Lawrence A. Cunningham, a professor at George Washington University and former corporate lawyer at Cravath, Swaine & Moore, has written numerous books…
…including, most recently, “Berkshire Beyond Buffett: The Enduring Value of Values.”
Warren E. Buffett taught two generations of people to become value investors. It’s time to expand that knowledge.
Value investing is a philosophy as much as a technique. At the bottom is a core belief in the simple idea that price is what you pay and value is what you get. For investing, the insight entails the possibility, through independent study and reflection, of allocating capital to ideas offering value greater than price.
The management philosophy of Mr. Buffett’s Berkshire Hathaway grows out of the same insight: that intangible values such as thrift or autonomy can translate into economic gain. Berkshire’s subsidiaries run businesses and adopt approaches that turn traits like reputation and a sense of permanence into constituent satisfaction and managerial flexibility that bolsters financial results.
On thrift, Berkshire and its subsidiaries rarely use debt, which is costly, preferring to rely on themselves to generate capital for reinvestment and expansion, whether retained earnings, deferred taxes, or insurance float. Acquisitions are made without bankers or brokers but via networks of trustworthy relationships. Self-reliance is the screen, not platoons of costly professionals conducting due diligence. The savings from such habits are large and value enhancement incalculable.
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On autonomy, Berkshire’s board and those of subsidiaries are interested in the business, paid little, meet infrequently, avoid consultants and contribute advice and business savvy more than oversight and second-guessing. Mr. Buffett defines Berkshire as a partnership, declaring: “While our form is corporate, our attitude is a partnership.”
Characteristically value-oriented, Berkshire shareholders reciprocate the partnership idea. They are interested, engaged, and informed. They hold the stock for long periods, trade little, concentrate heavily on Berkshire stock, and otherwise behave like owners and partners, not mere shareholders.
Most corporate boards set dividend policy at regular periodic amounts invariant to business conditions and split the stock when the price exceeds an affordable trading range to keep shareholders interested in trading it. Berkshire’s dividend policy varies with the corporate ability to reinvest earnings profitably, which has meant no dividends since 1969. It doesn’t split the stock to keep the price low, saving considerable frictional costs of trading.
On reputation, Mr. Buffett urges managers to think of one guiding idea: “Do nothing you would not be happy to have an unfriendly but intelligent reporter write about on the front page of a newspaper.” He’s been saying that since 1991 when he served as chairman of Salomon Brothers, a firm bedeviled by a bond-trading scandal. It was then that he minted another memorable admonition that Berkshire personnel still hear: “Lose money for the firm, even a lot of money, and I will be understanding; lose reputation for the firm, even a shred of reputation, and I will be ruthless.”
Such hortatory is often more bracing for a workforce than checks and balances and other bureaucracy, which is the more common response to ethical challenges in corporate America. Although training and compliance programs can help, they risk creating a sense that it is OK. to operate just within the letter of the law; at Berkshire, the clarion call is to promote playing well within the boundaries of propriety.
Beyond ethical appeal, leaders should stress to their teams that corporate culture matters because it translates into business performance. A business is known for integrity — treating suppliers, employees, and customers as the business would like to be treated if the positions were reversed — will usually win more interest and cooperation among such groups than rivals who are chiselers. Such a reputation — in merchandising, manufacturing, services, or other business activities — can manifest in better terms of trade at the outset of relationships and more flexibility to cope with periodic adversity. It can help attract and retain outstanding employees.
On permanence, finally, Mr. Buffett is known as a long-term investor, but a more profound point about time at Berkshire is that its horizon is forever. Unique among its rivals in the acquisition market, Berkshire has not sold a subsidiary in 40 years and pledges not to do so unless a business is doomed. Mr. Buffett urges managers to imagine that their business is their family’s only asset that they will own for at least 50 years.
Berkshire’s intangible values, including that sense of permanence, have great economic value to sellers, whether family businesses wanting a legacy or entrepreneurs seeking security. The value of corporate culture cannot always readily be measured, but Berkshire offers many examples. Sellers of businesses to Berkshire often sold for less than they could have received elsewhere because they valued Berkshire’s corporate culture, including Dairy Queen, Helzberg Diamonds, and NetJets.
In a representative case, Berkshire acquired R. C. Willey, a family-owned furniture retailer, for a price 12.5 percent less than a rival bid; Berkshire paid $175 million, besting offers above $200 million. The owners chose Berkshire because it offered permanence and autonomy.
Although Mr. Buffett is personally responsible for a great deal of Berkshire’s managerial practice, it has been internalized across the institution, in the shareholders, the board, and managers. Much will change in Berkshire without Mr. Buffett, but much will stay the same too, especially these principles.
The problem is not whether these will endure at Berkshire beyond Mr. Buffett, but how unusual the Berkshire model remains in corporate America. But just as Buffett taught two generations of value investors concepts such as the margin of safety and the difference between price and value, there may yet be hope for coming generations of managers who understand the enduring value of values.
(NYTIMES)
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