Wednesday, October 15, 2014
Cunningham, Berkshire Beyond Buffett
Berkshire Hathaway is a sprawling conglomerate comprising nearly 600 business units. (GE has 300.) Its subsidiaries include insurance operations, most notably GEICO, GenRe, and National Indemnity, and a range of other businesses big and small—for instance, BNSF, Fruit of the Loom, H. J. Heinz (50% owned), HomeServices of America, Dairy Queen, Johns Manville, Lubrizol, Berkshire Hathaway Energy Co. (formerly MidAmerican Energy), McLane, NetJets, Shaw Industries, The Pampered Chef, and the Omaha World Herald.
Warren Buffett once famously said that “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” And, along the same lines, “I can’t be involved in 50 or 75 things. That’s a Noah’s Ark way of investing—you end up with a zoo that way. I like to put meaningful amounts of money in a few things.”
Buffett may believe in concentrating his stock portfolio holdings, but the Berkshire family of companies is not only large but is also quite diverse. Granted, it’s short on high tech and health care companies so it’s not quite a Noah’s Ark, but it still spans numerous sectors of the economy.
Buffett makes a point of not being involved in the management of these companies. As Cunningham explains, “Berkshire’s hands-off management approach was made by choice but became necessary by default…. The choice to operate in a decentralized manner from the beginning reflected a belief in the value of autonomy and a conviction that people properly entrusted with authority will generally exercise it faithfully.” (p. 105)
The Berkshire companies exhibit a diversity of management styles and structures, but they are loosely bound by the Berkshire culture. Cunningham devotes the largest part of his book to illustrating how individual companies exemplify particular traits that create the Berkshire culture. (He strains to make these traits spell BERKSHIRE, mixing nouns and adjectives and not always choosing the most apt word.) He traces out the origins of these companies, how they came to join the Berkshire family, and how their managers are generating long-term economic value by simultaneously pursuing economic profits and intangible values—values such as thrift and reputation. There have been hiccups along the way, but by and large Berkshire companies are ones Buffett can truly be proud of.
What challenges face a post-Buffett Berkshire? Cunningham suggests that “problems will arise from the acquisition model, hands-off management, and a sprawling decentralized structure that eludes tight control and consolidated non-financial reporting.” (p. 220) Areas where Berkshire now gets a pass because of Buffett’s reassuring presence may come under closer scrutiny.
Overall, however, Cunningham is optimistic about the future of the company. “As a new guard leads the evolution of Berkshire beyond Buffett, they will set its course and the company will never be the same. Yet the core values that define it have proven to offer unique sustaining value. It is hard to imagine Berkshire without Buffett. But it seems wiser to believe in Berkshire beyond Buffett, an institution that transcends the man and will be his legacy.” (p. 232)