Liquidity and Control at Buffett’s Berkshire Hathaway

Warren Buffett’s ownership of Berkshire Hathaway is skewed heavily towards commanding greater voting power rather than a larger slice of the economic interest. He values control more than liquidity and is delighted to have shareholders who prefer liquidity to control to stake their money accordingly.   It is interesting to see the corporate governance tools used to create this structure and precisely how the voting power and economic interests are determined. 

Berkshire Hathaway, like many other corporations, has multiple classes of stock with different economic and voting rights. Berkshire’s Class A has 10,000 times the voting power as its Class B and 1,500 times the economic interest.  All shares are eligible to vote on most shareholder voting matters and there are no further distinctions as to economic rights, such as dividends or liquidation payments. Market prices generally reflect the economic rather than the voting ratio: the Class A shares recently traded at $170,000 per share while the Class B trade at $113 (very close to 1500-to-1).

Many stockholders, including Buffett, own some Class A and some Class B, in part because they exercised the right to convert A to B to give gifts and otherwise manage estate planning.   It is easy to see what portion Buffett or another shareholder has of each Class, simply his number of shares of a Class divided by all shares of that Class. Buffett, for example, owns about forty percent of Berkshire’s Class A shares and a small number of the Class B.

It is more important to know what percentage of the aggregate voting power and economic interest any given shareholder’s stake represents.  So: what percentage of the aggregate voting power and economic interest does Buffett command?  For Berkshire, the answer can be computed using the following formula that reflects the relative weight of the A compared to the B in votes and payouts:

 

Voting Power    =

Number of A Shares Owned + Number of B Shares Owned / 10,000

Total A Shares Outstanding + Total B Shares Outstanding / 10,000

Economic Interest =

Number of A Shares Owned + Number of B Shares Owned / 1,500

Total A Shares Outstanding + Total B Shares Outstanding / 1,500

 

Applied to Buffett (using the most recent proxy statement figures for share information):

 

          Buffett’s Voting Power =

    350,000 + 3,525,623 / 10,000      

892,657 + 1,126,012,136 / 10,000

= 34.9%

 

Buffett’s Economic Interest =

      350,000 + 3,525,623 / 1,500

892,657 + 1,126,012,136 / 1,500

= 21.4%

 

Conversion charts can be created to show the voting power and economic interest of given levels of A and B share ownership.  The following assume the same figures stated above, which can change from time to time as Class A shares are converted into Class B shares or other capital shuffles occur.

 

Class A Power

Shares % ofClass VotingPower EconomicInterest
  250  — 0.04 0.02
  500 .056 0.05 0.03
1000 .112 0.1 0.06
2000 .224 0.2 0.12
3000 .336 0.3 0.18
4000 .448 0.4 0.24
5000 .550 0.5 0.30
6000 .662 0.6 0.36
7000 .784 0.7 0.42
8000 .892 0.8 0.48
9000 1.00 0.9 0.54
10,000 1.12 1.0 0.60
15,000 1.68 1.5 0.91
30,000 3.36 3.0 1.82

                                                                                                 Class B Power

(shares in millions)

Shares % ofClass VotingPower EconomicInterest
  1 0.1 0.04 0.01
  5 0.4 0.20 0.05
10 0.9 0.42 0.1
20 1.8 0.82 0.2
30 2.7 1.22 0.3
40 3.6 1.62 0.4
50 4.4 2.02 0.5
60 5.3 2.42 0.6
70 6.2 2.84 0.7
80 7.1 3.24 0.8

 

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4 Responses

  1. Actually, it’s not that simple.

    To calculate voting power, one must – like courts in New York – use something like the Banzhaf Index of Voting Power. See, e.g., See, Banzhaf, Weighted Voting Doesn’t Work: A Mathematical Analysis, 19 Rutgers L. Rev. 317 (1965); Iannucci v. Board of Supervisors, 229 N.E. 2d 195 (1967)

    The reason is that voting power does not necessarily correspond to the percentage of the votes each person can cast.

    To take a trivial but illustrative example, if another shareholder had 51% of the total votes (calculated as above), Buffett’s Voting Power (with 34.9% of the votes) would be zero.

    On the other hand, if another large shareholder had 49.5% of the total votes (calculated as above), and most of the other shareholders had about 1%, Buffett’s voting power would be very small, and roughly equal to everybody else’s, since 49.5% plus 34.9% of the votes is no better or more important than 49.5% plus 1% – both are enough to produce a simple majority.

    PROFESSOR JOHN F. BANZHAF III
    George Washington University Law School
    2000 H Street, NW, Stockton 402
    Washington, DC 20052, USA
    (202) 994-7229 // (703) 527-8418
    http://banzhaf.net/

  2. Lawrence Cunningham says:

    John:

    You fail to distinguish between power and control. Power is the capacity to exert control. Someone entitled to cast votes has voting power even if unable thereby to dictate the outcome (i.e., control). Just because a group commanding 80% of the power can control the outcome does not mean that those with 20% have no power though they lack control.

    You also assume a majority voting rule which may not be the case. On many matters these days, non-binding shareholder resolutions are put before meetings that count as success for proponents even when supported by only 20 to 30 percent of the voting power. At Berkshire, moreover, an agreement provides that, if Buffett were to command a majority of the voting power on a given matter, he would cast his votes in proportion to the voting of the other votes cast.

    It is not simple at all, but quite complex.

  3. With all due respect, it was not I who failed “to distinguish between power and control.” You calculated what you repeatedly called “voting power.”

    For almost 50 years, the words “voting power” have been generally understood, in both legal and political science circles, to mean the ability to affect the outcome by and through voting (and only through voting).

    That’s why the Banzhaf Index of Voting Power has been widely used – by me and by many others – to calculate voting power in a wide variety of situations (e.g., weighed voting, the Electoral College, recent elections in Great Britain, under the EU Constitution, etc.), why it is taught in so many colleges (including even at GWU) as well as in high schools, why many people have written computer programs to calculate Banzhaf voting power in situations where it is not apparent, and why the term appears so often on the Internet and in literature searches.

    You also assert that “Just because a group commanding 80% of the power can control the outcome does not mean that those with 20% have no power though they lack control.” But I think that if, under all circumstances, someone’s vote can never affect (one way or the other) the outcome, most people would say his voting power is zero.

    Strangely, exactly such a situation existed for many years in Long Island, NY. There were 6 legislators who each cast a number of votes based largely upon population. Until I did the calculations, no one realized that 3 of the 6 had no voting power – no matter how any of them voted, their votes could never affect the outcome. Not surprisingly, it resulted in a court case. To understand the underlying theory and the mathematics, see: “The Original Banzhaf Power Index Problem”
    http://www2.fiu.edu/~rosentha/MGF1107/Nassau.htm

    You also note that some shareholder resolutions may be counted as a success by their proponents even if they fail, often by an overwhelming number of votes. That of course is true, but one doesn’t measure “voting power”mathematically, as you purported to do, based on psychological concerns and factors, how much publicity a proposal received, whether the corporation nevertheless got the message and later made changes on its own, etc.

    You are correct that voting power depends on whether the system requires for passage a simple majority vote, a 2/3 or other super majority vote, etc. That’s why the distribution of voting power has to be calculated separately depending upon the percentage of votes needed for passage – and therefore why Buffett’s voting power cannot be calculated in a vacuum according to your simple formula.

    By the way, that’s also why I was able to argue successfully about 50 years ago, while I was still in law school, that “Weighted Voting Doesn’t Work: A Mathematical Analysis” [19 Rutgers L. Rev. 317 (1965)]

    PROFESSOR JOHN F. BANZHAF III
    George Washington University Law School
    2000 H Street, NW, Stockton 402
    Washington, DC 20052, USA
    (202) 994-7229 // (703) 527-8418
    http://banzhaf.net/

  4. For anyone who may still be following this discussion of voting power, a very recent analysis/study of the Banzhaf Index can be found at “The Banzhaf Value in the Presence of Externalities”.
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2393478

    So, what I managed to create while only a law student is still being studied almost 50 years later!