplify what quality shareholders are looking for. And Amazon has attracted them in high density, and you can see why. I mean, Jeff is always talking about -- you know, the day one thinking, his 1997 letter to shareholders hit everybody over the head about this is going to be a long-term play, [laughs] you know, and it took a long time. But if you stuck with it, I mean, it's an extraordinary set of returns and it's more to come.

Hartzell: Yeah, and it's just, you don't hear that often from the tech area as well either. I'll make sure that Nick gets some questions in here as well, I want to ask one more quick question, though. Tesla and Apple split their stock recently. We know Warren has talked about stock splits, we've talked about them a lot to people, it doesn't really make that much of a difference. What are your thoughts on this? Does that help them attract quality shareholders or the opposite kind?

Cunningham: It has the opposite effect, Buck, you're right. One of the research elements we did for the book when we tried to figure out what are the things that companies do to attract long-term convinced, high-concentrated shareholders is avoid splitting the stock. And it's, I think, pretty obvious to see why. The reason Apple and Tesla are splitting the stock, the Boards of the company have said, is to attract new investors. But what that's going to do is going to attract a lot of short-term investors, going to do sales by some, purchases by others and then continued volatility and churn. And we flipped it around, and if you look at those stocks, companies with the highest share prices, Berkshire is obviously in a class by itself with six-figures, but there are about 10 or 15, last time I looked, that have four-figure stock prices, including, Apple, Amazon, Alphabet and then some other less well-known, but equally important. They have very high-quality shareholder bases. Because it's harder to sell four [laughs] and the other single it sends is that, we're not focused on the stock price here, we're focused on running the business and generating high returns on invested capital. The stock price is a little higher, a little lower, its way out of sight, it doesn't really bother -- doesn't influence our strategic thinking and so I'd rather have a Board of Directors thinking about capital allocation, should we make this acquisition, should we make this share buyback, than thinking, what if we had the stock price about a fifth less, you know, or half-off? So, I think it's a bad idea for both Apple and Tesla, certainly in terms of quality shareholders. They may not care, [laughs] you know, they may have other priorities. Like, someone said Apple is trying to use a low stock price to attract customer loyalty and affection; maybe that's right, but it's not how I think about it. So, just from a quality shareholder perspective, the quality of their shareholder base will decline as a result of the splits; that's what all the evidence suggests.

Sciple: Yeah. So, I want to link this quality shareholder concept with what we talked about earlier when it comes to succession at Berkshire, you talked about Amazon's ability to recruit quality shareholders, how important Bezos' annual letter is to that messaging to shareholders. How significant is the presence of a Founder-Leader at a company when it comes to recruiting quality shareholders? And how do the companies that have been able to maintain quality shareholder basis through a succession cycle, what do they do, how are they able to achieve that?

Cunningham: Oh, that's an excellent question. And the inventory there is mixed. We did not find a strong correlation with a sort of distinctive Founder and high-quality shareholders. And that's, I think, when you look at individuals, you know, some are more trustworthy than others, some have a longer-term horizon than others. They tend to attract, to use an old phrase, the shareholders they deserve. And so those who are long-term thinkers and strategists, do tend to attract. And I think their presence and their personality matters; Jeff is a good example; Mark Leonard at Constellations is an example; Don Graham at Graham Holdings, or formerly The Washington Post, is a good example; Tom Gayner at Markel. So, there's certainly that.

I can list another group of CEOs that are in some ways luminaries and founders and so on, but they haven't exhibited a similar disposition. And it's not criticism, they just have a different approach, a different outlook. They're not interested in the long-term necessarily, they're not interested in attracting any particular sort of shareholder.

On transitions, it's also a very interesting story. I highlight two in the book; one of them I already mentioned is Graham Holdings, it used to be The Washington Post. That business struggled mightily as print gave way to the internet, and it spun off a cable operation and it really morphed into quite a different business. And then Don Graham stepped down as Chairman and CEO and handed the reins over to his son-in-law. A huge change in what the company is and who the leaders were. But what happened is, and what happened in the shareholder base, it was an extremely high-quality shareholder base, including Berkshire Hathaway and a lot of followers of Warren and that tradition. As this transition got under way, that broke up, and those quality shareholders started to leave; and you can see it in the stock list year-to-year. But they've actually figured out they're gradually coming back as well. So, they've managed through transition, I think, relatively successful.

The another example was Leucadia National, the Ian Cummings and Joe Steinberg company that they built up over a period of +30 years, applying traditional value investing principles, a little different than Buffett's, a little more opportunistic, a little more of the old-fashioned cigar butt, that did sell businesses relatively quickly, but they were authentic investors who explained their position, who understood capital allocation and educated their investors using excellent communications, especially an excellent shareholder letter. And they attracted a high density of quality shareholders. Now, they got to the end of the run about five or so years ago. They engineered a very interesting succession plan through which they essentially sold themselves to Jefferies, [laughs] the New York-based investment bank; a very different kind of business.

And what you saw after that transition was a disruption in the quality shareholder base. You saw a lot of quality shareholder stick with, I think saying, look, if that's what Joe and Ian think -- and not just blind faith, Joe and Ian explained the rationale, why Jefferies is attracted, why its leadership understood Leucadia and why you can count on continuity around some of their rationale, and their capital allocation and so on. So, a bunch of quality shareholders stuck with them, but others left.

And in the same way that Graham Holdings, I think that the merger, that the sale, I don't think it's proven out completely, but it's a lot better than a lot of people thought. And so you see somewhat of a migration back in. So, those are, I think, fascinating stories. I explored some others in the book around succession at Progressive insurance and some others.

But, Nick, I think it's a profoundly important question. I think that the leadership is certainly a big part of attracting long-term high-concentration shareholders, and when that changes, people get worried. And that's going to happen to Berkshire Hathaway, I remain confident that that transition will be a little easier than either Graham or Leucadia, and it will prove out. But, you know, the quality shareholder is not stupid, [laughs] and they're not religious. You know, if this is not going to continue to be a worthy company, they will sell.

Hartzell: Yeah. And Leucadia and Jefferies have struggled, I mean, from a business performance-wise, they haven't grown book value in a long time. Rich Handler and a group of [...] but it is different, because it's mostly an investment bank and they've sold off and monetized most of the pieces that Joe and Ian had put together, now it's kind of a pure investment bank. So, yeah, Nick, go ahead.

Sciple: Yeah, I guess, one other question I had just looking forward into the future how companies recruit quality shareholders. Historically, it's been the shareholder letter, all that sort of thing, the annual report. Do you think, we're in this 21st century, we've seen Tesla and other companies say, we're going to use Twitter for official announcements about our company, do you think companies should change the way they communicate to try to recruit shareholders in the year 2020?

Cunningham: Yeah. And Twitter and social media may be part of that in terms of the media outreach. I think some discretion needs to be exercised around that, because you simply get the rapid news cycle. I mean, all the research that I did and that others have one that I read indicates that the more frequently a company is producing information, press releases, 8-Ks, you know, the periodic, the quick updates, the more volatile stock price is, the less long-term the shareholder base tends to be. Which just makes a lot of sense, I mean, there are a bunch of traders out there who are acting on new information. So, the more of it there is, the more likely you have high churn in your stock. So, I'd be pretty careful using a lot of Twitter.

On the other hand, I think we all do need to migrate to platforms, and digital obviously, in 2020. In 2020, we had in North America essentially no live annual meetings of shareholders. Almost everything was done with virtual platforms. And before 2020, you had maybe 50 or 80 big companies a year beginning to experiment that. Intel did it, Duke Energy did it. And I think the results of the experimenters were not bad. A lot of critics said, you can't replicate the in-person feeling, the opportunity to shake hands, and look people in the eye and ask follow-up questions and have breakouts and so on, you can't do that online. And that was a valid criticism; I think I even made it.

On the other hand, it has some advantages. More shareholders can attend, the information tends to be deliverable in a much more efficient and consolidated manner. And the technology permits interaction, so it's really up to the CEO about how many [laughs] follow-ups and so on that she lets them have. So, I think pre-2020 the, sort of, assessment was mixed, but after 2020, a lot of the meetings were exemplary, I participated in a few where it was an excellent meeting. So, I do think, how fast we recover from this pandemic and what restorations we do, I think the digital meeting, the virtual meeting is here to stay. And the best CEOs who are interested in cultivating a quality shareholder base ought to become really good at that and entice long-term committed shareholders on that basis and reach out to them.

So, someone mentioned, I was on the Board of Constellation, we had a virtual annual meeting. We usually have 400 shareholders about, attended in Toronto every year, digitally we had 600. I helped Chair the meeting around, handling the Q&A. And I thought we got as many or better and better questions than we ever had. And I, sort of, chaired the panel, in fact, and we pushed back, I and two other analysts. And I think it was a very good conversation. And then we got a lot of positive feedback from the shareholders. So, even if we could meet live next year, I think we'll add a virtual piece.

But, Nick, I think you're absolutely right that it will pay for corporate leadership to embrace and shape how we use this technology.

Hartzell: Constellation's meeting was great. And the way you grouped the questions, the way it involved all the managers answering questions, I would make a strong call for Berkshire to do that. Maybe you'd be willing to organize questions for them by topic. Because I think some of the way they're doing it right now, it's better than it was prior, you don't get all the questions, how to become a good investor and things like that from somebody's kid that they're holding up there. But the questions that Constellation got were great. And I think there are some important questions that need to be asked at Berkshire, and it would be nice to do a similar thing. And I think maybe that's something they'll consider going forward, because that was great at Constellation.

So, I have two questions left, then I'll let Nick do whatever he wants, but one of those, you just mentioned Constellation, Mark Leonard is a great CEO. For those people listening that have never heard Constellation Software, it's the best company you've never heard of, because it's Canadian, it is a technology company and it's been a wonderful performer. And so, it's a great business, Mark Leonard is the Chairman there, I guess.

And I want to ask you, Larry, since you know both of them very well, can you compare and contrast Mark Leonard to Warren Buffett and maybe what are one or two things they have in common and then one or two things that make them different as leaders of great businesses?

Cunningham: Thanks, Buck. Yeah, I admire them both immensely, and for some of the similar reasons. I'd say, in terms of the one or two things they have in common. The greatest thing that distinguishes them from others, and that they have in common, is a very high degree of rationality. They are more in command of their, kind of, emotional responses to things than anybody I know. I mean, they get happy and sad and joyous and remorseful and stuff, they're human beings, but they're able to control that aspect of their thinking and to really rivet on the substance of what's in front of them like no one else I know or have read about. So, they're [laughs] very much up at the top. And you know, the rest of us can learn from that. I think it is very important to discipline [laughs] yourself around that, to be human, feel emotions, but at the same time to bracket them when you're making especially business or capital allocation decisions.

And the second thing is, I'll call it absorption. They are just very good at digesting enormous amounts of information. And that can be from reading, which they both love to do voraciously. Conversations, lectures, way into the digital information platforms and stuff. And so, they're just very well-read well-rounded. And it's just a capacity to digest information and synthesize it. So, I can go down. So, I think the other big thing, I'll name a third. The other thing they have in common that's maybe most relevant for us is that they think about their companies and their acquisitions or investments and almost every other decision that happens at their companies in terms of capital allocation. It's their North Star. In business, really what you do with every dollar [laughs] is important. And that's how they think. And not every CEO does that. These guys are both trained in the investment world. Warren in the old-fashioned, kind of, merchant acquisition and investment; Mark, more in private equity.

But on the opposite side, on the things where they're different. Yeah, their personalities are quite different, Warren has always been a little bit of a showman. He's an "aw, shucks!" kind of guy, modest, Midwestern and so on, but he welcomed the limelight, he is very happy to be on television. I don't think he has -- you know, he's practically, the tens of thousands with enormous festivities and really a conscious commitment to having a spectacle out of -- you know, he even calls it the Woodstock of Capitalism all that. I think Warren actually is -- not that he's eager for it, but he's quite OK with the extensive coverage on television, now the internet and books and so on.

Mark is exactly the opposite. You know, it wasn't just until a couple of years ago, there was not a photograph of Mark Leonard available on the internet; you couldn't find out what he looked like. These days it's impossible to prevent that, but it's still. He's very, very modest, very circumspect, he'd rather sit -- and he's not an introvert by any means, [laughs] he's very social, a lot of fun, but he doesn't want the limelight. Someone made a joke -- I've got one of the new books, it's called Dear Shareholder, it's a collection of letters of CEOs that have attracted a high density of quality shareholders. And so, I've got, you know, Warren is the dean of that, obviously. Mark Leonard is in there. Prem Watsa is in there; another Canadian investor at Fairfax Financial Holdings. And I named the book, Dear Shareholders: The Best CEO Letters from Warren Buffett to Prem Watsa. (sic) [Dear Shareholder: The Best Executive Letters from Warren Buffett, Prem Watsa and Other Great CEOs] And a lot of people said, well, Mark is by far a better track record than Prem. Why didn't you put Mark on there? I said, Mark would kill me. [laughs] Mark doesn't want his name, you know. Prem on the other hand -- Prem is a little more like Warren, he's -- and I love Prem too. But he's pretty happy to have his name. So, Mark, he does not want the limelight, is not interested in it at all. And I'd say that's the biggest difference.

I mean, another obvious difference, just in terms of their investment scope. Warren has invested throughout industry, across every sector, really. I mean including tech and now Japan, Germany, elsewhere, Mark has invested all over the world, but almost entirely in vertical market software. Software companies. He'd be good going beyond that. So far Constellation is exclusively vertical market software. And so, what they do every day, how they think and what they have to think about is very different. You know, the economic context, the macroeconomic industrial structure of the Berkshire companies are all over the map, [laughs] 40 or 50 of them. So, how you think about incentives and drivers of managers and stuff, performance and business is different. At constellation it's far more similar business to business.

And so, I don't think that says a ton about the individuals, but I think it might say a little.

Hartzell: Yeah. And I think, for those of us who follow on the outside, and Constellation, I think, made over 300 acquisitions throughout their time, so they've been even more acquisitive than Berkshire Hathaway has, that I think the skills that Mark Leonard and team bring to the table will allow them to, kind of, go outside of that vertical market software area. But they've done so well in that, they probably don't want to step out, because the economics don't look as attractive in other places. So, that's great. And we can talk about Constellation for a long time; a wonderful business.

I want to ask one more, and this is about, kind of, ESG, the Environmental, Social, and Governance. You've kind of been on the forefront of the governance part of the ESG movement before it was, kind of, a movement, I would say. This year has had a staggering amount of, kind of, uprise certainly associated with racism throughout our country. And I know in the early days Warren Buffett was involved, with his first wife Susie, on a lot of the Martin Luther King things and racial equality and even gender equality, and we can add that. My question for you is not as a Board member of a public company, but also somebody who's a scholar of Berkshire Hathaway and has done a lot. What can companies out there do?

The NBA players have certainly taken a stand on this and raised awareness of it, but you know, for instance, you mentioned I've been at a Berkshire meeting just a couple of years ago with my son, we walked around, 40,000 people there. I didn't see a whole lot of people of color in the audience. There were certainly a lot more Asians that were there than the previous time that I went before that. But just as you mentioned online, putting the annual letters on there, how do we get the greatness of capitalism and companies out there and make it more approachable for people of color?

Cunningham: Yeah, these are profound questions. And I think that some of it does have to start locally and individually. And I think the upheaval has stimulated a lot of that kind of ground-up individual human beings asking themselves what they can do and then specific communities, churches, and schools, my own university has made a significant public commitment to focusing on inclusion, Boards of Directors of companies more broadly, organizations, business roundtables let's say. And so, I think you're seeing a heightened consciousness around this need.

And I mean, I've done a little bit of it in terms of identifying, especially younger women, in particular, of color and trying to get them into my networks of, let's say, older Whiter guys who have the keys to the boardroom door. And then I think you'll see a lot more of that.

And then as a policy matter, as an intellectual matter, I recently, I did a lot of research on Board gender diversity. And I was focused on this, in part, as the Director of Constellation. So, I was looking, in particular, at Canada. And I did a ton of research, and I've just published an article based on the research in The Canadian Business Law Journal, which is a publication at University of Toronto. I focused on gender diversity within somewhat North American bias and kind of focus on Canada. What I found in the literature was, both, the academic literature and the, sort of, public advocacy literature, were two big arguments for increased Board gender diversity. And one of them was social justice, fairness, it's the right thing to do. You just can't exclude half of the population from important functions like this. So, we ought to just make that cultural change in the name of justice and doing right.

In other words, it was an economic argument that said that diversification of Board is associated, but some people said it causes enhanced economic performance at companies. And there was a lot of rhetoric around that performance connection and, as I said, some assertions of causation.

When I dug in the literature, I found the arguments on the social justice aspect to be compelling, the economic argument, the evidence didn't support many of the claims. And so, I came away from this concluding that it's a bad idea for advocates of more gender diversity. And I think this is my hypothesis, this discussion would apply also to minority diversity and beyond Boards. It's not a great idea to make economic arguments that we will be richer if we do this or we will have higher returns on invested capital, or this company will be better and will be a better performer. I can see why people made those arguments, but they've got a rhetorical punch that they can persuade Directors who feel like they owe it to the shareholder to deliver high returns, to try to get them to agree. But since the data doesn't support it, I'm worried that when we appoint a more diverse Board and the returns don't wear out, that group is going to be stigmatized. And I think that's the worst thing that could happen.

So, I think the social justice argument is compelling and I'd elevate it. And I'd say, look, the economics -- I'll bet there's going to be a random distribution, you know, every individual is a little stronger or weaker around, you know, [laughs] convincing their colleagues that this is a good or bad acquisition and so on. So, leave that to the side and say, it's correct, it's right.

Hartzell: Yeah, that's good. I agree. Yeah.

Sciple: So, I've got a couple of closing questions. So, first of all, on the ESG question, you mentioned you serve on multiple boards, you're Vice Chairman at Constellation, study this area. How do you think that there's this conversation around, the move to stakeholder capitalism, you mentioned the business roundtable, how do you think corporate governance truly is different, say, 10 years from now versus a lot of these conversations we're having? How much do you think is implemented and what do you think are the changes that we could expect?

Cunningham: I think that my concern is that, just as I said a minute ago about the rhetoric of economic outperformance, I'm a little concerned about the rhetoric of a new capitalism or stakeholder capitalism or a new hierarchy and which constituents count. And my focal point for that concern is the business roundtable's mission statement signed last August by 180 or so CEOs of major companies. They identified a list of priorities in corporate administration and what's striking about the list is that its shareholder is at the bottom, it starts with employees and then it includes customers, communities and shareholders are at the bottom. And there's a lot of news made around how this is a new approach to capitalism; it's not shareholder capitalism, its stakeholder capitalism.

What bothered me about that is that there's actually nothing new in the statement. And I think it's misleading to describe it as this new thing. The statement is almost a carbon copy of the 1943 credo adopted by Johnson & Johnson, one of the most shareholder capitalist companies in the world. But what they said in 1943, and what they still say now, is that the reason we're in business is to provide excellent products for customers; the doctors and patients. And then it's to build a workforce and train people and provide a livelihood, and then to protect our communities and finally to deliver a return to shareholders. And I just think that's how it's always been, that a company earns profit for its shareholders by catering to its customers and rewarding its employees. And I think a thoroughgoing embrace of that is fair and fine, and I worry that what the business roundtable did was a little more political than real. And that it doesn't add value to the conversation or progress in governance, but it's either a bit of a whitewash or a bit of a dodge or a bit of a leave us alone. And so that's my concern around it.

And you know, how different and so in, it lost me. I think the question of race and gender is, I think, the highest priority. And maybe that's in the social sector. The bit about the environment; I mean, that's a serious concern. My overall critique of the ESG movement is that we have had the engagements of this sort throughout American economic history under different labels. Before ESG, it was corporate social responsibility, before that the stakeholder model. And so, there's a lot of history to this, and I think it's an endless tension about how much emphasis ought to be put on the bottom-line and shareholder returns versus those intermediate ones in terms of revenues and labor costs. And I think we have to continue to have those conversations.

But I guess my big concern is how the current dialogue is dominated by index investors whose business model is such that they can really only speak to very high-level general propositions. And I think it's because they own 4,000 companies. And so, they can't really take an informed position about whether at Constellation, that the Chairman and the CEO ought to be different people, or whether at Berkshire there are too many friends and family of Warren Buffett. They can't do that, so they end up saying, all Chairs and CEOs need to be split or you need an independent outside, all boards need to be a majority of independent. And I worry about that in corporate governance, I worry about it even more in environmental, maybe even in social, where it's just easier for BlackRock's Larry Fink to say, here's how all companies need to be, because he can't afford to go in and look individually. So, that's my greatest concern is that the indexers -- I mean, the business model is wonderful in a way, let's deliver the market for ordinary people at virtually no cost or risk. But then when they inject themselves in environmental, social, governments and other things, they can only do it wholesale, [laughs] and it concerns me. That's one of the motivations for the quality shareholder project too, because I think that cohort has better incentives to make tailored recommendations around certainly governance. And I think it's also true to other social and environmental stuff.

Hartzell: Yeah.

Sciple: Yeah, to kind of just to conclude, also I had a couple of last questions on Warren Buffett. You know, we're at a time now, it seems like every 20 years we get this idea that value investing is dead, or that Warren Buffett has lost it and all that. Where would you put the current narrative around Buffett as compared to where these discussions have been in the past?

Cunningham: I think you're exactly right; you see this cyclicality. And Warren is one of a kind, and he becomes a great target for criticism. And so, [laughs] he's contrarian and people criticize and like to, sort of, follow the lead and be contrarian to. And he still -- so, he's iconic and truly generous, he is a class by himself. And even the people who have accepted or share the intellectual outlook, long-term committed shareholders, are a very small portion of the total population. I'd say my estimate, based on research, is that they represent about 15% of ownership of equity cap, the quality shareholders do. 40% is by indexers, 40% is by transit; and 5% or so in varying combinations is held by activists. So, it's a rare and lonely [laughs] -- it's a small and kind of lonely community. On the other hand, there's a lot of collegiality, and there's a thick ecosystem and people know each other and tend to see each. And that is part of the reason why Motley Fool has been so successful.

And we weather the storms. And so that whole cohort. Well, in 1999, we failed here; 2008, you failed there; and 2020, you failed here, you know. And the research, I mean I think this is very interesting, the research on, can value systematically outperform versus indexing, is vibrant, we've seen it endlessly. I think it's inconclusive; others draw stronger conclusions about what they've seen in the evidence. But to be sure, the relative delta varies over time. And of late, I guess, the value crowd lags, you know, because the FANGs have just been so, kind of, phenomenal.

But you know, where we are with views of Warren and views of the school he represents, do go in a bit of ebb-and-flow, at least externally. I mean, I think the people -- [laughs] readers of my books, let's say, they tend to be steady believers [laughs] and practitioners throughout the 25 or so years that I've been doing ...

Sciple: Right. And that brings me to my last question. Obviously, attitudes throughout Warren Buffett's career of whether he's got it right or wrong, have fluctuated. But he's 90 years old, we're looking now back more to his career more than we're looking toward the future. You know 20, 30 years from now, what do you think is the lasting legacy of Warren Buffett for investors?

Cunningham: To me, you know, let me start out the conversation identifying four possible answers to that question: Investment prowess, management prowess, philanthropic generosity, or educator. I'd add a fifth. And I think that his greatest achievement and the thing for which he'll be most greatly remembered is building a company that was bigger than himself. Again, I'm very bullish on Berkshire Hathaway. I think it'll be here in 30 years. I may be wrong. But I think that certainly he deserves credit for that. You know, he poured his ego into Berkshire Hathaway, his cultural fingerprints are all over it in terms of modesty, decentralization, thrift, permanence. He's designed it, and it's in his image.

And yet 400,000 employees, 800 subsidiaries, $500 billion of assets. This diverse, massive organization gets all that, and it is so big and powerful and I think magnetics that it'll last a long time. So, it's partly a prediction, partly a hope because I think it's magnificent that he was able -- I mean, this company is so distinctive and so special, and so just absolutely unusual in corporate America that I hope it continues, and I think it will. And I think if it does, that would be his lasting legacy.

Sciple: All right. Well, Lawrence, thank you so much for taking the time to sit with us. If folks want to go find your books or keep track with what you're doing, where can they go find your work?

Cunningham: I guess the best place is my school, George Washington University, you put in my name in that, you'll get my bio and links to -- I'm running an initiative on the quality shareholder program, you'll get links to a lot of the literature around that. And I've got, obviously, lots of books for sale [laughs] on Amazon, and lots of my articles are free on the SSRN. So, I think just googling my name will yield plenty of avenues.

Hartzell: Great. Well, thank you very much. We appreciate it, Larry; it was great catching up again. We appreciate all your insights on Berkshire Hathaway and social, governance and all that kind of stuff. Have a wonderful rest of your Summer and a great school year, whether it be virtual or whatever else, and hopefully we'll see you at a Berkshire Hathaway annual meeting in the near future in-person.

Cunningham: Always a pleasure. Thank you, both, very much.

Sciple: As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Steve Broido for mixing the show. For Buck Hartzell and Lawrence Cunningham, I'm Nick Sciple, thanks for listening and Fool on!