Lawrence A. Cunningham: Mimicking Warren Buffett

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By Lawrence A. Cunningham, who will discuss his new book, Berkshire Beyond Buffett: The Enduring Value of Values, at Washington University’s Olin School in St. Louis on Wednesday February 25 at 4:00 pm.  Special guests include Tom Manenti, CEO of Berkshire’s MiTek subsidiary.   

Berkshire Hathaway, the conglomerate Warren Buffett built, is vast and unconventional. Yet despite unusual traits, the company’s success comes down to favoring old-fashioned business values like trust and thrift while shunning the fast buck and debt. For businesses of all sizes, it offers a model worth emulating.

If Berkshire were a country and its revenues its gross domestic product, the company would be among the world’s top 50 economies. Berkshire’s cash alone exceeds the total assets of all but the largest corporations. While Warren Buffett became famous as a stock picker, he built Berkshire through insurance companies and today oversees a hodgepodge of wholly-owned businesses, including a popular US auto insurer (GEICO), a large railroad (BNSF), a huge energy company, and pacesetters in fields as different as diamonds and mobile homes.

Although not every business always outperforms, overall Berkshire has beaten the broader stock market for its shareholders 80 percent of the time, often by double digits. Berkshire’s average annual gain has doubled that of the Standard & Poor’s 500 index, a cross-section of public company stocks. With a market value of $350 billion, Berkshire has generated great wealth for all its constituencies.

The reason? Berkshire’s subsidiaries share common values, reinforced by the tone at the top. The first is trust, giving subsidiary managers autonomy to run businesses as they see fit. These managers, in turn, tend to delegate responsibility, so decisions are made by those with the best information and incentives. Managers uniformly say the result of so much authority is feeling an equal degree of accountability.

Berkshire’s second principle is permanence: Berkshire has never sold a subsidiary in forty years and pledges not to. When it acquires a company it credibly commits to owning it forever, through thick and thin. Such a permanent time horizon enables making strategy over many years not fixating on the short-term.

Berkshire culture is thrifty, under the adage that a penny saved is a penny earned. It avoids debt, costly because of interest, and risky because of the catastrophic effects of bankruptcy. Berkshire prefers to fund operations through retained earnings and low-risk sources like insurance premiums.

Berkshire’s culture appeals to business owners when they sell.  For example, Berkshire gives family businesses a home where members call the shots and can cement the family’s legacy. They relish the freedom from debt and appreciate the benefits of Berkshire’s favorable business reputation.

Berkshire’s success attracts followers seeking to emulate the model.  They dream of creating conglomerates in its image just as literary types want to write the next great novel. It is unlikely to be done on the same scale, but rewards are available from establishing mini-Berkshires. There are many of these, including several Berkshire subsidiaries, as well as independent companies that have consciously adapted the model.

A prominent example is MiTek, a St. Louis-based company Berkshire acquired in 2001. A pioneer in the manufacturer of roof trusses—the integral structural framework in the space between rooms and roofs of buildings—it makes the machinery and tools architects and builders need to make dreams realities. Built by merger dating to 1981, the company’s extensive and impressive record of growth through acquisitions prompts Warren Buffett to call it a mini-Berkshire. Thanks to the leadership of industry icons like Gene Toombs and Tom Manenti, Mi-Tek soars as an exemplar of Berkshire culture—being not only thrifty, decentralized and long-term as well as earnest and entrepreneurial.

The Berkshire model offers competitive advantages over rivals in the acquisition market, at both the parent level and for subsidiaries such as MiTek. For example, private equity firms and leveraged buyout operators intervene in management, borrow extensively, and flip within a few years. They do so because, unlike Berkshire and MiTek which use their own corporate capital, rivals deploy money staked by others expecting payback over short periods. In fact, private equity firms are short term by design, as they create funds with ten-year lives (five to sow then five to reap). Investors start looking for their payback in year six so operators fixate on returns right away.

Warren Buffett is one-of-a-kind and Berkshire is peerless. The company cannot be replicated and the man cannot be replaced. But having infused the business with a set of transcendent values for all to see, business and investors alike can benefit from the example.  And the list of exemplary Berkshire subsidiaries is long, including not only MiTek, but eight companies large enough to qualify on their own for the Fortune 500, including Berkshire Hathaway Energy, Lubrizol, Marmon Group, and McLane.  For those who share old-fashioned values, companies like Berkshire and its subsidiaries offer not only investment opportunities and potential business homes but inspiration.

Adapted from Lawrence A. Cunningham, Berkshire Beyond Buffett: The Enduring Value of Values

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