Berkshire’s Blemishes: Lessons for Buffett’s Successors, Peers, and Policy

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Berkshire’s Blemishes: Lessons for Buffett’s Successors, Peers, and Policy

Columbia University has published my most recent research paper, available free on SSRN (registration required): “Berkshire’s Blemishes: Lessons for Buffett’s Successors, Peers, and Policy.” Here is the abstract.’

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Berkshire Hathaway’s unique managerial model is lauded for its great value; this article highlights its costs. Most costs stem from the same features that yield such great value, which boil down, ironically, to Berkshire trying to be something it isn’t: it is a massive industrial conglomerate run as an old-fashioned investment partnership. An advisory board gives unchecked power to a single manager (Warren Buffett); Buffett makes huge capital allocations and pivotal executive hiring-and-firing decisions with modest investigation and scant oversight; Berkshire’s autonomous and decentralized structure grants operating managers enormous discretion with limited second-guessing; its trust-based culture relies on a cultivated vision of integrity more than internal controls; and its thrifty anti-bureaucracy means no central departments, such as public relations or general counsel.

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Delineating the visible costs of Berkshire’s model confirms the desirability of tolerating many of them, given the value concurrently generated, but also reveals ways to improve the model—a few while Buffett is at the helm but mostly for successors. Current reform suggestions include hiring a full-time public relations professional at headquarters and more systematically developing senior executives; suggestions for future reform include enhanced subsidiary compliance resources and separating the identity and personal opinions of top executives from the corporation and its official policy.

Besides helping Berkshire, the review and suggestions will help managers of other companies inspired by Buffett’s unique managerial model and policymakers who should study it. Implications for peers and policymakers include highlighting flexibility in corporate governance, the efficacy of the conglomerate form, and especially the value of strategies that produce long-term thinking among shareholders and managers alike.

Berkshireblemishes

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Larry is a professor of law at the George Washington University Law School. He joined the GW Law School faculty in 2007, having previously taught for 6 years at Boston College (where he served a 2-year term as Academic Dean) and for 8 years at Cardozo (where he served a 5-year term as Director of the Heyman Center on Corporate Governance). He also taught courses at many other schools in the US and abroad, including Central European University, Columbia University, Hebrew University, University of Navarra, and Vanderbilt University. Before entering academia, he practiced corporate law for 4 years at Cravath, Swaine & Moore. He earned his BA from University of Delaware and his JD magna cum laude from Cardozo. Larry writes extensively in corporate and securities law, with a special emphasis on law and accounting and investor perspectives. He teaches courses in those fields as well as Contracts. He has published a dozen books and 50 law review articles. His recent books include: Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press 2012), The AIG Story (Wiley 2013), The Essays of Warren Buffett: Lessons for Corporate America (Carolina Academic Press 2013), and Berkshire Hathaway’s Value of Values (Columbia University Press 2014). Areas of Interest: Accounting, Auditing, Contracts, Corporate Law, Finance, Investing, Legal Education, Securities Regulation
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