Berkshire Hathaway and Daily Journal Corporation appear to have very little in common.
Berkshire Hathaway is a massive conglomerate with a market capitalization of nearly $900 billion. Daily Journal’s operations include a legacy legal newspaper publishing business and small software company. Its market capitalization is approximately $540 million. The only reason these two companies are mentioned in the same article is because of Charlie Munger’s impact on each of them. In both cases, Mr. Munger’s unique personality and perspective shaped these companies and left an imprint on the corporate culture.
How long will Mr. Munger’s influence last at Daily Journal? Less than six months after his death, there are reasons for concern about the corporate culture. Top management and the board of directors have no meaningful ownership interest and it appears that the company is moving toward a more conventional director compensation program. On May 24, Daily Journal announced that the size of the board will increase from three to four directors and that director compensation will increase by a factor of ten. While the absolute level of compensation, set at $25,000 in cash plus $25,000 in restricted stock units, is hardly egregious in comparison to other public companies, it is an obvious departure from the Munger playbook.
In March 2022, Steven Myhill-Jones joined Daily Journal as Chairman and Interim Chief Executive Officer. He was appointed as permanent CEO in October 2023. According to the company’s latest proxy, Mr. Myhill-Jones earned $330,000 in 2022 and $1,050,000 in 2023. As Mr. Munger’s handpicked choice to lead Daily Journal, I am sure that shareholders have given Mr. Myhill-Jones the benefit of the doubt as he begins what they hope will be a long tenure. However, if I was a shareholder, I would be disappointed that Mr. Myhill-Jones did not use any of his compensation to purchase Daily Journal shares. As of December 28, 2023, Mary Conlin’s modest holding of 100 shares is the only ownership interest among directors and officers.
The Munger system calls for paying directors a nominal sum each year. The previous $5,000 retainer was clearly not enough to compensate directors for their time. However, directors of public companies should not require high levels of compensation as long as they have adequate skin in the game. Let’s take a look at Daily Journal’s ownership interest among directors and executive officers as of the end of 1995, the earliest proxy available on the SEC’s Edgar System:
When you have directors and officers controlling over half of the company, there is no need to pay directors more than a symbolic amount. But when directors own little or no shares, what is their incentive to serve? Personal relationships can play a role, and there’s no doubt that Mr. Munger’s presence on the board prior to his death was reason enough for involvement. But without Mr. Munger’s presence, how can Daily Journal attract qualified directors? If they cannot find director candidates among their existing ownership base and feel a need to bring in directors with software industry experience, they will need to pay those directors for their time. Rasool Rayani, the company’s new director, has significant software experience.
Daily Journal’s plan to grant $25,000 of restricted stock units annually to directors is subject to approval by shareholders at the 2025 annual meeting. Absent such approval, the RSU grant will be settled in cash based on the company’s stock price. By paying directors $25,000 in cash and $25,000 in RSUs, Daily Journal hopes to build an “ownership” mentality, but this type of program is woefully inadequate in terms of building up a meaningful interest for people who are successful enough to contribute as directors. Furthermore, being given shares is a far cry from purchasing shares on the open market in terms of aligning incentives. There is no reason that directors cannot purchase shares of Daily Journal on the stock market like anyone else.
I do not expect employees of a public company to work for below-market wages and Daily Journal is going to face significant challenges attracting qualified software engineers in the years to come. Charlie Munger provided a gift of $1 million of his own shares to seed a stock-based compensation system for Daily Journal, although this plan has yet to be put into effect. However, $1 million is obviously just a starting point. Daily Journal will either have to spend cash or issue stock to attract highly qualified engineers in the years to come.1 Due to Mr. Munger’s wisdom, Daily Journal has a large stock portfolio that could be drawn upon to invest in the software business. However, issuing some stock to employees might be necessary given competitive pressures and compensation norms in the software industry.
Perhaps I am an idealist, but I do expect directors of public companies to own significant amounts of stock and to be willing to serve as directors primarily to have an influence over their investment rather than as a means to earn additional compensation. This was the Daily Journal’s ethos for decades, with Charlie Munger and Rick Guerin acting as exemplars. It is also the ethos of Berkshire Hathaway which pays nominal cash compensation to directors and does not issue stock.
Berkshire Hathaway is better positioned than Daily Journal to retain its unique culture after Warren Buffett leaves the scene. Berkshire’s board is larger and has a more significant ownership interest. The company’s Vice Chairmen, Greg Abel and Ajit Jain, have large ownership interests in Berkshire. Mr. Buffett’s estate, overseen by his children, will control a large block of stock for a decade after his death. Berkshire is a diversified conglomerate, not a small company trying to compete in the software industry.
Although comparing Berkshire Hathaway to Daily Journal is much more extreme than comparing apples to oranges, I feel uneasy about how Daily Journal’s transition is progressing so far. The fact that the new CEO did not build an ownership interest on his own is disappointing and the new director compensation plan, while not egregious, is not a step in the right direction. It will be interesting to see how Daily Journal’s business and corporate governance evolves in the years to come. As a Berkshire Hathaway shareholder, I am concerned about how long the company’s culture can last. If Daily Journal’s culture fails to last, that is not a great sign for Berkshire’s future culture despite the acknowledged differences between the two companies.
Recent articles about Daily Journal:
- Daily Journal Faces an Uncertain Future, January 4, 2024
- Daily Journal Corporation Deep Dive (pdf), January 24, 2023
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- The company’s shareholders approved an equity compensation plan at the 2024 annual meeting. However, no grants have been made as of the date of the company’s latest 10-Q filed on May 14, 2024. Presumably, the RSU plan for directors must be separately approved based on the language contained in the 8-K dated May 24, 2024 [↩]