Chris Douglas

Gin!

Filed By Chris Douglas | June 26, 2006 1:05 PM | comments

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That's what you say the moment a hand of cards comes together in a game of gin rummy, and you lay them down perfectly for all to see. It's the hand Warren Buffet played today in donating 37 Billion, or 85% of his fortune, to the Bill and Melinda Gates Charitable Foundation.

But the press is paying attention to the set of 3 cards (Buffet, Bill Gates and Melinda, joining together in a endeavor of significant charitable impact), not the run of 4 cards that Buffet played for Berkshire Hathaway and for Gates from a business perspective. THAT's where the other part of the story is.

By donating the largest stake of Berkshire Hathaway to the foundation of Bill and Melinda Gates, he transfers controlling shares of Berkshire Hathaway, a diversified holding company, to a Charitable Institution. What is the effect?

1.) Buffett produces a general management solution to his succession planning at Berkshire Hathaway, where the question of the hour has always been: After Buffett, who will keep watch over the diverse holdings of Berkshire Hathaway? Now we have the answer. Bill Gates. Gates' control of the Foundation, which in turn will surely be the largest shareholder of Berkshire Hathaway, means that he will be ever present in the deliberations of Berkshire Hathaway, whether some future management wants him there or not. You can be sure, in this case, that the Gates Foundation has agreed NOT to sell the Berkshire Hathaway stock, but instead to retain it.

2.) Buffett sidesteps the estate tax, which otherwise could direct (depending on legislative changes) up to 55% of his holdings to the U.S. Government. In essence, consider that tens of billions of dollars will NOT be going into the U.S. Treasury as a result of Buffett's gift to the Foundation. Likewise, Buffett sidesteps any present or future capital gains taxes on his fortune. And the dividends paid to the foundation for its holdings will also not be taxed.

3.) One of the most successful conglomerates in the world will now be run for the benefit of charity. In fact, the gift of Berkshire Hathaway to the Gates Foundation is good news for other Berkshire shareholders, who have been able to enjoy the fruits of Buffett's labor without fear of his extracting more than his share. Other corporations have enriched executives far beyond the value they have added, often rewarding mere competence with the fortunes that should be reserved for risk-taking entrepreneurs. A loss and manipulation of shareholder influence has been part of the wholesale enrichment of management at the expense of all others, earning cries of concern from even the Wall Street Journal. Now, with Buffett preserving his block of shares as a whole, and passing it to Gates, a charitable foundation will ride herd on executive compensation at Berkshire Hathaway ever after, ensuring that the company's great value is not robbed and carried off by mere managers.

4.) Finally, as a benefit to the Gates Foundation and to their causes, the base of foundation wealth will be diversified far more than the two company names of Microsoft and Berkshire imply. Remember what happened to the Lilly Foundation when the Lilly stock dropped.... or what happened to Ted Turner's pledge of hundreds of millions to the UN when the value of his holdings at Turner plummetted. While Gates' charitable fortune, resident in the value of the Microsoft stock held his foundation, could drop if Microsoft's place in the world of software takes a hit, the Buffett charitable fortune, though under one stock name, is a highly diversified conglomerate in insurance, paint, burgers, ice cream and, well, you name it. One company or one sector could take a hit, and the charitable fortune will retain it most of its value.

Warren Buffett has put his hand down on the table, and it is an impressive hand not merely for charitable reasons.


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I admit I don't understand half of this, but do you think this would have been necessary, would have happened if the "death tax" had been repealed?

Chris Douglas | June 26, 2006 6:02 PM

Hard to say. Buffett and Gates have both made clear that they are no fans of inherited wealth, so they may, like the Pulliams and other great families, might have gotten rid of a lot of their wealth anyway.

But the estate tax made a necessity of virtue.

Marla R. Stevens | June 27, 2006 7:11 AM

Fascinating read, Chris. I can see that it will make the stock stable in the long run but will it affect it in the short run?
Are there other companies out there in a position that Berkshire was in before the donation whose primary shareholders might take a cue from Buffett?

Chris Douglas | June 27, 2006 5:29 PM

Maybe, Marla. But Berkshire Hathaway is in many ways unique. More attention may be accorded to Buffett's salutary role than to the head of virtually any other company.

I wonder that you think that just because the foundation is charitable that we are assured that there will not be excessive compensation for executives and board members. What part of the history of foundations encourages you in such a belief?

I am also not convinced that Bill Gates will prove a wise investment counselor; his proven talents lie elsewhere, in restrictive marketing schemes.