Lawrence A. Cunningham, author of the best-seller, The Essays of Warren Buffett: Lessons for Corporate America, and an upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values
Q&A with Lawrence Cunningham
Q1: What inspired you to write this book and what are some of its key implications?
A: For one, it celebrates Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s 50th anniversary under Warren Buffett’s leadership. And, for the past 20 years, people have been asking for 20 years what happens to Berkshire Hathaway if Warren Buffett gets hit by the proverbial bus; the question now has added urgency since the billionaire businessman is 84. The popular answer became paradoxical: Buffett tried to build an enduring institution at Berkshire and yet even great admirers doubt that the company can survive without him. My book demonstrates how Berkshire’s corporate culture is designed to make the company outlast any one person, making the culture part of its succession plan.
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Q2: How did you research this book and what did your research reveal?
A: Background research dates to the 1990s when I published The Essays of Warren Buffett: Lessons for Corporate America, based on a symposium with Buffett and Berkshire vice chairman, Charlie Munger. In that era, Berkshire looked like a mutual fund, primarily owning stocks. Today, the company is instead defined by its 50+ wholly owned businesses and so my immediate research focused on them. In addition to traditional archival material, I interviewed, with Buffett’s permission, many Berkshire insiders, including numerous subsidiary CEOs. I also surveyed 500 Berkshire shareholders. The result: a comprehensive portrait of Berkshire Hathaway.
Q3: Who is Tom Murphy and why did he write the foreword to your book?
A: Tom Murphy is a legendary manager who built Capital Cities/ABC into a broadcasting powerhouse in which Berkshire invested. When I saw Warren during the weekend of Berkshire’s 2014 annual meeting, I asked him who he thought should write the foreword. He immediately named Murphy, explaining that he learned most everything he knows about management from Tom. Readers will discover that Murphy, now a Berkshire director, fostered the same culture at Capital Cities/ABC that characterizes Berkshire today. Tom writes:
From afar, it may look like Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B’s wide-ranging businesses are very different from one another. In fact, as Larry’s book discusses, though they span industries, they are united by certain key values, like managerial autonomy, entrepreneurship, frugality and integrity.
Q4: What is appealing about Berkshire culture?
It boosts returns on capital from intangible virtues, such as autonomy, entrepreneurship, frugality, and integrity—and especially a sense of permanence. In doing so, Berkshire practices a philosophy of capitalism that does well by doing good, is sensitive but unsentimental, lofty yet pragmatic, and public-spirited but profitable. It’s a way of doing business that matches today’s zeitgeist, with its sense of stewardship and fair play, and also has a timeless horizon.
Q5: What are some of the surprises in store for your readers?
A: This book is the first about Buffett as a manager as well as an investor, and the first about Berkshire as a corporate entity rather than merely a collection of investments. Besides being a “legendary investor,” as he is often simplistically identified by journalists, Buffett built a formidable corporation, demonstrates unsung managerial prowess, and chartered a course for American capitalism that is more profound and wide-reaching than simply finding valuable investments at discounted prices. Moreover, the integrated telling of the stories of Berkshire’s businesses and their colorful personnel offers a new way of seeing Berkshire, more a coherent whole than a fragmentary portfolio.
Q6: What is the audience for the book?
It is obviously of interest to Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B’s million shareholders and 300,000 employees and the legions of value investors Buffett has inspired over the decades. But the audience is broader because Berkshire is a case study of a distinctive but not inimitable culture. The book offers valuable lessons for everyone involved in shaping American business: managers, entrepreneurs, owners, shareholders, directors, policymakers, gatekeepers like accountants and lawyers, as well as scholars of corporate life.
Q7: What’s the rationale for your book tour with the participation of Berkshire insiders?
As with the book’s portrait and thesis, the book tour will feature diverse voices speaking to the traits behind the strong and distinctive corporate culture at Berkshire Hathaway. Guests at these events will hear about Berkshire from a variety of people with intimate knowledge of the company from multiple vantage points, like subsidiary founder Jim Clayton, director Susan Decker, director-and-investor Sandy Gottesman, long-time investee Don Graham, Gen Re chief executive Tad Montross, and many others.
Q8: On the book tour, why are most of your hosts universities?
Universities and other learned societies are ideal locales for this discussion because the book’s purpose is to educate and encourage thoughtful dialogue. We are grateful to our hosts, starting with my employer George Washington University, my alma maters—University of Delaware and Yeshiva University (Cardozo Law School)—and spanning geographically from Columbia to Stanford, along with stops in Chicago, Des Moines, Knoxville, Minneapolis, Richmond, St. Louis, and elsewhere.
Q9: How can people get more information about the book and your book tour?
Blog Post 1 – Lawrence Cunningham: Buffett and Murphy on Management
While everyone knows that Warren Buffett modeled himself after Ben Graham as a stock picker that made Buffett famous in the latter 20th century, few know a more important point for the 21st century: as a manager, he modeled himself after Tom Murphy.
Murphy is a 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 Warren who should write the foreword to Berkshire Beyond Buffett, he immediately suggested Tom. 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 Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B’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 Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B as an institution that transcends Buffett and will be his legacy.
Blog Post 2 – Lawrence Cunningham: Berkshire Hathaway’s Profound Succession Plan: BERKSHIRE HIRE
What will happen to Berkshire Hathaway after the Warren Buffett era? The answer to that multi-billion dollar question lies in my new book, Berkshire Beyond Buffett: The Enduring Value of Values, which lays out in detail Berkshire’s five-pronged succession plan with all its nuances and complexities. Here is a thumbnail sketch.
At most companies, succession planning focuses on grooming a senior manager who can assume the role of chief executive. Today you hear about who should succeed Jamie Dimon at JPMorgan and 15 years ago about who should succeed Jack Welch at General Electric. The personnel aspects of Berkshire’s succession plan are a bit more involved—although, despite enormous attention, they are also the least significant parts of its plan.
Buffett’s management roles will be divided into an executive function (CEO) and an investment function (CIO). The next CEO will come from among existing Berkshire executives, probably one of its 50 significant subsidiaries. This successor will get responsibility for Berkshire’s acquisitions and allocating capital. Chapter 9 of the book shows how many Berkshire managers excel in these areas, providing a wealth of managerial talent.
The second function is handling investments. Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B hired two people in the past half-decade—Ted Weschler and Todd Combs—for that job. They’ll face challenges ahead, including tough choices about when to sell big stakes and what to do with the proceeds. While still important, the investment side of Berkshire has greatly declined in significance in recent years, now representing only about 20 percent of its value.
Third, for board chairman, Warren says he’d propose a member of the Buffett family, widely assumed to be Howard, his eldest son. That job would be to sustain the cultural heritage I outline in Berkshire Beyond Buffett. In an interview for the book, Howard noted that Berkshire is his father’s life’s work, and sustaining the legacy is vital to him.
As important as personnel is, more important is the question of shareholder control. Buffett has been Berkshire’s largest shareholder since 1965, today owning 20% of the economic interest and holding 34% of the voting power. While many assume that after he departs, Berkshire will go from having a controlling shareholder to lacking one, that’s misleading.
As I detail in chapter 14, Warren has carefully planned for his shares to be distributed gradually over a period of up to twelve years to foundations, which will in turn sell the shares in steady annual liquidations. For that time, Buffett’s estate, through its executors, will continue as Berkshire’s controlling shareholder, making a gradual rather than an abrupt shift.
More important than all this, and what will enable the great company to endure beyond the Warren Buffett era, is Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B’s corporate culture. My book tells the stories of Berkshire’s 50 significant direct subsidiaries, which define the company today, representing 80 percent of its value.
As I examined each, through archival research plus interviews and surveys, a pattern emerged: the same traits began to appear repeatedly, nine altogether. These intangible traits translate into financial gain. They also secure the company’s future, hence the book’s sub-title: The Enduring Value of Values.
Those nine values define the book’s central chapters, each chapter telling the stories of four or five subsidiaries that exemplify given values. After I organized and wrote the book, I played around with the nomenclature to form an acrostic from these values that spells out the company’s first name, as seen in the table below, which also captures the essence of each and notes an illustrative subsidiary. The book then weaves these stories and values together to reflect what amounts to a profound succession plan.
|Budget-mindedness||A penny saved is a nickel earned||GEICO|
|Earnestness||The value in promise keeping||Gen Re|
|Reputation||Results benefit from reputation||Clayton Homes|
|Kin-like||Wealth can last more than 3 generationswhen families value identity and legacy||Ben Bridge Jeweler|
|Self-starters||To the entrepreneur go the spoils||Dairy Queen|
|Hands-off||Delegate everything but reputation||Pampered Chef|
|Investor savvy||Price is paid, values are exchanged||BH Energy|
|Rudimentary||Impossible dreams are impossible,so stick to your knitting||Fruit of the Loom|
|Eternal||Berkshire as a permanent home,a Boys Town for the corporate homeless||Brooks Running Shoe|
Berkshire Beyond Buffett: The Enduring Value of Values by Lawrence Cunningham
Lawrence A. Cunningham, Henry St. George Tucker III Research Professor
George Washington University
Follow Me on Twitter: @CunninghamProf