Berkshire Hathaway: Think for Yourself & The Compass to Decentralization via 1997 - 2001
"We now have completed 37 Berkshire years without having a CEO of an operating business elect to leave us to work elsewhere.” - Warren Buffett
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 Six of my exploration of Warren Buffett’s shareholder letters and annual meetings (as of 1994). 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
A lot happened from 1997 to 2001. The Asian Financial Crisis hit in 1997-98. The Dotcom bubble popped in 2000. The World Trade Center fell in 2001 and the U.S. entered a new war. Meanwhile, Berkshire chugged through the turmoil, adding more businesses amidst the crisis.
The insurance operations were hit by the unforeseen risk of terrorism. Buffett wrote extensively on their mistakes in insurance and their disciplined operations rewarded them with such a learning opportunity.
The world questioned the superficial absence of technology businesses inside Berkshire. But the medley of furniture, jewelry, boots, flight simulators, and utility companies chugged on at their own pace. Berkshire evolved to solidify its position as an insurance business with the acquisition of General Re to complement the existing reinsurance and property & casualty insurance (i.e. GEICO) business.
The collapsing systems revealed the fragility of centralization—accentuated by the herd. Yet, decentralized organizations like Berkshire saw the benefit of having autonomous units within.
The backdrop of such crises prioritized the same set of questions, worries and doubts hurdled towards Buffett and Munger. In this textbook display of human nature to overemphasize the present condition as a perpetuity, two of Buffett’s teachings caught my eye.
First was Buffett’s words on decentralization in response to the human desire for control. Second was the importance of thinking for yourself amid interrogations on why he didn’t own Microsoft or some dot-com company if he was such a genius. Neither are new for those who’ve read my previous articles on Berkshire. But reinforcement is how we learn.
Let us start with Berkshire’s decentralization. Not a mere focus on the fact it is but how it came to be that way. It’s a matter of looking at Berkshire’s decentralized structure as a necessity than some ingenious strategic plan. It was a requirement for this specific business.
Berkshire’s Compass Leads to Decentralization
I wrote about Berkshire’s decentralized operations and centralized capital allocation in past articles. But, to be fair, Berkshire evolved from the earlier articles as it added more businesses. This decentralization became more impressive as they acquired more businesses while seeing the collective enterprise thrive.
Crucial to Berkshire's decentralized operating system was its lack of strategic plans. There wasn’t a master plan or overarching mission statement where Buffett was leading his managers to some promised land.
"Once we start making decisions for our managers in that respect then we become responsible for the operation, and they are no longer responsible for the operation. They are responsible for their operations, and that means they get to call the decisions. And they should do what is best for their subsidiary, and it’s up to any other company that wants to do business with them to prove why that is best for them. That’s the Berkshire approach to things.” - Warren Buffett
Each manager had their own prerogative. Buffett didn’t set objectives for these managers. There was no end destination.
He had a compass he operated by and trusted his managers to have their own. Their true North didn’t have to be identical, just a similar approximation was enough and each manager operated as an individual in charge of their own process.
No Master Plan
Buffett often touted the absence of a formal system at Berkshire. The managers of Berkshire’s businesses didn’t have formal review processes, no budget meetings, no submitting of operating plans to HQ, etc.
The managers had their own way of operating their companies and Buffett’s job was to stay out of their way. While I could sit back and accept this with blind adulation, the question loomed… “What made this possible?”
It’s easy to say it was because Buffett was at the helm. But what was the base script that incentivized this behaviour?
The hint was in the result of Berkshire. The possibility of an insurance company with its portfolio of retail and energy businesses spoke to the core modus operandi that made decentralization a natural necessity.
At the core, it had leaders who loved studying and investing in businesses. That requires a business required to do sensible things with the capital it earned. That was it.
Insurance was one of many opportunities Buffett saw. But it wasn’t planned for Berkshire to be an insurance entity 30 years ago. Instead, Berkshire stuck to what it set out to do of deploying capital in a sensible manner.
“Berkshire, we have no master plan. And Charlie and I did not sit down in 1960—early ’65—and say, ‘We’re going to do this and that,’ and all that…..we’re going to try and do sensible things as we go along. The more money we have, the harder it is to find sensible things. But that’s the criteria.” - Warren Buffett
Berkshire was designed to be a vehicle for its owners to invest in great companies and have fun along the way. That required acquiring businesses with managers who were wired a certain way.
“...the truth of the matter is that we have decentralized power in the operating businesses to a point just short of total abdication. And we don’t think our system is right for everybody. It has suited us and the kind of people that have joined us.” - Charlie Munger
For the business to achieve these functions, it had to be decentralized. That was the only sensible thing for it to do. That required finding people shaped to fit the Berkshire approach.