Buffett’s Ultimate Achievement: Berkshire is Bigger than Him

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“What happens to Berkshire Hathaway if Warren Buffett gets hit by a truck?” That question has nagged the company’s constituents for two decades. It used to be a genuine concern that the fate of the man and the company he built and controlled were one. With Warren Buffett’s demise went Berkshire Hathaway. But after two decades of intensive definition, by words, deeds and training, Buffett has institutionalized Berkshire’s methods and processes to a point where it most likely will endure long after Buffett departs. And that’s not only a good thing for Berkshire holders, it is a testimony to what Buffett has accomplished.

Beginning in 1993, Buffett has written about what happens after he’s gone, and he and the Berkshire board have formalized the plan. Since 2005, their succession plan involves splitting Buffett’s job between managing (a chief executive officer) and investing (a chief investment officer). He and the board have identified and recruited particular people for the two roles. Berkshire has always boasted a deep bench on the managerial side; it added necessary strength on the investment side in the past few years. The choices have been kept confidential, of course, but an important job has been done in finding and positioning the most capable successors prepared to accept the challenge of filling some very big shoes.

Lawrence Cunningham The Essays of Warren BuffettNo succession plan, however, can possibly provide for another consequence of Buffett’s departure, which is the disappearance of an unusual ownership structure. Buffett has always been Berkshire’s controlling shareholder, lately with about 1/3 of the voting power, always representing 99% of his net worth. He has been gradually reducing his stake by regular annual transfers to the Gates Foundation, a process that will accelerate in coming years and after his death. The company will thereafter lack a controlling shareholder, which has been an important strength, because Buffett’s word has been his bond. Nevertheless, there are philosophical, operational and strategic considerations which give Berkshire institutional autonomy, endowing it as an organizational machine larger than one human being and greater than the ownership feature of a controlling shareholder.

Despite being a massive public corporation, Berkshire’s philosophical character is defined by a partnership sensibility. Buffett forged that characteristic by stating it repeatedly in his annual letters and acting as the managing partner of a partnership would, explaining business decisions candidly and owning up to mistakes. The appeal to partnership works, as the owners of the company’s equity act more like partners than shareholders: nearly every shareholder on January 1 remains a shareholder on December 31 and an overwhelming percentage of Berkshire shares are owned by people for whom Berkshire is their largest holding. They flock to the company’s annual meeting by the tens of thousands and devour with alacrity the annual report (and my thematically-arranged collection of Buffett’s letters, The Essays of Warren Buffett: Lessons for Corporate America).

Management and operations follow suit. Berkshire ultimately consists of the ownership of 80 operating subsidiaries, whose managers report directly to a single chief executive at a firm with only 9 executive officers. A sense of partnership has deep tacit roots among the two dozen businesses Berkshire has owned for more than 20 years and even more explicit identification among the management and employees of the dozens of much larger companies that Berkshire has acquired in the past 20 years. When selling to Berkshire, those owner-managers all heard the same philosophy and signed onto it. That philosophy gives managers extraordinary autonomy and carries a commitment that Berkshire will retain businesses, not auction them off to make a quick buck or avoid a loss.

No successor senior executive will find it desirable let alone possible to alter that acquisition model. The pledges of managerial freedom and Berkshire’s continued ownership of acquired businesses have created a unique asset. It has made Berkshire the buyer of choice for successful owner-managers ready to sell their businesses. True, one reason that approach worked in the early days was Berkshire’s ownership structure, in which Buffett controlled 40%, which will indeed change. But, crucially, it is the consequence of that ownership structure—the demonstrated value of the model and the built-in group who signed onto it—that institutionalizes the practices, no longer reliant on that ownership structure or that person to sustain it.

No successors will be able readily to radically alter that partnership conception which is thus baked into the company. It will be important for successors to immediately reiterate belief in this model, to ratify the culture, and any executive not doing so will face pressure to get with the program from both shareholders and managers. Therefore it is unlikely that Berkshire would soon lose what is distinctive about it and revert to being just another one of the vast run of large public corporations with standard C-suite cultures. Buffett’s folksy demeanor, Midwest sensibilities and writing style are inimitable. Berkshire’s letters will sound different and the meetings will feel different. But Berkshire will remain, the letters studied and the meetings attended with associated friendships continued.

The greater danger to Berkshire’s future comes not from the eventual absence of Buffett but from the continued pressure to homogenize corporate governance in America. Berkshire’s board has historically embraced the partnership model, boasting directors who were savvy and knowledgeable and had a clear conception of the various roles in corporate life: managers as stewards, shareholders as owners, and directors as overseeing that relationship. Berkshire’s board also bought the partnership philosophy, manifested in high levels of director ownership of the stock as a percentage of total shares and as a percentage of director net worth.

But such expertise and interest as desirable director traits have been demoted by governance gurus in the past 20 years in favor of independence and diversity. A singular corporate governance model has emerged, often with a flavor-of-the-day that every company is said to need, such as age limits for directors, staggered boards or their repeal, separating or combining the roles of chief executive officer and chairman. Berkshire has resisted such fads, but some of the reforms have been enacted into law, which is why it now has numerous outside directors without adhering to longstanding tradition that called for Berkshire directors to own large amounts of company stock. The incumbent board, and Buffett’s executive successors, must be vigilant in defending the flexibility needed to assure preserving Berkshire’s uniqueness.

Warren Buffett is sui generis and there is no other company like Berkshire. The company cannot be replicated and the man cannot be replaced. But having infused the business with a set of transcendent values, the company promises to survive the man. As usual, Warren’s own words seem most apt: “The special Berkshire culture is deeply ingrained throughout our subsidiaries, and these operations won’t miss a beat when I die.” We all hope the proverbial truck is another decade or more off, and will lament its arrival whenever it comes. Yet as Warren quipped at the 1997 conference where we introduced The Essays, it won’t be as bad for the rest of us as it will be for him.

  • Martin Conder

    Whilst we all hope Buffett will continue to manage Berkshire forever, there is one aspect of the inevitable future transfer of ownership which it seems is not often considered. To date Buffett has been hoarding assets on the basis that he can allocate the capital better than anyone else. He doesn’t pay a dividend and only exceptionally buys back Berkshire stock. He avoids issuing new stock and so doesn’t feel a pressing need to get the stock price up nearer to intrinsic value. But as a large portion of Berkshire transfers to the Gates Foundation a different dynamic might emerge. Buffett wants his legacy to be used effectively and that means it needs to be spent. The Foundation will therefore need dividends or a good price for it’s stock to generate the cash it needs. A very different financial strategy for Berkshire could therefore be required.

    • beyondproxy

      Martin, great points. Capital allocation priorities will almost certainly be reevaluated at a post-Buffett Berkshire. We trust the Berkshire board to arrive at the best decision.

      • http://twitter.com/martinconder Martin Conder

        To take this one step further, Buffett is open about the fact that a few Berkshire owned businesses are not really earning their keep but that overall this is a price worth paying to attract the best new acquisition opportunities. But if there is increased pressure to produce cash returns to shareholders there must, at some point, be a huge temptation to review this strategy. At least that is what I would feel, but then that is why I will never be asked to run Berkshire :)

        • beyondproxy

          Berkshire will change gradually, so there will likely be few big capital allocation changes in the near future. Over time, all options might be on the table.

          It seems that as long as the underperforming businesses are not losing money, Berkshire is likely to keep them.