The question facing Berkshire Hathaway is life after Warren Buffett. And it’s a quandary worth $330 billion, Berkshire’s market value.
In “Berkshire Beyond Buffett,” George Washington University law professor Lawrence Cunningham tries to prove the Oracle of Omaha has built a corporate culture strong enough to ensure Berkshire succeeds after its charismatic founder departs. Though Cunningham shows there’s a common thread throughout Berkshire’s portfolio, he fails to make a convincing case investors could follow.
Cunningham is a scholar, an acolyte even, of Buffett. His third book on the billionaire investor comes at a time when concern over Berkshire’s future has swelled, not least because of wobbles at a series of recent big-name investments – Tesco, Coca-Cola and IBM. As its founder turned 84 this year, bringing the inevitable moment when he must cede control closer on the horizon, succession is the key question shareholders must confront.
Cunningham isn’t worried. He believes Buffett has institutionalized a culture at Berkshire that, to use a Buffettism, acts as a “moat” protecting its business. This, he argues, is Berkshire’s competitive advantage – not Buffett himself or the “float” provided by Berkshire-owned insurers like Geico and Gen Re. Cunningham describes these values using a cutesy sort of acrostic poem: “Budget Conscious; Earnest; Reputation; Kinship; Self-Starters; Hands off; Investor Savvy; Rudimentary; Eternal.” Get it? B.E.R.K.S.H.I.R.E.
The book profiles all of the company’s major subsidiaries – across industries and geographies – to illustrate their adherence to these principles. Geico, the car insurer, for example, exemplifies “Budget Conscious”; Gen Re is “Earnest”; housing manufacturer Clayton Homes survived the financial crisis because of its “Reputation” for low-risk lending.
The alignment between Berkshire’s standards and those of family-run businesses like Nebraska Furniture Mart is particularly striking. For community businesses that trade in reputation, and have spent time, labor and capital to earn the trust of clients, being acquired by a corporation that won’t meddle too much after the deal is optimal.
Family-run businesses only have a 30 percent chance of success after passing to a second generation and half that with the third, according to Cunningham. Nebraska Furniture Mart’s financial success through several generations is a testament to the sustainability of Berkshire’s values.
The B.E.R.K.S.H.I.R.E. concept may help create a unified, profitable Berkshire under Buffett’s management. But Cunningham struggles to provide tangible evidence to make his case. The book cites the continued success of the Marmon Group after its founders, Jay and Robert Pritzker, sold to Berkshire and eventually left. Like Berkshire, Marmon was a diversified conglomerate that analysts worried would be too unwieldy to succeed under new management.
Marmon’s solution for generational succession was to sell to Berkshire. But Berkshire has no rival in size or scope – there’s no Buffett to buy Berkshire. The problem here isn’t that Cunningham has cited the wrong evidence, rather that there isn’t much to choose from. Proving corporate culture can guarantee financial longevity is a near-impossible task.
Berkshire’s eternal financial success would be a safer bet if Buffett’s investing acumen today seemed as robust as it did decades ago. That series of flubs at Tesco, Coke and IBM, however, suggests the start of a worrying pattern.
Moreover, the straight-shooting Buffett broke his own code when he abstained from voting for a controversial compensation plan at Coke in April. He later admitted that he disagreed with the plan but didn’t want to seem unsupportive of Chief Executive Muhtar Kent. How will Buffett’s successors carry forward his corporate values if he’s not abiding by them now?
“Berkshire Beyond Buffett” is a great deep dive into Berkshire’s portfolio and Buffett’s theories of management. Furthermore, the book breaks ground by showing Buffett to be an exceptional manager, and not just a legendary investor. But it’s not “rich with lessons for those wishing to profit from the Berkshire model” as promised on the dust jacket, nor is it an obvious tool for entrepreneurs and business leaders. Those looking for a handy answer to the $330 billion question of Berkshire after Buffett will need to do their own work.