Comeback Crusader

ILLUSTRATION FOR TIME BY THOMAS FLUHARTY

(2 of 3)

Stock options are another Buffett hot button. While that Sun Valley conference was under way last summer, Coke's board voted to begin treating the options it grants to executives and other employees as an expense that reduces reported earnings which is how Buffett and increasingly others say they ought to be accounted for. Coke was just the third large company to make the change, preceded years earlier by Boeing and Winn-Dixie Stores. Since Coke made the move, about 150 others have piled on. The Financial Accounting Standards Board is widely expected to begin requiring such treatment of stock options within a year or two. Buffett "is so sound and so right about so many issues that eventually people catch up to what he's been saying," says Barry Diller, CEO of USA Interactive and a fellow director with Buffett on the boards of both Coke and Washington Post. As in his investing, Buffett sticks to his principles even during periods when they're unpopular, and expects to be proved correct in the long run. Then others follow.

Buffett is in fashion today but that wasn't the case just a few years ago. In December 1999--about the same time Buffett presciently warned in FORTUNE that stock-market returns were on the verge of a dramatic and long-lasting slowdown a writer at Barron's stated what many were thinking: "Warren Buffett may be losing his magic touch." As the Internet craze mounted through the '90s, Buffett had become a renowned technophobe. But consider this feat: during the past three grueling bear-market years, Berkshire stock has soared nearly 40%. Those remarkable returns came during a period when hundreds of companies went bankrupt and millions of investors, including honchos like Bernie Ebbers at WorldCom, were wiped out.

Buffett's investing savvy during those hard years has made his giant insurance businesses, Geico and General Re, the envy of their industry. While other insurers have lost billions investing the premium payments they receive, Berkshire's insurance units have benefited from Buffett's deft hand. For example, he got General Re to dump all its stocks before Berkshire bought the company in December 1998, ahead of the market's collapse. Now Geico and General Re have deep enough pockets to ride out the insurance industry's famously volatile cycles and capture more business in the long term as struggling firms fall away. "Over the past 18 months he's put his insurance business in a great position," says Thomas Russo, a money manager, long-time Buffett watcher and Berkshire shareholder at Gardner Russo & Gardner. "He alone has the capital, and I don't think Berkshire's stock price reflects that yet."

Buffett's influence over the influential is what gives his views so much currency. His position on an issue inspires strategy in places where he holds no board seat or investment stake. Look again at the earnings-guidance issue. Daft sought out Buffett. McDonald's made its announcement after CEO Jim Cantalupo had turned to one of his advisers Don Keough, a former long-time Coke executive and FOB (Friend of Buffett). Keough had adopted Buffett's view. On the question of expensing stock options, Cathleen Black, president of Hearst Magazines, who sits with Buffett on the Coke board, has broached the idea at IBM, another firm at which she serves as a director. Diller says he intends to stop granting stock options altogether and look for another incentive plan. Doris Christopher, who sold The Pampered Chef to Berkshire, says she has been captivated by Buffett's willingness to lose money in the short run to preserve a firm's reputation like, say, eating the cost of shipping a product express after a customer has had it on back order. She advocates that approach at three nonprofit groups at which she is on the board.

Buffett declined to be interviewed for this story lest, he says, he be besieged by follow-up media requests. No time for all that while he's hard at work saving American business from itself. Yet he doesn't view himself as any sort of caped crusader. "I've never seen him try to push an agenda," says Black. Buffett's efforts tend to be understated. But now that he's becoming more vocal about his beliefs, he can expect more opposition. In an op-ed article in the Wall Street Journal, Harvey Golub, a director at Dow Jones and former CEO of American Express, has already argued that stock options should not be regarded as an expense on a company's books. Intel chairman Andy Grove spoke for much of the tech world last September when he told the Conference Board that "stock options are a red herring. The real issue is excessive compensation for executives. [Expensing options] will not be an effective deterrent to abuse." Meanwhile, many investors who can't afford to hold a stock forever value quarterly guidance because it helps prevent nasty profits surprises that can whipsaw a stock's price.