Author: Lawrence Cunningham

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What’s Buffett’s Secret to Great Writing?

symposium-coverWe all write more than ever today, but do we communicate well?  As one group, corporate directors, pondered how to communicate effectively to shareholders, they  turned to the gold standard.  They wondered, what most distinguishes Warren Buffett’s annual missive to Berkshire Hathaway shareholders, and asked me, as a student of these writings for two decades, for the answer.

Clarity, wit and rationality are hallmarks to emulate, I said, along with how Buffett personally pens lengthy sections to read more as literary essays than corporate communications.

But, far more important, these attractive qualities are products of a deeper distinction with greatest value. Every Buffett communiqué has a particular motivation: to attract shareholders and colleagues—including sellers of businesses—who endorse his unique philosophy. Tenets include fundamental business analysis, old-fashioned valuation methods, and a long time horizon.

A recurring motif of Buffett’s writing is the classic rhetorical practice of disagreement. Buffett recites conventional wisdom along with multiple reasons why it is inaccurate or incomplete. He then differentiates Berkshire with themes like autonomy, permanence, and trust.

In a new article I wrote at the request of the National Association of Corporate Directors (available free here), I parse recent examples to show that Buffett’s dispatches often work on several levels simultaneously. Think of circles on a dartboard, with the bull’s-eye as Berkshire’s distinctive practices, which Buffett relentlessly explains. Surrounding that core explication, in concentric circles, Buffett lauds specific Berkshire businesses or personnel, contrasts their industry or competitors, and opines on related public policy debates.

By arguing in this artful manner, Buffett hones Berkshire’s corporate culture while answering rivals and critics alike. Leaving an unmistakable effect on the conglomerate’s millions of owners, managers, and employees, Buffett’s essays are a model of tone-at-the-top governance.

Buffett’s essays are rich with history, putting current debates in broad context, and steeped in statistics, anchoring argument in data. Buffett contrasts and compares; jokes and quips; and prefers to praise by name but criticize by category. Even when confronting critics, Buffett’s essays avoid sounding defensive.

Above all, the work expresses who Warren is—a confident, astute and joyous capitalist. Yale University writing professor William Zinsser says that “Motivation is at the heart of writing.” Buffett loves Berkshire, his curated life’s work defined by unusual shareholders, adroit managers, and idiosyncratic principles. Munger has commented: “Warren’s whole ego is poured into Berkshire.”

More than the elements of style, such motivation is a gold standard worth aspiring to.

Download the full article free here.

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In 1996, based on a law review symposium they led together, Warren Buffett chose Lawrence Cunningham to compile his famous shareholder letters into the book, The Essays of Warren Buffett: Lessons for Corporate America, now in its 4th edition and sold worldwide in a dozen languages.

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Berkshire’s Blemishes: Lessons for Buffett’s Successors, Peers, and Policy

Columbia University has published my most recent research paper, available free on SSRN (registration required): “Berkshire’s Blemishes: Lessons for Buffett’s Successors, Peers, and Policy.” Here is the abstract.

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Berkshire Hathaway’s unique managerial model is lauded for its great value; this article highlights its costs. Most costs stem from the same features that yield such great value, which boil down, ironically, to Berkshire trying to be something it isn’t: it is a massive industrial conglomerate run as an old-fashioned investment partnership. An advisory board gives unchecked power to a single manager (Warren Buffett); Buffett makes huge capital allocations and pivotal executive hiring-and-firing decisions with modest investigation and scant oversight; Berkshire’s autonomous and decentralized structure grants operating managers enormous discretion with limited second-guessing; its trust-based culture relies on a cultivated vision of integrity more than internal controls; and its thrifty anti-bureaucracy means no central departments, such as public relations or general counsel.

Delineating the visible costs of Berkshire’s model confirms the desirability of tolerating many of them, given the value concurrently generated, but also reveals ways to improve the model—a few while Buffett is at the helm but mostly for successors. Current reform suggestions include hiring a full-time public relations professional at headquarters and more systematically developing senior executives; suggestions for future reform include enhanced subsidiary compliance resources and separating the identity and personal opinions of top executives from the corporation and its official policy.

Besides helping Berkshire, the review and suggestions will help managers of other companies inspired by Buffett’s unique managerial model and policymakers who should study it. Implications for peers and policymakers include highlighting flexibility in corporate governance, the efficacy of the conglomerate form, and especially the value of strategies that produce long-term thinking among shareholders and managers alike.

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Trump v. Mahr: Another Donald Contract Folly

(Credit: Ethan Miller/Getty Images)

(Credit: Ethan Miller/Getty Images)

In 2012, Donald Trump, flirting with a run for the presidency of the United States and criticizing its incumbent, Barak Obama, pressured the President to confirm his U.S. citizenship by publicly disclosing his birth certificate.

Despite Obama having done so, Trump sustained the pressure, posting a video on the internet on October 24, 2012—the last week of the election campaign—in which he offered to pay $5 million to Obama as consideration for the President publishing his college and passport applications and records.

Trump was serious, even suggesting charities, clarifying his goal of producing the information, and committing to pay within one hour. The offer also had a deadline: October 31, 20012 at 5:00 p.m. That hour having come and gone without Obama accepting, the offer terminated Obama’s power of acceptance.

On January 7, 2013, the comedian and political talk show host, Bill Maher, appeared on the Tonight Show with Jay Leno. After calling Trump a liar and racist, he characterized some of Trump’s public ramblings as “syphilitic monkey.” Then came what Trump portrayed as an offer: “suppose that perhaps Donald Trump had been the spawn of his mother having sex with an orangutan. . . . I hope it’s not true . . . , but, unless, he comes up with proof, I’m willing to offer 5 million dollars to Donald Trump . . . that he can donate to a charity of his choice. . . .”

Trump formally submitted his “acceptance” of this “offer” the next day, sending a copy of Trump’s birth certificate attesting that he is “the son of Fred Trump,” and naming the charities designated as beneficiaries of the $5 million. In Trump’s view, a contract was formed “the moment the Acceptance Letter was sent,” a reference to the usual rule of acceptances, which makes them effective on dispatch (affectionately referred to as the “mailbox rule”).

On February 4, 2013, Trump sued Maher. The lawsuit, of course, was an inherent loser, and Trump soon withdrew it. But in their filings, Trump’s lawyers got much of contract doctrine right, in both the Obama background and Maher interactions.

In relation to Obama, the lawyers correctly noted that (1) an offer creates the power of acceptance, (2) an unrevoked offer may be accepted by following the route to acceptance stated in the offer and a binding contract results, and (3) that the power of acceptance terminates upon any expiration stated (or upon the offer’s revocation of it, the offeree’s rejection of it, or the offeror’s death).

So why did Trump file such a patently frivolous lawsuit?  For a hint and another example of how Trump is a prolific frivolous litigator in American courts, see this companion post.

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Donald Trump, Prolific Frivolous Litigator, Part I

Donald Trump (credit: Business Insider)

Donald Trump (credit: Business Insider)

For about two years, Chicago’s skyline has had the letters T R U M P adorning a showy luxury building the presumptive Republican presidential nominee put up during the financial crisis.   While locals led by Mayor Rahm Emanuel recoiled at the Donald’s bad taste in design, lawyers and citizens alike should recall some of the poor judgment, tone deafness, and ignorance of the law he displayed during the long construction process.

As told in my book aimed at new or aspiring law students, Contracts in the Real World: Stories of Popular Contracts and Why They Matter, Donald Trump thought the so-called “Great Recession” of 2008-09 so calamitous to count as an “Act of God.” He was in the midst of building what would be one of Chicago’s tallest skyscrapers, rivaling the old Sears (now Willis) Tower, a combination luxury hotel and condominiums.

To finance the project, Trump borrowed $640 million from lenders led by Deutsche Bank in February 2005. By the end of 2008, Trump had only sold condos netting him $204 million along with others under contract that would yield another $353 million. That left him facing a shortfall of nearly $100 million when he was obligated to repay his lenders $40 million per month. Trump cited the Great Recession as an excuse to delay making monthly payments. The banks refused to accept the excuse from timely payment, so Trump, a prolific litigant, went to court. Read More

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Buffett’s Timeless Investing Principles

 

WB MOAFWarren Buffett distills investment success into three words—margin of safety—and tells investors to take one of two approaches: either focus on value or buy an index fund. Buffett, the “Oracle of Omaha,” has been steadfastly giving such sage advice for decades, through calm and choppy markets alike.

In fact, twenty years ago I hosted Warren and Charlie Munger, his Berkshire Hathaway partner, for a two-day conference at Cardozo Law School that launched an international best seller, The Essays of Warren Buffett: Lessons for Corporate America. At the time, Warren’s investing style was unfashionable. Critics increasingly said he’d lost touch, misunderstanding the budding “new economy” and its “game-changing” technology.  Buffett foresaw exceedingly high stock prices—and soon proved correct.

After recently stumbling on the transcript from that gathering, I published an annotated version, The Buffett Essays Symposium: Annotated 20th Anniversary Transcript.  It’s packed with timeless gems for every investor—then and now, in ups or downs—including these three pivotal propositions. Read More

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Dale Oesterle on Buffett & Munger 20 Years Later

35Editor’s Note: Dale Oesterle (Ohio State U.) contributes an extended version of his current reflections on The Buffett Essays Symposium: A 20th Anniversary Annotated Transcript, recently published by The Cunningham Group and Harriman House. Prof. Oesterle (right) participated in the 1996 symposium’s panel on takeovers and engaged in extensive colloquy with Berkshire Hathaway Vice Chairman, Charlie Munger, sitting in the front row (left).   67

Much has changed since my exchange with Mr. Munger in 1996.  Relevant to my comment, leveraged acquisition practice, and our view of the social utility of leveraged acquisitions has changed significantly.

First, true hostile tender offers, tender offers that close hostile, are dead.  By hostile, I refer to tender offers that are made and executed (closed) without the consent of the target board of directors.  An offer closes hostile when the hostile bidder, buys enough stock to replace vote out a resisting target board.  Financial buyers were “raiders” funded by “LBO Funds” [Leveraged Buy-Out Funds].

We have a very infrequent current substitute in which hostile tender offers are made contingent on the success of a hostile proxy contest. But the word hostile now attaches to tender offers that are, in essence, harsh opening bargaining positions to pressure sitting boards of the target to negotiate to a friendly conclusion. These bids too are rare, however.

What now survives of the old 80s hostile acquisition is a rather timid substitute.  Hedge funds buy small stock stakes so as to not trigger takeover defenses and, as “activist shareholders,” attempt to persuade a sitting board to engage in major transactions or financial reorganizations.

In most cases, the incumbent board and the new active block shareholder negotiate to some sort of compromise.  Incumbent boards that refuse any and all changes face a challenge for one or two board seats and “shark attacks”, a growing group of shareholders, other hedge funds and even institutional investors, that is increasing disturbed by the board’s position.  The common public attack, fueled by the same group of lawyers, politicians, and pundits that attacked raiders, now focuses on hedge funds and “activist shareholders.”

True leveraged acquisition became friendly, run by “PE [Private Equity] Funds,” and often focused on distressed companies negotiating purchases short of inevitable or impeding bankruptcy.  PE Funds also attracted the scorn of the public for their often radical re-organization efforts;  workers were fired, factories closed or sold, and headquarters moved. Read More

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Scalia and The Sherlock Holmes Canon: Canine Silence

Justice Scalia Speaking at GW

Justice Scalia Speaking at GW

While Justice Antonin Scalia‘s life is celebrated in a Catholic Mass of Christian Burial tomorrow in Washington by family and close friends, his legacy is being elaborated by the wider circle of former clerks, lawyers, and judges who knew him, including by many of my GW colleagues who clerked for him or other Justices.  Agree or disagree with the famously feisty jurist and scholar, his life and legacy are monumental.

Coincidentally, a new article, “The Sherlock Holmes Canon,” brought to my attention on the very eve of Justice Scalia’s untimely passing, is very timely. In this article, being published in the GW Law Review, Professor Anita S. Krishnakumar of St. John’s University explores one of the late Justice’s interpretive theories, which he called “The Canon of Canine Silence.” Scalia used it to capture what he explained was a “phenomenon under which courts may refuse to believe Congress’s own words unless they can see the lips of others moving in unison.”

To steal a line from the redoubtable Larry Solum, download this while it is hot.  Following are some highlights of the piece the Editors of GW Law Review offered in their press release:

In the famous Sherlock Holmes story Silver Blaze, Mr. Holmes and Dr. Watson solve the case of a missing racehorse, based in part on the “curious incident of the dog in the night-time.” That is, Mr. Holmes infers that the thief must have been someone with whom the stables watchdog was familiar, because the dog did not bark as the horse was stolen. Mr. Holmes reasons: when an unfamiliar person enters the stables, the watchdog barks; the watchdog did not bark; thus, no unfamiliar person entered the stables.

Courts have applied Mr. Holmes’s “dog that did not bark” logic when construing the meaning of statutes. The interpretive presumption holds: if a new law or statutory amendment would significantly change the existing legal landscape (i.e., introduce something unfamiliar), Congress can be expected to comment on that change in the legislative record; thus, a lack of congressional comment regarding a significant change can be taken as evidence that Congress did not intend a change in the law.

… Professor Krishnakumar critically examines the “dog that did not bark” canon, evaluating its normative and theoretical implications. She finds:

  • In recent years, the Supreme Court has applied the canon with increasing frequency.
  • Yet there is little study of the Court’s practice of inferring meaning from Congress’s failure to comment.
  • In most cases, it is dubious to infer that Congress could not have intended to make a substantial change without notation in the legislative record.
  • The canon is actually a “clear statement” rule in disguise. It assumes a baseline state of the law, and requires that changes from that baseline be accompanied by explicit legislative acknowledgment.
  • Professor Krishnakumar concludes that although Justices view attentiveness to congressional silence as part of
    their duty as faithful agents , they often end up using the canon to guard against changes they find normatively problematic.
  • In the wake of, and leading up to, highly divisive Supreme Court decisions, The Sherlock Holmes Canon is fascinating to anyone with an interest in law, politics, or the intersection of the two. The next application of the canon could have a significant impact on all of us.To repeat: .

This piece is likely to stay hot, so download anytime.

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Warren Buffett’s Timeless Ten Investing Rules

cunningham buffett 4e coverAbout 10 years ago, editors of Investing Rules asked me the top ten rules from Warren Buffett on investing.  Last week, the editors asked me to update the list for a new edition.  After studying the list for the first time in a decade, guess how much change was needed?

None. Given the timeless quality of Buffett’s method, I did not elect to change a word.  Herewith the list, as good today as ten, twenty or more years ago. And for elaboration of these and other insights, see The Essays of Warren Buffett, recently updated to a fourth edition.

  1. Don’t be the patsy.

If you cannot invest intelligently, the best way to own common stocks is through an index fund that charges minimal fees. Those doing so will beat the net results (after fees and expenses) enjoyed by the great majority of investment professionals. As they say in poker, ‘If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy’.

  1. Operate as a business analyst.

Do not pay attention to market action, macroeconomic action, or even securities action. Concentrate on evaluating businesses.

  1. Look for a big moat.

Look for businesses with favorable long term prospects, whose earnings are virtually certain to be materially higher 5, 10, 20 years from now.

  1. Exploit Mr. Market.

Market prices gyrate around business value, much as a moody manic depressive swings from euphoria to gloom when things are neither that good nor that bad. The market gives you a price, which is what you pay, while the business gives you value and that is what you own. Take advantage of these market mis-pricings, but don’t let them take advantage of you.

  1. Insist on a margin of safety.

The difference between the price you pay and the value you get is the margin of safety. The thicker, the better. Berkshire’s purchases of the Washington Post Company in 1973-74 offered a very thick margin of safety (price about 1/5 of value).

  1. Buy at a reasonable price.

Bargain hunting can lead to purchases that don’t give long-lasting value; buying at frenzied prices will lead to purchases that give very little value at all. It is better to buy a great business at fair price than a fair business at great price.

  1. Know your limits.

Avoid investment targets that are outside your circle of competence. You don’t have to be an expert on every company or even many – only those within your circle of competence. The size of the circle is not very important; knowing its boundaries, however, is vital.

  1. Invest with ‘sons-in-law’.

Invest only with people you like, trust and admire – people you’d be happy to have your daughter marry.

  1. Only a few will meet these standards.

When you see one, buy a meaningful amount of its stock. Don’t worry so much about whether you end up diversified or not. If you get the one big thing, that is better than a dozen mediocre things.

  1. Avoid gin rummy behavior.

This is the opposite of possibly the most foolish of all Wall Street maxims: ‘You can’t go broke taking a profit’. Imagine as a stockholder that you own the business and hold it the way you would if you owned and ran the whole thing. If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.

 

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Delaware’s Latest Show of Corporate Savvy

corp_logo_180x175Delaware continues to be the savviest seller in the world of corporate charters and related services, thanks to a combination of judicial vision and legislative elegance supported by all the state’s leadership and citizens alike.  The most recent example appears in the intersection of two technical corners–strike suit merger litigation and forum selection bylaws.

As detailed in this Wall Street Journal article of Wednesday, Delaware’s Chancery Court, led by Vice Chancellor Travis Laster, has been cracking down on frivolous shareholder suits challenging mergers.  The cases tend to be settled quickly based on corporate governance promises. Most of the cash that changes hands goes to plaintiffs’ lawyers while defense lawyers and boards seem to accept paying this “merger tax” as an investment in the certainty that that there will be no future litigation.

The WSJ piece suggests that the Chancellors’ crackdown may simply lead plaintiffs’ lawyers to file such suits in other forums.  But this overlooks one of the most important developments in recent Delaware corporate law, with which the savvy Delaware judges are keenly attuned.  If plaintiffs’ lawyers start filing increasing numbers of suits outside the Chancery Court,  more and more boards would unilaterally adopt bylaws barring such cases from any forum but Delaware.

The Delaware legislature recently authorized boards to do just that and courts elsewhere are bound to respect such arrangements and transfer any filed cases over to Delaware (as the Oregon Supreme Court did at year end in Roberts v. Triquint Semiconductor, Inc.).

True, in the past, Delaware boards and defense lawyers settle the frivolous cases and may find value in the finality. To that extent, the Chancellors’ crackdown on settlements may lead them to prefer litigating in courts more willing to give a rubber stamp, perhaps states eager to compete with Delaware in the corporate chartering and services business.

Except the Delaware judges are signaling a new world where boards need not fear these suits and crave their settlement as much as in the past.  If so, that makes Delaware more attractive and favors its selection for forum.  That increases board incentives to adopt Delaware forum bylaws.

A clearly virtuous effect of this combination of legislative, judicial, and directorial innovation is to make the merits matter more.  For Delaware, it is yet another way to cement the state’s deserved reputation as an attractive place to be incorporated.  And it does so primarily in the name of quality corporate law administration, rather than being either pro-management or pro-shareholder.

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Hot Topics 2015 to 2016: A New Year Note

What an eventful 2015! Thanks to you, my friends and colleagues in media, business, investing, and academia, for engaging conversations, publications, and gatherings on a range of topics. These include Berkshire Hathaway, shareholder activism, the AIG case, celebrity contract disputes, and many more.  During 2016, I’ll continue to offer insights, interviews, and commentary and lecture widely on the vital business stories of the day. As we move into the New Year, herewith a forecast of hot topics in 2016 I’ve been following, gratefully along with many of you, in 2015:

  1. Shareholder Activistm 2.0 . A subject of ascending importance, I’m especially interested in the activist personalities and target cultures, and in 2015 commented for a profile of Carl Icahn in the  San Jose Mercury News (by Michelle Quinn) and of Nelson Peltz in the Wilmington News Journal (Maureen Milford & Jeff Wordock) as well as the case of DuPont Company on WDEL Radio (Frank Geravce). Expect to see more of the younger generation of activists—even younger than Bill Ackman and with fewer resources—as this approach to governance cements as mainstream. I am directly involved in a few of these efforts, including as a director nominee.
  1. Google and Gloms. As a cross-current against activism, I foresee continued restoration of the conglomerate business model. In 2015, I endorsed Google’s move in that direction, as noted in stories in The Omaha World-Herald (Steve Jordan), Quartz (Max Nisen), and MarketWatch (Tim Mullaney). I expect to see more conglomerates, even as many shareholder activists oppose them, and predict that the clash will be resolved by switching from a general aversion to gloms to the specific question of the model’s suitability for particular personalities, ownership structures, and corporate cultures.
  1. Berkshire Culture. I continue to believe that Berkshire corporate culture is special and full of lessons. In 2015, I was grateful to many editorial page editors for printing my op-eds on this theme. These addressed corporate culture and leadership in The Wall Street Journal (thanks Mark Lasswell & Paul Gigot); what’s so instructive about Berkshire in The Omaha World-Herald (thanks Deb Shanahan & Steve Jordan); and numerous aspects of Berkshire and Buffett in the Dealbook of The New York Times (thanks Jeff Cane & Peter Henning, Wayne State U.). More to come in 2016 as the company continues to both evolve and stay the same, as thoughtfully put in various stories in which I’m quoted, including in Fortune (Roger Lowenstein) and Reuters (Luciana Lopez).

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