Buffett’s Flock and Berkshire’s Future
Forty-thousand investors, including me, descend on Omaha, Nebraska this weekend for the annual meeting of Berkshire Hathaway Inc., the company Warren Buffett has run for nearly forty years. Many will be asking a proverbial question: “What happens to Berkshire if Buffett gets hit by a truck?” It used to be a genuine concern that the fate of the man and the company he built and controlled were one: with Buffett’s demise went Berkshire.
But after two decades of intensive definition, by words, deeds and training, Buffett has institutionalized Berkshire’s unique culture, methods and processes to a point where it most likely will endure long after Buffett departs. Joe Nocera captured a distinctive point about this when recommending that President Obama read my book, The Essays of Warren Buffett: Lessons for Corporate America: Buffett’s rules of investing are rules to live by, which explains why Berkshire’s shareholders’ meeting, unusual among large companies, draws a large number of shareholders.
Berkshire shareholders know that Buffett, an octogenarian, and the Berkshire board, have formalized a succession plan. It involves splitting Buffett’s job between managing and investing. They have identified and recruited particular people for the two roles. The choices have been kept confidential, 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.
No succession plan, however, can 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 1/4 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 not only flock to the company’s annual meeting by the tens of thousands, they devour with alacrity the annual report (for my notes on this year’s chairman’s letter, see here).
Management and operations follow suit. Berkshire ultimately consists of the ownership of 80 operating subsidiaries (some of which own many multiples more), 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 considering acquisitions, Buffett screens for a corporate culture that fits the existing Berkshire culture, ideally meaning a family business whose founders instilled related values in the workforce. 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. A unique asset results from the distinctive corporate cultures acquired, the pledges of managerial freedom and Berkshire’s continued ownership of acquired businesses. 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.
Berkshire’s practices have also included a no-dividend policy and a very long-term horizon. Some fear that the Gates Foundation will have a different appetite, needing cash to meet philanthropic objectives and therefore potentially preferring dividends and adopting a short-term focus. But cash needs can be met through pre-planned and incremental sales of the stock and gifts may be funded in stock as well. Radical change is not inevitable.
What’s inevitable is that 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 and values celebrated. 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 a 1997 conference I organized that gave birth to The Essays of Warren Buffett: Lessons for Corporate America, it won’t be as bad for the rest of us as it will be for him.