How do you replace the irreplaceable?
Itâs an especially salient question for Berkshire Hathaway and its 84-year-old Chairman and CEO Warren Buffett (Trades, Portfolio). Speculation about the companyâs succession plan and what a post-Buffett Berkshire Hathaway will look like is mounting in advance of the companyâs annual letter to shareholders, due in February, in which Buffett has promised to reveal his vision for the companyâs future.
A panel of speakers, all intimately familiar with the company and its iconic leader, convened at Stanfordâs Rock Center for Corporate Governance for a discussion titled âBerkshire Beyond Buffett: The Enduring Value of Values.â The panelists homed in on three core values that Buffett has used to guide his company: integrity, autonomy, and permanence.
In addition to Buffettâs unparalleled mix of investment savvy and business acumen, an unswerving commitment to these three values helped make Berkshire Hathaway one of the most successful companies in history, with a market capitalization of around $355 billion. And, the panelists agreed, by embedding those values deep into every level of his company from the beginning, Buffett has put Berkshire Hathaway in the best position to thrive after he hands off the reins â so long as any successor holds true to them.
A Reputation for Integrity
Tom Russo (Trades, Portfolio), partner at Gardner Russo & Gardner and a JD/MBA graduate of Stanford, remembers when Buffett spoke to his investing class in 1982. âThe refrains that Warren touched upon in class are really the same things he talks about today,â Russo says. âHe said all the standard investment stuff, but then he said, âWhen youâre making an investment, you have to understand one thing: You canât make a good deal with a bad person.ââ
Indeed, while Berkshire Hathaway is a vast conglomerate of 60-plus businesses of different sizes, in different sectors, and founded at different times, the subsidiaries are united by a commitment to conduct their business in an ethical manner, says Brad Kinstler, CEO of Seeâs Candies, one of the first companies bought by Berkshire Hathaway.
The right way to do things, Kinstler explains, is to imagine a football field, where if you go outside the lines, you are in the wrong. âWarrenâs philosophy would be, âWe want to play down the center of the field. We donât want to get anywhere close to the out-of-bounds lines. We simply donât need to, and for our reputation, itâs best that we donât.ââ
Indeed, the rare ethical breaches at Berkshire Hathaway are exceptions that prove the rule. Consider the example of Benjamin Moore Paint, says Lawrence Cunningham, author of Berkshire Beyond Buffett and a professor of law at Georgetown University. When Berkshire acquired the paint manufacturer and retailer in 2000, Buffett promised the companyâs distributors that it would continue to work with them. These were mom-and-pop shops across the country, rather than big-box retailers like Home Depot and Loweâs. âThatâs a very difficult business model to sustain these days, given the power of those big retailers,â Cunningham notes.
So difficult that Denis Abrams, who took over as CEO of Benjamin Moore in 2007, was nearing a deal with Loweâs in 2012 â until Buffett found out about it and fired him. âNow the current CEO, Mike Searles, is committed to that model and committed to keeping that Berkshire promise, which is so valuable. And heâs turned it into a competitive advantage, saying âWeâre the only big paint manufacturer and retailer thatâs selling through those old-fashioned distributors,ââ Cunningham says.
The Power of Autonomy
While more than 300,000 people work for Berkshire Hathaway in its various subsidiaries, they are overseen by a mere 25 people â including Buffett and Vice-Chairman Charlie Munger (Trades, Portfolio) â from corporate headquarters. This ratio of corporate overhead to company assets is almost unheard of in any business setting. What makes it possible?
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