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Friday 06 May 2011
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The risk that Berkshire Hathaway boss Warren Buffett just can't see "I don't think they'll be looking for a guy who plays the ukulele," Warren Buffett quipped about his eventual successor. Warren Buffett, who is giving his $50bn fortune to charity, insists there is a succession plan at Berkshire Hathaway Photo: AP By Richard Blackden 6:00PM BST 05 May 2011Comments
The world's third-richest man must be getting tired of having to picture a world without him in it. But there's little surprise that the 80 year-old is increasingly asked to.
Trying to separate where Buffett ends and Berkshire Hathaway, the company he founded almost half a century ago, begins, is like trying to escape your own shadow. You just can't do it. And it gets no easier after spending a weekend at Berkshire's annual pilgrimage of shareholders in Omaha, Nebraska. At a press conference last Sunday, Buffett was asked why his successor would possibly want to live in the mid-western city. Omaha often comes up when trying to explain Berkshire's distinctiveness.
That Berkshire isn't headquartered in either Silicon Valley or the corridor between Washington DC and Boston is actually one of its more commonplace features. Unlike in Britain, the big beasts of corporate America are scattered far and wide. There's Kraft in Northfield, Illinois, Procter & Gamble in Cincinnati, Ohio, and Wal-Mart in Bentonville, Arkansas.
What makes Berkshire unusual is much more interesting and, for those shareholders looking over the horizon, potentially far more troubling. Describing the company as a conglomerate is arguably a stretch. On the one hand, it has about $144bn (£87.7bn) invested in some of America's biggest companies. Coca-Cola, for example, counts Berkshire as its biggest shareholder. On the other, it owns about 70 companies which you're unlikely to have ever heard of unless you happen to work for them, are a competitor or a customer. There's TTI, a distributor of resistors in Fort Worth, Texas; then there's H.H. Brown, a shoemaker in Connecticut; or there's Forest River, a maker of boats and pontoons that's based in Indiana. Each business sends back any excess cash they generate to Omaha, where Buffett and Charlie Munger, his long-term business partner, plough it back into shares or into acquiring new companies.
With Buffett in the financial kitchen, it's a recipe that's allowed Berkshire to outperform the S&P 500 every year since 1965. Though, as Buffett has said, generating the returns is getting tougher given Berkshire's size. It may also sound like something Roald Dahl would have come up with had he ever chosen to write a tale about making money. But it's real enough. Just ask the chief executive of Goldman Sachs. Lloyd Blankfein didn't turn to Buffett because he's fond of the ukelele. He was after the credibility that an investment by Buffett would bring the bank in the febrile days following the collapse of Lehman Brothers.
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30 Apr 2011Now fast forward, say, a quarter of a century to the next major financial crisis. Will the signature of Berkshire's chief executive command the same weight as its founder to a bank boss scrambling to shore up confidence?
Buffett and Munger certainly think so, and say they can clearly see the line that separates their personalities from this entity called Berkshire. There's no doubt Berkshire has some defining characteristics. It's hugely decentralised. Of its total of 260,000 employees, only tens of them are based in Omaha. There's an emphasis on long-term profitability of the subsidiaries at the expense of any short-term gains. That's allied to Buffett's determination to manage Berkshire's risk. The billionaire seems particularly proud of the 11 times he has outperformed the S&P when the index recorded an annual decline during the past 45 years. And, finally, there's the ethical standards Buffett expects from those running businesses.
It's why his handling of David Sokol, a former top lieutenant who bought shares in a company he then recommended his boss buy, has come in for such criticism. Sokol's departure in late March also reignited the debate about who will eventually step into the top job because he was seen as a leading candidate. Buffett and Munger say that the next leader will come from Berkshire's ranks because it's the only way to preserve the company's culture. There's no obvious reason, at least to the outside observer, why that should be true.
When the subject gets raised, the 80-year-old billionaire - who is giving his $50bn fortune to charity - insists there is a succession plan. But Berkshire isn't like some of the corporate behemoths it invests in. Coca-Cola, Procter & Gamble and Tesco, for example, all spend a lot of time and resource grooming future leaders. They make sure there is "bench strength" to use the jargon preferred by business schools. They also have the mechanisms in place to deliver a company culture - whatever employees may think of it - that is far bigger than any one person.
The culture at Berkshire appears to be Buffett. He invests huge trust in the management of the companies Berkshire buys, while the management teams, often already wealthy in their own right, clearly want to sell their businesses to him and are motivated to work for him. It may be that Buffett and Munger do have a brilliant plan up their sleeve. But it seems more likely that Berkshire's star will burn out when Buffett's does. It's a risk that the greatest investor of the past 100 years may be
Comment
Comments
The world's third-richest man must be getting tired of having to picture a world without him in it. But there's little surprise that the 80 year-old is increasingly asked to.
Trying to separate where Buffett ends and Berkshire Hathaway, the company he founded almost half a century ago, begins, is like trying to escape your own shadow. You just can't do it. And it gets no easier after spending a weekend at Berkshire's annual pilgrimage of shareholders in Omaha, Nebraska. At a press conference last Sunday, Buffett was asked why his successor would possibly want to live in the mid-western city. Omaha often comes up when trying to explain Berkshire's distinctiveness.
That Berkshire isn't headquartered in either Silicon Valley or the corridor between Washington DC and Boston is actually one of its more commonplace features. Unlike in Britain, the big beasts of corporate America are scattered far and wide. There's Kraft in Northfield, Illinois, Procter & Gamble in Cincinnati, Ohio, and Wal-Mart in Bentonville, Arkansas.
What makes Berkshire unusual is much more interesting and, for those shareholders looking over the horizon, potentially far more troubling. Describing the company as a conglomerate is arguably a stretch. On the one hand, it has about $144bn (£87.7bn) invested in some of America's biggest companies. Coca-Cola, for example, counts Berkshire as its biggest shareholder. On the other, it owns about 70 companies which you're unlikely to have ever heard of unless you happen to work for them, are a competitor or a customer. There's TTI, a distributor of resistors in Fort Worth, Texas; then there's H.H. Brown, a shoemaker in Connecticut; or there's Forest River, a maker of boats and pontoons that's based in Indiana. Each business sends back any excess cash they generate to Omaha, where Buffett and Charlie Munger, his long-term business partner, plough it back into shares or into acquiring new companies.
With Buffett in the financial kitchen, it's a recipe that's allowed Berkshire to outperform the S&P 500 every year since 1965. Though, as Buffett has said, generating the returns is getting tougher given Berkshire's size. It may also sound like something Roald Dahl would have come up with had he ever chosen to write a tale about making money. But it's real enough. Just ask the chief executive of Goldman Sachs. Lloyd Blankfein didn't turn to Buffett because he's fond of the ukelele. He was after the credibility that an investment by Buffett would bring the bank in the febrile days following the collapse of Lehman Brothers.
Warren Buffett shuns gold as an investment
Buffett's success built on huge bet on USA
Warren Buffett upbeat on damage from Sokol affair
'Buffett should consider action against Sokol'
Warren Buffett squares up to critics in Omaha
Warren Buffett admits 'big mistake' over Sokol
Now fast forward, say, a quarter of a century to the next major financial crisis. Will the signature of Berkshire's chief executive command the same weight as its founder to a bank boss scrambling to shore up confidence?
Buffett and Munger certainly think so, and say they can clearly see the line that separates their personalities from this entity called Berkshire. There's no doubt Berkshire has some defining characteristics. It's hugely decentralised. Of its total of 260,000 employees, only tens of them are based in Omaha. There's an emphasis on long-term profitability of the subsidiaries at the expense of any short-term gains. That's allied to Buffett's determination to manage Berkshire's risk. The billionaire seems particularly proud of the 11 times he has outperformed the S&P when the index recorded an annual decline during the past 45 years. And, finally, there's the ethical standards Buffett expects from those running businesses.
It's why his handling of David Sokol, a former top lieutenant who bought shares in a company he then recommended his boss buy, has come in for such criticism. Sokol's departure in late March also reignited the debate about who will eventually step into the top job because he was seen as a leading candidate. Buffett and Munger say that the next leader will come from Berkshire's ranks because it's the only way to preserve the company's culture. There's no obvious reason, at least to the outside observer, why that should be true.
When the subject gets raised, the 80-year-old billionaire - who is giving his $50bn fortune to charity - insists there is a succession plan. But Berkshire isn't like some of the corporate behemoths it invests in. Coca-Cola, Procter & Gamble and Tesco, for example, all spend a lot of time and resource grooming future leaders. They make sure there is "bench strength" to use the jargon preferred by business schools. They also have the mechanisms in place to deliver a company culture - whatever employees may think of it - that is far bigger than any one person.
The culture at Berkshire appears to be Buffett. He invests huge trust in the management of the companies Berkshire buys, while the management teams, often already wealthy in their own right, clearly want to sell their businesses to him and are motivated to work for him. It may be that Buffett and Munger do have a brilliant plan up their sleeve. But it seems more likely that Berkshire's star will burn out when Buffett's does. It's a risk that the greatest investor of the past 100 years may be sorely underestimating.
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