.
. . Berkshire corporate policy strikes a balance between autonomy and
authority. Buffett issues written instructions every two years that
reflect the balance. The missive states the mandates Berkshire places on
subsidiary CEOs: (1) guard Berkshire’s reputation; (2) report bad news
early; (3) confer about post-retirement benefit changes and large
capital expenditures (including acquisitions, which are encouraged); (4)
adopt a fifty-year time horizon; (5) refer any opportunities for a
Berkshire acquisition to Omaha; and (6) submit written successor
recommendations. Otherwise, Berkshire stresses that managers were chosen
because of their excellence and are urged to act on that excellence.
Berkshire
defers as much as possible to subsidiary chief executives on
operational matters with scarcely any central supervision. All quotidian
decisions would qualify: GEICO’s advertising budget and underwriting
standards; loan terms at Clayton Homes and environmental quality of
Benjamin Moore paints; the product mix and pricing at Johns Manville,
the furniture stores and jewelry shops. The same applies to decisions
about hiring, merchandising, inventory, and receivables management,
whether Acme Brick, Garan, or The Pampered Chef. Berkshire’s deference
extends to subsidiary decisions on succession to senior positions,
including chief executive officer, as seen in such cases as Dairy Queen
and Justin Brands.
Munger
has said Berkshire’s oversight is just short of abdication. In a wild
example, Lou Vincenti, the chief executive at Berkshire’s Wesco
Financial subsidiary since its acquisition in 1973, ran the company for
several years while suffering from Alzheimer’s disease—without Buffett
or Munger aware of the condition. “We loved him so much,” Munger said,
“that even after we found out, we kept him in his job until the week
that he went off to the Alzheimer’s home. He liked coming in, and he
wasn’t doing us any harm.” The two lightened a grim situation, quipping
that they wished to have more subsidiaries so earnest and reputable that
they could be managed by people with such debilitating medical
conditions.
There
are obvious exceptions to Berkshire’s tenet of autonomy. Large capital
expenditures—or the chance of that—lead reinsurance executives to run
outsize policies and risks by headquarters. Berkshire intervenes in
extraordinary circumstances, for example, the costly deterioration in
underwriting standards at Gen Re and threatened repudiation of a
Berkshire commitment to distributors at Benjamin Moore. Mandatory or
not, Berkshire was involved in R. C. Willey’s expansion outside of Utah
and rightly asserts itself in costly capital allocation decisions like
those concerning purchasing aviation simulators at FlightSafety or
increasing the size of the core fleet at NetJets.
Ironically,
gains from Berkshire’s hands-off management are highlighted by an
occasion when Buffett made an exception. Buffett persuaded GEICO
managers to launch a credit card business for its policyholders. Buffett
hatched the idea after puzzling for years to imagine an additional
product to offer its millions of loyal car insurance customers. GEICO’s
management warned Buffett against the move, expressing concern that the
likely result would be to get a high volume of business from its least
creditworthy customers and little from its most reliable ones. By 2009,
GEICO had lost more than $6 million in the credit card business and took
another $44 million hit when it sold the portfolio of receivables at a
discount to face value. The costly venture would not have been pursued
had Berkshire stuck to its autonomy principle.
The more important—and more difficult—question is the price of autonomy. Buffett has explained Berkshire’s preference for autonomy and assessment of the related costs:
We
tend to let our many subsidiaries operate on their own, without our
supervising and monitoring them to any degree. That means we are
sometimes late in spotting management problems and that [disagreeable]
operating and capital decisions are occasionally made. . . . Most of our
managers, however, use the independence we grant them magnificently,
rewarding our confidence by maintaining an owner-oriented attitude that
is invaluable and too seldom found in huge organizations. We would
rather suffer the visible costs of a few bad decisions than incur the
many invisible costs that come from decisions made too slowly—or not at
all—because of a stifling bureaucracy.
Berkshire’s
approach is so unusual that the occasional crises that result provoke
public debate about which is better in corporate culture: Berkshire’s
model of autonomy-and-trust or the more common approach of
command-and-control. Few episodes have been more wrenching and
instructive for Berkshire culture than when David L. Sokol, an esteemed
senior executive with his hand in many Berkshire subsidiaries, was
suspected of insider trading in an acquisition candidate’s stock. . . .
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