Berkshire Hathaway: The Berkshire System & Imperfect Cultures via 2010-2014 Letters
"Character is crucial: A Berkshire CEO must be “all in” for the company, not for himself."
The following is an investing article for OMD Journal. Keep in mind I may own or have owned the company discussed. None of this is investment advice, do your own due diligence.
Find the archive of companies and people explored here
This is Part Nine of my exploration of Warren Buffett’s shareholder letters. While most letters and questions focus on his financial analysis and investment advice, I wanted to pull out elements that showed his analysis of people—something he doesn’t get enough credit for.
Here are articles on preceding letters:
Pre-Berkshire Hathaway: Buffett Partnership Letters 1957 - 1969
Berkshire Hathaway: Acquiring People it Deserves via 1971 - 1980 Letters
Berkshire Hathaway: Financially Sub-Optimal Yet Optimally Human via 1981-1986 Letters
Berkshire Hathaway: Families of the Sainted Seven via 1987-1991 Letters
Berkshire Hathaway: Ordinary Things by Exceptional People via 1992-1996 Letters
Berkshire Hathaway: Think for Yourself & The Compass to Decentralization via 1997 - 2001
Berkshire Hathaway: Owner Capitalism via 2002 to 2005 Letters
Berkshire Hathaway: The Self-Aware Organization via 2006 - 2010 Letters
The letters from 2010 to 2014 focused on the succession at Berkshire Hathaway and its Powerhouse Five—a collection of industrial businesses making up the infrastructural backbone of the U.S.
The Powerhouse Five showcased Berkshire’s indisputable position as an essential part of the U.S’s infrastructure, safekeeping their long term future. But core to the message of the future was Munger and Buffett sharing the Berkshire System that got them there and the culture required to maintain it.
They Can’t Live Without You
The Powerhouse Five consisted of Berkshire Hathaway Energy (successor of Mid-American Energy), Burlington Northern Santa Fe Railways (BNSF), Iscar, Lubrizol and Marmon. Looking at the two largest (BHE & BNSF) they formed an irreplaceable core to the U.S. economy.
"BNSF carries about 15% (measured by ton-miles) of all inter-city freight, whether it is transported by truck, rail, water, air, or pipeline. Indeed, we move more ton-miles of goods than anyone else, a fact establishing BNSF as the most important artery in our economy’s circulatory system."
"BHE’s utilities serve regulated retail customers in eleven states. No utility company stretches further. In addition, we are a leader in renewables: From a standing start ten years ago, BHE now accounts for 6% of the country’s wind generation capacity and 7% of its solar generation capacity. Beyond these businesses, BHE owns two large pipelines that deliver 8% of our country’s natural gas consumption; the recentlypurchased electric transmission operation in Canada; and major electric businesses in the U.K. and Philippines. And the beat goes on: We will continue to buy and build utility operations throughout the world for decades to come."
Simply put, people need electricity. Everything is powered by electricity. The future without oil that environmentalists yearn for will still require electricity to power every mode of transport and device.
Nearly everything we own is now powered by rechargeable batteries, which require electricity. We could go away from that but we would need physical batteries, and Marmon owns Duracell so, Berkshire’s got you covered there as well.
While we don’t need social media to live—I’m the n=1 of this. But we need electricity. We also need all the basic goods produced from all over the world and moving it about is also the role of Berkshire.
It’s fascinating to see how Berkshire evolved from textiles to insurance to becoming a major player as the provider of truly essential services to the country with the world’s largest economy. This was something that required a truly long-term view—I’m talking about generations, not merely decades. Without a doubt, succession will have been carefully thought out when the decisions made the decade before considered the future long after Buffett.
Succession
Plans for the future brought forth lengthy write-ups by Buffett and Munger on the past, present and future of Berkshire. Core to the message was Munger’s depiction of the Berkshire System that got them to the current point, as well as Buffett’s view on what mattered going forward to maintain the culture.
Looking at succession, Buffett holds two positions at Berkshire. He is the CEO and the Chairman of the Board of Directors. His role is to allocate capital through both private and public investments.
Todd Combs and Ted Weschler were introduced as the investment managers who would take over the public investment business in the future. Both were made Chairman of their own operating business. Buffett once said he was a better investor because of his experience as a business owner and that lesson was to be instilled into the two investment managers for the future.
As for the role of Chairman of the Berkshire Board he suggested his son, Howard. He believed this would be best to help “keep the culture” at Berkshire. But note how this was a suggestion, not a guaranteed position made through nepotism.
"If elected, Howard will receive no pay and will spend no time at the job other than that required of all directors. He will simply be a safety valve to whom any director can go if he or she has concerns about the CEO and wishes to learn if other directors are expressing doubts as well. Should multiple directors be apprehensive, Howard’s chairmanship will allow the matter to be promptly and properly addressed."
Furthermore, his incentives will be tied in the fact that he is a shareholder, not by any payment for sitting on the board. It’s just the right way to set up succession for the chairman role. It just makes sense!
As for the CEO role, we know today that Greg Abel from Berkshire Hathaway Energy will be succeeding Buffett as CEO of Berkshire. He’s the individual Buffett and Munger selected to have met their requirements:
"Character is crucial: A Berkshire CEO must be “all in” for the company, not for himself. (I’m using male pronouns to avoid awkward wording, but gender should never decide who becomes CEO.) He can’t help but earn money far in excess of any possible need for it. But it’s important that neither ego nor avarice motivate him to reach for pay matching his most lavishly-compensated peers, even if his achievements far exceed theirs. A CEO’s behavior has a huge impact on managers down the line: If it’s clear to them that shareholders’ interests are paramount to him, they will, with few exceptions, also embrace that way of thinking."
Now we all know the CEOs are important. Most times, they get paid the most—and I know, that isn’t the best way to decipher importance of an individual. But they are the leader of the organization.