What Is It Like to Be
Owned by Warren Buffett?
A new survey reveals
Berkshire’s management style.
October 29, 2015 | by Shana Lynch
many companies, there’s a bit of magic to being bought by Warren
Buffett’s Berkshire Hathaway. The company’s “Powerhouse Five,” its
largest noninsurance businesses,
billion in pre-tax earnings last year, up nearly 13% from
the previous year. Its smaller companies also grew, increasing 8% over
course, not all his bets
have paid off
(think Tesco and Dexter Shoe). But from an outsider’s perspective,
Berkshire’s strategy has been a wild success. Using market returns,
shares gained a
1,826,163% since Buffett took the reins in 1965.
what does it look like from the inside? Stanford Graduate School of
David F. Larcker
and Stanford GSB researcher
surveyed approximately 80 Berkshire subsidiary CEOs to determine how
management style translates on the ground.
Acquisitions in general
can move quickly or take years, but Buffett moves fairly quickly when
he’s ready to buy. The CEOs of Berkshire’s smaller subsidiaries (less
than $1 billion in revenue) said about one to two months passed
between initial acquisition discussion and a formal offer. Larger
subsidiaries took longer — on average, six to nine months. Closing
times also lined up similarly: Smaller firms took between one to two
months to close, while larger firms took four to five months.
Most respondents said
their companies experienced few major governance changes following
their acquisitions. When there were changes, they were most often to
the board of directors or CEO compensation contracts. Insurance
subsidiary CEOs said they changed internal-audit and risk-management
practices. Of course, companies that had been publicly traded
eliminated their investor-relations departments.
Still, changes were
relatively few, the CEOs reported. One respondent noted, “The only
change is that I now discuss any major capital acquisitions with
Warren. We run the business the way we always have.”
The subsidiary chiefs
also believe their companies’ performances are better under Berkshire
(and even better than if they were stand-alone companies). Respondents
point to Berkshire’s brand value and financial strength. Another
reason? Berkshire lets CEOs focus on a longer performance horizon than
they would expect under other ownership. Although each CEO varied on
what that horizon would be, with estimates ranging from three years to
50, they all said Berkshire management encourages a long-term focus.
Another area of
agreement: Survey respondents think they’d be paid better elsewhere.
All say their annual bonus is calculated with two performance measures
(typically, larger corporations use 2.4 measures). Berkshire CEOs are
judged on metrics such as earnings, return on equity, and operating or
profit margins. None have their compensation tied to Berkshire’s stock
price, which is standard practice in many large companies.
No one gives a
company this kind of freedom.
— Survey respondent
According to the survey,
Buffett lives up to his “delegation just short of abdication” style.
The CEOs provide monthly financial statements to headquarters, but
they have infrequent contact with Buffett. Most report having phone
calls with him on a monthly or quarterly basis. None have a
pre-established schedule, and all said they initiate the communication
Buffett is also unlikely
to get involved in the affairs of their companies, the CEOs noted.
They would handle independently issues like labor disruptions,
supply-chain issues, legal action against the company, or modest
declines in sales. What would bring Buffett to the phone: anything
that impacts Berkshire’s reputation or a severe restatement of
previously reported financial results, respondents said. One CEO
noted, “No one gives a company this kind of freedom.”
Life Beyond Buffett
Each CEO who took the
survey agrees that common culture is shared across Berkshire’s
subsidiaries, and that culture — focused on honesty, integrity,
long-term orientation, and customer service — won’t change when
Buffett steps down. As one said, “The more I interact with the board
at Berkshire and other Berkshire managers, the more confident I am in
the future of Berkshire post-Warren.”
Read more about the
by the Corporate Governance Research Initiative at Stanford Graduate
School of Business and the Rock Center for Corporate Governance at
Stanford University. David F. Larcker is the James Irvin Miller
Professor of Accounting and Brian Tayan is a researcher at Stanford
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