“Although Berkshire is one of the world’s largest and most famous corporations, few people understand it as an institution that will be Buffett’s legacy.”—Lawrence Cunningham
The following post is by Lawrence Cunningham, author of Berkshire Beyond Buffett: The Enduring Value of Values. For more on the book you can also read an interview with Lawrence Cunningham.
While everyone knows that Warren Buffett modeled himself after Ben Graham as a stock picker, few know that as a manager, he modeled himself after Tom Murphy.
Murphy is the legendary executive whose skillful acquisitions and leadership resulted in the Capital Cities communications empire. In 1985, he engineered the acquisition of ABC, Inc. for $3.5 billion, among the largest takeovers of the time, and a decade later facilitated its acquisition by Walt Disney Co. for $19 billion.
When I asked Buffett who should write the foreword to Berkshire Beyond Buffett, he immediately suggested Murphy. Warren, an early investor in Capital Cities who later asked Murphy to join Berkshire’s board, explained that “everything I know about management I learned from Tom.”
Judging by Berkshire’s operational success over several decades, Buffett clearly knows a lot about management. Reading Murphy’s foreword together with my book, it’s clear that the management principles Murphy exemplifies animate Berkshire as well. Among those principles, three stand as bulwarks against skepticism of Berkshire’s size, governance, and durability: a commitment to permanence dismisses calls for Berkshire to shrink by divesting some businesses; a belief in autonomy explains its unusual approach to internal control; and a savvy acquisitiveness proves the track record of its deep managerial bench that will sustain its future.
Permanence: Observers ask whether it might be desirable to divide Berkshire’s 50+ direct subsidiaries into multiple corporations or spin-off certain businesses. Some argue that size is an albatross that limits growth and that vastness is a veil that obscures the real value of many subsidiaries. See’s Candies, for instance, would fetch billions if auctioned to Hershey or Nestlé, but Berkshire’s stock market price might not register such value.
The answers to petitions to shrink or break-up Berkshire are an emphatic no and no. Doing so would undermine two sources of value contributed by the bedrock principle of permanence. First, permanence elongates managerial time horizons to enable increasing long-term value in excess of short-term gain. Second, the promise of permanence offered when acquiring new businesses enables Berkshire to pay a cash price less than business value. Divisions and divestitures are antithetical to both sources of value.
Autonomy: Every time there is a problem at a given Berkshire subsidiary or with a given person—whether alleged insider trading by a top executive a few years ago or a recent failure to make a regulatory filing—people want to know whether Berkshire gives its personnel too much autonomy. Critics favor a more rigorous system of internal control and oversight common among other large American corporations to deter wrongdoing and promote compliance.
The answer is Berkshire is totally decentralized and always should be. Autonomy is another distinctive bedrock principle perfected by Murphy and practiced by Buffett and others across Berkshire. Granting autonomy contributes to a culture of trust where people aspire to uphold a corporation’s values, achieving not merely deterrence and compliance but a commitment to integrity.
Managers and employees appreciate the respect autonomy shows and respond productively. True, tight leashes might help avoid this or that costly embarrassment but the gains from a trust-based culture of autonomy, while less visible, dwarf those costs.
Acquisitiveness: Murphy and Buffett built their respective corporations largely through acquisitions, Murphy primarily in media and Buffett in diverse industries. Acquisition savvy was essential to success at both places and will continue to be—as Berkshire grew, it became more heavily invested in outright acquisitions of whole businesses as opposed to merely taking minority positions in the stocks of larger companies. That acquisitiveness and investor savvy is also a key feature of Berkshire culture: the subsidiaries make acquisitions of their own. The acquisition experience of some Berkshire managers even rivals that of Buffett or Murphy, though all adhere to the value-oriented approach to acquisitions that Ben Graham would recognize.
Berkshire Beyond Buffett: The Enduring Value of Values articulates and consolidates these three themes of permanence, autonomy, and acquisitiveness, plus others. Riveting vignettes about Berkshire’s 50 primary subsidiaries draw on interviews and surveys of many subsidiary CEOs and other Berkshire insiders and shareholders who believe in these values just as Buffett and Murphy do. There may be nothing else like Berkshire and this amazing group of unique people are among the reasons. Although Berkshire is one of the world’s largest and most famous corporations, few people understand it as an institution that will be Buffett’s legacy.