Just like school, you have
to do your homework

Last spring, nearly 6,000 enthusiastic analysts, reporters and investors crowded into Omaha to attend what has been called the "mother of all annual meetings." They come to hear Berkshire Hathaway's chairman, Warren Buffett, talk about business.

    Buffett, America's wealthiest investor and one of the nation's most admired capitalists, makes it a practice to stay at the podium until the last question is answered. The Berkshire meeting starts at 10 a.m. and questions roll in until mid-afternoon. At noon, Buffett and members of the audience amble out to the lobby to buy sandwiches and Coca Colas.

    While Berkshire's shareholder meeting is by no means typical, few annual meetings are what they used to be — quick, perfunctory affairs designed to meet the minimum requirements of the Securities and Exchange Commission.

    Corporate annual meetings today can be both entertaining and enlightening, especially for shareholders who come prepared. Getting ready for an annual meeting requires homework but the rewards are many. The exercise will make you a more knowledgeable and successful investor.

    Read company documents for fundamental information on the progress of the company. When reviewing material sent to you, pay attention to sales and earnings trends. Although there may be a few down years, the overall trend for both should be ever higher. Look for any changes, such as new partners or products, entry into new markets or an increase or decrease in a company’s debt level. Read the footnotes, especially any notes regarding pending litigation.

    Finally, check out the auditor's statement. The auditor should affirm that the company’s financial statements reflect the true condition of the company and that the company appears to be a going concern. In other words — no hidden problems exist that could bring the company to its knees.

    It also is useful to read the company’s Form 10-K, which must be filed with the SEC annually. The 10-K sometimes is called the "real" annual report, because SEC reporting rules are stringent. You can get a copy of the 10-K by calling the company’s investor relations department, or the document may be posted on the SEC's Internet service, Edgar.

    Know The Players

    You will receive a proxy with your corporate ballot. The statement contains a brief biography of all board members, reports the salaries of top executives, and explains stock options, bonus plans and other proposals on the ballot.

    Shareholders will want to know if board members are independent or if they merely rubber-stamp the policies and actions of the chief executive officer. Ask yourself if management seems up to the challenges facing the company. Is there a clear line of succession, giving depth to the management team? Do directors and top management own enough stock to put their personal money at risk along with yours?

    When he buys stock, Buffett says, "I always picture myself as owning the whole place. And if management is following the same policy that I would follow if I owned the whole place, that’s management I like."

    Additionally, you want to know if there are major shareholders who don’t serve on the board. Anyone owning more than 5 percent of a company’s stock will be reported in the proxy statement. Even if they don’t serve on the board, major shareholders can influence corporate policy.

    Location And Conduct

    Pay attention to where the annual meeting is held and how it is conducted. Some companies hold bare-bones meetings and others put on stylish affairs. The meeting should be appropriate for the company’s line of business, its image and for its financial condition.

    Ask questions. Be circumspect about a company that squelches shareholder participation. You can learn a lot by asking questions and by listening to the questions of other shareholders.

    If you are lucky, a serious corporate "gadfly" or activist shareholder will attend your annual meeting and pose tough questions. In the early 1990s Salomon Brothers, the New York investment banking house, nearly collapsed due to a scandal involving bond trading improprieties. Because Berkshire Hathaway was a major shareholder in Salomon Brothers, Buffett was enlisted to act as temporary chairman to help the company through the crisis. He did the job for 10 months without pay. At Salomon's annual meeting, Buffett faced a three-hour grilling from analysts, investors and the media.

    Well-known gadfly shareholder Evelyn Y. Davis asked Buffett how he could justify charging $158,000 for the cost of his corporate jet, which shuttled Buffett between Omaha and New York City. "I work cheap, but I travel expensive," Buffett replied.

    Davis also groused about the $25 million in legal fees associated with the resolution of Salomon's problems: "I would be delighted to have you negotiate with (the lawyers), Evelyn. And I think the mere mention of that would be enough to induce a little moderation."

    The repartee between Buffett and Davis was good natured, but Davis raised important points. When thinking of questions you may want to ask, try to clear up any doubts that arose from reading the corporate literature.

    If there was insufficient information on new products, ask what concepts the company has on the drawing boards. Ask who the top competitors will be and how management plans to best the competition. Ask how the company will finance new products, future construction or the costs of branching into new markets.

    If you feel dissatisfied that a question was answered fully, talk to other shareholders after the meeting, especially those who also posed intelligent questions.

    If you wish to put forth a shareholder proposal, start early. Rules for making ballot proposals vary from state to state and company to company.
    When all is said and done, think about what you've seen and heard. Did management seem honest? Did they avoid questions, cover up or divert attention to a safer topic? Did management treat shareholders with respect?

    When asked why thousands of shareholders travel long distances to attend Berkshire Hathaway's meetings, Buffett replies: "They come because we make them feel like owners."

    Janet Lowe is author of "Value Investing Made Easy" (McGraw Hill), "Warren Buffett Speaks" (John Wiley & Sons) and other investment books.