What Warren Buffett has accomplished at the head of Berkshire Hathaway is nothing short of astonishing. Not only has he built a massive company, but he has done it while maintaining an unparalleled reputation for business integrity. The man is an American business icon. He is also mortal. Buffett is now 84 years old. The question of what happens to Berkshire after Buffett moves on has weighed on the company for years – indeed, the rating agency Fitch has long highlighted as a risk of the company that so much depends on Buffett, whose departure, they aver, can only diminish the company’s value. These kinds of questions will only grow in coming years as Buffett ages further. (In the interests of full disclosure, I should add that I am a Berkshire shareholder, so these questions are not mere idle concerns for me.)
Will all of magic really disappear once the Sage of Omaha is no longer at the helm? In his new book, “Berkshire Beyond Buffett: The Enduring Value of Values” (here), George Washington University Law Professor Lawrence Cunningham takes up this question with admirable enthusiasm. Based on his comprehensive overview of the incredible company that Buffett has built, Cunningham concludes that what makes Berkshire unique is not Buffett himself; rather, it is the culture of the company. Berkshire, according to Cunningham “has distinct features and a strong corporate culture that will endure beyond Buffett.’
Cunningham reaches this conclusion based on a wide-ranging inspection of the company’s many wholly owned subsidiaries. Based on this review, Cunningham concludes that the seemingly diverse collection of subsidiaries share a set of common traits that are “distinctive, durable – and unique to Berkshire” and that “will allow Berkshire to endure beyond Buffett’s departure.”
For “mnemonic power,” and with only a little strain to make it work, Cunningham has reduced the list of common traits to a nine-letter acrostic that just happens to spell out the word “Berkshire.” The traits are: Budget Conscious; Earnest; Reputation; Kinship; Self-Starters; Hands off; Investor Savvy; Rudimentary; Eternal. That is, Buffett has assembled a group of companies led by managers that share his commitment to thrift; that value the autonomy and long-term commitment involved in Berkshire’s ownership; and that share his commitment to maintaining a reputation for integrity.
Over several interesting and readable chapters, Cunningham examines various Berkshire subsidiaries to show how they exemplify these characteristic traits. Cunningham presents the subsidiaries’ stories as a series of case studies. The stories include the histories of many familiar Berkshire companies, such as See’s Candies and GEICO. The stories also include interesting descriptions of some companies that may not be as familiar, such as FlightSafety International, MiTek, and Forest River. The companies’ stories are presented as a series of short vignettes that read like parables – each one coming as it does with its own moral lesson.
Not that Cunningham’s review is simply a panegyric. Cunningham is careful to consider several notable stumbles that have occurred along the way. Cunningham closely examines problems that arose at Gen Re after the company was acquired by Berkshire. He is also critical of both Buffett’s and Berkshire’s handling of the unusual circumstances that led to the departure of David Sokol, after Sokol had made a massive investment in the shares of Lubrizol before recommending to Buffett that Berkshire consider buying the company. In Cunningham’s view, the stumbles represent circumstances where Berkshire or Buffett uncharacteristically strayed from the company’s fundamental principles – in the end, reinforcing how critical the fundamental principles are to the company’s value and success.
Cunningham also optimistically suggests that some of the measures that Buffett has recently put in place have laid the groundwork for a smoother transition. For example, he notes that in recent years Buffett has brought in Todd Coombs and Ted Wechsler as sub-portfolio managers, as one of several steps that Cunningham suggests provide “the promise of durability” that will ensure that Berkshire continues to thrive after Buffett is gone.
One particularly interesting part of Cunningham’s analysis is his consideration of the Marmon Group, which is a large industrial conglomerate that was founded by the Pritzker family. Berkshire took over ownership of the company in anticipation of the passing of the company’s long-standing leaders. As Cunningham notes, Marmon was not only a perfect fit for Berkshire, but the two companies were built in very similar ways. Both had grown by acquisitions, undertaken in a careful and controlled way. Both were founded and developed by powerful leaders who left an indelible mark on their companies.
While there are also important differences between the two companies, Marmon, Cunningham suggests, provides one potential model for the post-Buffett Berkshire Hathaway. Cunningham notes one particular step the Pritzkers took as they prepared their companies for their departure.They organized the company into sectors supervised by divisional Presidents, who could create and implement strategy across the business segments. Based on the Marmon example, there is, Cunningham asserts, “good precedent for believing that even such a vast and decentralized enterprise can endure well beyond its founders.”
Cunningham also makes an interesting point about the business activities of a number of the subsidiaries. While Buffett has many praiseworthy talents, his true genius is capital allocation. He has made an astonishing number of successful acquisitions. As a result, Berkshire represents a great collection of companies that will continue to produce revenue and profits long after Buffett is gone. My concern has always been that after Buffett is gone, his successors may be unable to repeat his incredible deal making acumen. Cunningham points out that a number of companies in Berkshire’s portfolio – companies as diverse as MiTek, Forest River and Lubrizol – have been very acquisitive since their own acquisition by Berkshire. The managers of these and several other companies in the Berkshire group have proven to be very successful dealmakers in their own right. Maybe there will never be anyone with quite the touch that Buffett has, but the company will still continue to be able to deploy its capital in ways that grow the company’s value and contribute to the company’s success, even after Buffett is no longer on the job.
The bottom line for Cunningham is that in Berkshire Buffett has assembled a set of businesses and business managers that will give the enterprise enduring value; as he puts it, you can take Buffett out of Berkshire, but you can’t take Berkshire out of the subsidiaries.
In the book’s Epilogue, Cunningham does sound notes of caution. He allows that after Buffett, we must accept that there will be “slippage.” He observes that: “Deals may not come Berkshire’s way. Offers Berkshire makes may not be on terms as agreeable as they have been. Negotiations may be less favorable.” But returns will not be disappointing, and there will be no justification for dismembering the company or taking other radical steps. In the end, Cunningham concludes, Berkshire transcends Buffett and the company will be his enduring legacy.
I have to say I found Cunningham’s analysis interesting and reassuring Just the same, I do worry what the future may hold for the company, both in the near and longer term. In the near term, I worry about the company as Buffett remains at the helm. My household happens to include an aging relative who is exactly the same age as Buffett. She could not be relied upon to organize a bowl of Wheaties even if you spotted her the bowl, the cereal box, the milk and the spoon. Buffett by contrast is aging well, but the years have their own weight and cannot be gainsaid. The transition to the post-Buffett era could prove difficult not because the change will take place abruptly; it could prove difficult because the pre-departure era could prove to be far longer than is good for the company.
I also worry about the ownership base. One of the keys to Buffett’s great success is that he managed to build a shareholder base for his company that shares his business philosophy, that is willing to take a long-term view, and that knows better than to insist that the company’s management meet various short term goals. The shareholders have been amply rewarded for acquiescing in these views. Will the shareholders be as patient with new managers who lack Buffett’s track record and credibility – particularly if the new managers feel compelled to go in new or different directions? Will the new managers feels constrained in the making the changes that different times may require?
For all of the company’s great past success, a period of uncertainty lies somewhere ahead for the company in the not too distant future. In reading Cunningham’s book, I was reminded of something that one of the Berkshire subsidiary Presidents once said to me. The individual said that when Buffett dies, the company’s share price could plunge, perhaps dramatically. When that happens, the individual said, raise all the cash you can and buy as many shares as you can, because once the dust has settled and some time has passed, the world will figure out that Berkshire will still be a great company, even after Buffett is long gone. I happen to believe that assessment is true. Cunningham’s interesting book provides the explanation why that is so.
Readers who lilke me are particularly interested in Warren Buffett will want to note that Professor Cunningham is the author of the excellent topically indexed anthology of Buffett’s annual letters to Berkshire shareholders, “The Essays of Warren Buffett,” which I reviewed in an earllier post, here.