A few weeks ago, Class A shares of Warren Buffett’s Berkshire Hathaway topped a staggering $200,000 a share. Berkshire, which came in at No. 4 on the latest Fortune 500 list, has 300,000 employees spread across 59 subsidiaries, and more cash on hand — $55.5 billion — than any other company in America. Its market value is roughly $330 billion, and it is often cited as one of the “most admired” companies in the world. Berkshire has achieved all of this in the fashion of an old-school American conglomerate, refusing to focus on just one sector or industry. As a result, Berkshire’s stock and subsidiary portfolios include such behemoths as American Express; Burlington Northern Santa Fe; Coca-Cola; GEICO; Heinz; IBM; Walmart; and Wells Fargo, to name just a few.
Yet, the company’s growth has slowed: Over the last five years, it underperformed the S&P 500 for the first time in its history — and Berkshire skeptics question whether such a large and tentacular entity can continue to thrive without its Oracle-in-Chief. Lawrence Cunningham, a law professor at George Washington University and author of the thoughtful “Berkshire Beyond Buffett: The Enduring Value of Values” (Columbia Business School Publishing), is betting that it can. While Cunningham’s book works quite well as a testament to Warren Buffett’s unassailable vision and leadership, as well as to what Berkshire embodies and may continue to embody after Buffett, it comes up a bit short as an argument for why Berkshire’s greatness will outlive its leader.
The Berkshire culture
Some have criticized Buffett for an apparent desire to prove that his “methods are not just for him, but can be institutionalised and passed on to a new generation of managers under whom Berkshire Hathaway will continue to thrive.” Cunningham has flipped this criticism on its head and made it the operating thesis of “Beyond Buffett”: It is precisely Buffett’s methods — Cunningham calls them values — that will ensure Berkshire’s long-term, post-Buffett success.
To Cunningham, these are values in the economic, rather than ethical sense, and he categorizes them in an acrostic that spells — what else? — B-E-R-K-S-H-I-R-E.* Berkshire’s defining characteristic is the size and diversity of its many subsidiaries, which “vary in nearly every way.” Yet, Cunningham argues, there is a “common thread running throughout”: Each subsidiary exhibits one or more element(s) of the Berkshire “corporate culture,” as defined by the B-E-R-K-S-H-I-R-E values acronym. The bulk of Cunningham’s book is devoted to illustrating just how the various Berkshire subsidiaries support this conclusion. GEICO, Cunningham tells us, best illustrates the “Budget conscious” value; Gen Re gets credit for its focus on “Earnestness,” and so on.
This first part of Cunningham’s argument is compelling. After reading “Beyond Buffett,” few will doubt that the company has a unifying set of values and a well-defined vision; but that only gets us half way.
* B: Budget conscious; E: Ernest; R: Reputation; K: Kinship; S: Self-starters; H: Hands off; I: Investor savvy; R: Rudimentary; E: Eternal.
Is culture really enough?
The second part of Cunningham’s argument is that the B-E-R-K-S-H-I-R-E value system is not Buffett-dependent — and instead will continue to support the company’s success long after Buffett’s departure. Rather than a litany of well-researched and cleverly-categorized examples, however, here Cunningham’s chief piece of supporting evidence essentially boils down to a single entity: the Marmon Group.
Started in the early part of the 20th century, the Marmon Group evolved from a law firm into an investment firm under the stewardship of the Buffett-like brothers, Jay and Robert Pritzker. Motivated by an identical set of B-E-R-K-S-H-I-R-E values, the Marmon Group evolved into an extremely successful but highly diversified conglomerate. In other words, it became a “mini-Berkshire.” Just as some have predicted the unraveling of a post-Buffett Berkshire, “Many analysts thought that the Marmon Group was too unwieldy for any but the Pritzkers to run and predicted it would perish soon after they left.” Of course, “The analysts were wrong.” What happened to the Marmon Group after the Brothers Pritzker passed on? Why, it was swallowed up by Berkshire Hathaway! Moreover, after joining the Berkshire empire in 2008, the Marmon Group has been left to operate “pretty much as it had for decades,” thereby refuting all those who predicted its demise and simultaneously supporting Cunningham’s theory about the wherewithal of the B-E-R-K-S-H-I-R-E values.
While arguments by analogy can be convincing, this one seems a bit too cute and a touch too anomalous. After all, where is the Berkshire that will buy Berkshire?
Moreover, recent Berkshire-related news has cast some doubt on the wisdom of the Berkshire culture, and whether such a culture can actually persist under increasing economic and regulatory pressures. For example, in recent weeks, Berkshire missed filing deadlines for investments in Dow Chemical Co. and USG Corp., the latter of which resulted in an $896,000 penalty from the Federal Trade Commission.** Buffett and Berkshire have also recently come under fire for financing Burger King’s purchase of Tim Hortons, which critics have argued is really just a ploy to escape a hefty U.S. tax burden.
Though Cunningham does an admirable job ascertaining and explaining the corporate culture of Berkshire Hathaway — both how that culture has evolved and how it has contributed to Berkshire’s success — what he doesn’t do nearly as convincingly is explain why this culture will in fact endure beyond Buffett.
** To his credit, Cunningham anticipates some of these challenges, noting that “problems will arise from [Berkshire’s] acquisition model, hands-off management, and a sprawling decentralized structure that eludes tight control and consolidated non-financial reporting.”
Buffett’s real legacy
Cunningham closes with what is perhaps the most important note about Berkshire’s leader, and one worth noting in any coverage of Warren Buffett: He is in the process of giving all of his wealth to charity. Buffett’s “giving pledge,” which he announced in 2006 in conjunction with Bill and Melinda Gates, has thus far encouraged 127 billionaire or former billionaire individuals and couples to make similar pledges to give away most of their fortunes. Buffett has always championed the idea that with great wealth comes great (social) responsibility, partly due to the fact that, in Buffett’s own words, we live in a society that:
“rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions.”
To Buffett, the troubling disconnect between social and economic value inherent in a capitalist economy demands social responsibility and philanthropy from those fortune enough to benefit from it. One certainly hopes that future billionaires will continue to follow Buffett’s lead.
Cunningham is clearly in awe of his subject, and it’s easy to see why. As he puts it in this book, Buffett is sui generis, and “Beyond Buffett” certainly supports that claim. Whether there will truly be a “Berkshire beyond Buffett,” however, is another matter.
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