Warren Buffett: Corporate Manager and Motivator Extradorinaire
It’s well known that Warren Buffett is one of the most successful stock market investors in history.
It’s not as well known that he is also an extraordinary corporate manager, motivator and leader.
Buffett doesn’t invest the way others do and he doesn’t manage people the way others do. He invests better than others and he manages people better than others do.
Berkshire Hathaway is both an investment corporation and a very large operating business. As of the end of 2012, it had total assets of $427 billion. Of this total, $121 billion, or 28% consisted of marketable investments (equity stocks and fixed income). An additional $47 billion or 11% consisted of cash and cash equivalents. The remaining $260 billion or 61% of assets consisted mostly of the various businesses that Berkshire Hathaway owns. The annual report lists about 80 separate businesses that Berkshire owns (and many of these have subsidiaries as well). There are a total of 288,000 employees. The top managers of approximately 60 separate businesses report directly to Warren Buffett. Some of these 60 businesses are very large in their own right. Buffett recently noted that “We now have eight subsidiaries that would each be included in the Fortune 500 were they stand-alone companies.”
The share price of Berkshire Hathaway has grown from about the approximate range of $14 to $18 (of 1965) to $152,000 (in early 2013) in the 48 years that Warren Buffett has been in charge. Book value per share has grown by a staggering 587,000%. This immense success has included enormous success in both stock investing and in the management of the numerous businesses that Berkshire owns.
It is therefore evident that Warren Buffett has been an absolutely extraordinary corporate manager, motivator and leader.
By conventional wisdom Buffett’s approach would likely be viewed as lacking in “controls” and supervision of his direct reports. Given Buffett’s track record, conventional wisdom may not be so wise after all.
It is certainly worth examining his approach to management.
In a nutshell: He has selected very competent, ethical and likeable people to run the various businesses that Berkshire owns. He has motivated these managers to produce extraordinary results. He has placed enormous trust in these managers and has let them know that he is counting on them and that he is very confident in their abilities to perform. His motivation involves both financial and emotional rewards for jobs well done. And, perhaps most importantly, he has left these managers alone to do their jobs. He has intervened when required, which has been seldom. To be sure, he monitors their results extremely closely but he seldom interferes. (With some 60 direct reports there is no possible way that he could be interfering very often with each.)
Here is how Berkshire describes its overall approach.
“Through our subsidiaries, we engage in a number of diverse business activities. Our operating businesses are managed on an unusually decentralized basis. There are essentially no centralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by our corporate headquarters in the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. It also is responsible for establishing and monitoring Berkshire’s corporate governance efforts, including, but not limited to, communicating the appropriate “tone at the top” messages to its employees and associates, monitoring governance efforts, including those at the operating businesses, and participating in the resolution of governance related issues as needed.”
As proof of this “hand-off” approach, note that there are a total of only 24 employees in the head office.
Roger Lowenstein described Buffett’s management and motivation strategies in his book: Buffett the Making of an American Capitalist. This was regarding Ken Chace, President of the Berkshire Hathaway’s struggling textile operations after Buffett took control in 1965. Buffet’s management style as of 1970 is described.
In managers, Buffett looked for a self starter with a proven track record. Buffett understood that most people, regardless of what they say, are looking for appreciation as much as they are for money. He made it clear that he was depending on them and he underlined this by showing appreciation for their work and by trusting them to run their own operations. In his 1970 annual report, Buffett saluted [Berkshire textile boss] Ken Chace’s attitude and effort in a very tough industry. When a fabric buyer tried to go around Ken Chace, and invoked the name of a mutual friend from college, Buffett told the buyer that such matters were up to Chace. This show of loyalty increased Chace’s dedication to Buffett. He was stingy about paying Chace…and he tightened up considerably on the pension plan. Yet Chace deeply appreciated his autonomy under Buffett and was extremely devoted to him. Though Buffett wouldn’t loosen his wallet, he was uncanny as a motivator.
Buffett’s annual letters provide a good deal of insight into his management approach. His approach has not changed over the decades.
Buffett’s 2012 annual report at page 101 stated the following about management. “Most of our managers are independently wealthy, and it’s therefore up to us to create a climate that encourages them to choose working with Berkshire over golfing or fishing. This leaves us needing to treat them fairly and in the manner that we would wish to be treated if our positions were reversed.”
All of Buffett’s annual letters are chock full of extremely complementary descriptions of his direct reports. And many of these name individual managers and describe their specific accomplishments. Can you imagine how motivating it must be to be singled out and publicly praised like this by a man such as Buffett? These letters are read by many, many thousands of people. In your experience do many (if any) other CEOs praise their direct reports, publicly and by individual name like this? Buffett gets extraordinary results out of people and he heaps extraordinary praise on people, while most corporate leaders and bosses are somewhat stingy with praise and often obtain far lesser results. Coincidence?
The following are some excerpts from his 2011 letter, written in early 2012.
“As 2011 started, Todd Combs joined us as an investment manager, and shortly after yearend Ted Weschler came aboard. Both of these men have outstanding investment skills and a deep commitment to Berkshire. Each will be handling a few billion dollars in 2012, but they have the brains, judgment and character to manage our entire portfolio when Charlie and I are no longer running Berkshire.”
“Your Board is equally enthusiastic about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire. (We have two superb back-up candidates as well.)”
“On September 16th we acquired Lubrizol, a worldwide producer of additives and other specialty chemicals. The company has had an outstanding record since James Hambrick became CEO in 2004, with pre-tax profits increasing from $147 million to $1,085 million. Lubrizol will have many opportunities for “bolt-on” acquisitions in the specialty chemical field. Indeed, we’ve already agreed to three, costing $493 million. James is a disciplined buyer and a superb operator. Charlie and I are eager to expand his managerial domain.”
“First by float size is the Berkshire Hathaway Reinsurance Group, run by Ajit Jain. Ajit insures risks that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most importantly, brains in a manner that is unique in the insurance business. Yet he never exposes Berkshire to risks that are inappropriate in relation to our resources. Indeed, we are far more conservative in that respect than most large insurers. For example, if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever faced – Berkshire as a whole would likely record a moderate profit for the year because of its many streams of earnings. Concurrently, all other major insurers and reinsurers would be far in the red, and some would face insolvency.”
“From a standing start in 1985, Ajit has created an insurance business with float of $34 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By these accomplishments, he has added a great many billions of dollars to the value of Berkshire. Charlie would gladly trade me for a second Ajit. Alas, there is none.”
“We have another insurance powerhouse in General Re, managed by Tad Montross.”
“Finally, there is GEICO, the insurer on which I cut my teeth 61 years ago. GEICO is run by Tony Nicely, who joined the company at 18 and completed 50 years of service in 2011. GEICO’s much-envied record comes from Tony’s brilliant execution of a superb and almost impossible-to-replicate business model. During Tony’s 18-year tenure as CEO, our market share has grown from 2.0% to 9.3%. If it had instead remained static – as it had for more than a decade before he took over – our premium volume would now be $3.3 billion rather than the $15.4 billion we attained in 2011. The extra value created by Tony and his associates is a major element in Berkshire’s excess of intrinsic value over book value. There is still more than 90% of the auto-insurance market left for GEICO to rake in. Don’t bet against Tony acquiring chunks of it year after year in the future.”
“In addition to our three major insurance operations, we own a group of smaller companies, most of them plying their trade in odd corners of the insurance world. In aggregate, their results have consistently been profitable and the float they provide us is substantial. Charlie and I treasure these companies and their managers.”
“At yearend, we acquired Princeton Insurance, a New Jersey writer of medical malpractice policies. This bolt-on transaction expands the managerial domain of Tim Kenesey, the star CEO of Medical Protective, our Indiana-based med-mal insurer. Princeton brings with it more than $600 million of float, an amount that is included in the following table.
“Among large insurance operations, Berkshire’s impresses me as the best in the world.”
“I am proud of what has been accomplished for our society by Matt Rose at BNSF and by Greg Abel at MidAmerican. I am also both proud and grateful for what they have accomplished for Berkshire shareholders.”
“Almost all of our managers delivered outstanding performances last year, among them those managers who run housing-related businesses and were therefore fighting hurricane-force headwinds. Here are a few examples: Vic Mancinelli again set a record at CTB, our agricultural equipment operation. We purchased CTB in 2002 for $139 million. It has subsequently distributed $180 million to Berkshire, last year earned $124 million pre-tax and has $109 million in cash. Vic has made a number of bolt-on acquisitions over the years, including a meaningful one he signed up after yearend. TTI, our electric components distributor, increased its sales to a record $2.1 billion, up 12.4% from 2010. Earnings also hit a record, up 127% from 2007, the year in which we purchased the business. In 2011, TTI performed far better than the large publicly-traded companies in its field. That’s no surprise: Paul Andrews and his associates have been besting them for years. Charlie and I are delighted that Paul negotiated a large bolt-on acquisition early in 2012. We hope more follow.”
“Iscar, our 80%-owned cutting-tools operation, continues to amaze us. Its sales growth and overall performance are unique in its industry. Iscars managers – Eitan Wertheimer, Jacob Harpaz and Danny Goldman – are brilliant strategists and operators. When the economic world was cratering in November 2008, they stepped up to buy Tungaloy, a leading Japanese cutting-tool manufacturer. Tungaloy suffered significant damage when the tsunami hit north of Tokyo last spring. But you wouldn’t know that now: Tungaloy went on to set a sales record in 2011. I visited the Iwaki plant in November and was inspired by the dedication and enthusiasm of Tungaloy’s management, as well as its staff. They are a wonderful group and deserve your admiration and thanks.”
“McLane, our huge distribution company that is run by Grady Rosier, added important new customers in 2011 and set a pre-tax earnings record of $370 million. Since its purchase in 2003 for $1.5 billion, the company has had pre-tax earnings of $2.4 billion and also increased its LIFO reserve by $230 million because the prices of the retail products it distributes (candy, gum, cigarettes, etc.) have risen. Grady runs a logistical machine second to none. You can look for bolt-ons at McLane, particularly in our new wine-and-spirits distribution business.”
“Jordan Hansell took over at NetJets in April and delivered 2011 pre-tax earnings of $227 million. That is a particularly impressive performance because the sale of new planes was slow during most of the year. In December, however, there was an uptick that was more than seasonally normal. How permanent it will be is uncertain. A few years ago NetJets was my number one worry: Its costs were far out of line with revenues, and cash was hemorrhaging. Without Berkshire’s support, NetJets would have gone broke. These problems are behind us, and Jordan is now delivering steady profits from a well-controlled and smoothly-running operation. NetJets is proceeding on a plan to enter China with some first-class partners, a move that will widen our business “moat.” No other fractional-ownership operator has remotely the size and breadth of the NetJets operation, and none ever will. NetJets’ unrelenting focus on safety and service has paid off in the marketplace.”
“Its a joy to watch Marmon’s progress under Frank Ptak’s leadership. In addition to achieving internal growth, Frank regularly makes bolt-on acquisitions that, in aggregate, will materially increase Marmon’s earning power. (He did three, costing about $270 million, in the last few months.) Joint ventures around the world are another opportunity for Marmon. At midyear Marmon partnered with the Kundalia family in an Indian crane operation that is already delivering substantial profits. This is Marmon’s second venture with the family, following a successful wire and cable partnership instituted a few years ago. Of the eleven major sectors in which Marmon operates, ten delivered gains in earnings last year. You can be confident of higher earnings from Marmon in the years ahead.”
“Last year See’s had record pre-tax earnings of $83 million, bringing its total since we bought it to $1.65 billion. Contrast that figure with our purchase price of $25 million and our yearend carrying-value (net of cash) of less than zero. (Yes, you read that right; capital employed at See’s fluctuates seasonally, hitting a low after Christmas.) Credit Brad Kinstler for taking the company to new heights since he became CEO in 2006”.
“Our experience with NFM and the Blumkin family that runs it has been a real joy. The business was built by Rose Blumkin (known to all as “Mrs. B”), who started the company in 1937 with $500 and a dream. She sold me our interest when she was 89 and worked until she was 103. (After retiring, she died the next year, a sequence I point out to any other Berkshire manager who even thinks of retiring.)”
Mrs. B’s son, Louie, now 92, helped his mother build the business after he returned from World War II and, along with his wife, Fran, has been my friend for 55 years. In turn, Louie’s sons, Ron and Irv, have taken the company to new heights, first opening the Kansas City store and now gearing up for Texas. The “boys” and I have had many great times together, and I count them among my best friends. The Blumkins are a remarkable family. Never inclined to let an extraordinary gene pool go to waste, I am rejoicing these days because several members of the fourth Blumkin generation have joined NFM.”
That is certainly a boat load of superlatives and the highest of compliments and praise. It seems self evident that this kind of personal specific and public praise would be highly motivating. And yet how many CEOs do anything remotely like this in their annual reports (or elsewhere)?
As proof that Warren Buffet’s managers are motivated and loyal consider what Buffett wrote in his 2002 annual letter: In 38 years, we’ve never had a single CEO of a subsidiary elect to leave Berkshire to work elsewhere.”
As an indication of the trust placed in his managers consider what Buffett said in his 1988 letter. “Fechheimer (A family run business that Berkshire purchases control of in 1986) made a fairly good-sized acquisition in 1988. Charlie and I have such confidence in the business savvy of the Heldman family (The founding and managing family) that we okayed the deal without even looking at it. There are very few managements anywhere – including those running the top tier companies of the Fortune 500 – in which we would exhibit similar confidence.
“Our workers and unions have exhibited unusual understanding and effort in cooperating with management to achieve a cost structure and product mix which might allow us to maintain a viable operation. (2) Management also has been energetic and straightforward in its approach to our textile problems. In particular, Ken Chace’s efforts after the change in corporate control took place in 1965 generated capital from the textile division needed to finance the acquisition and expansion of our profitable insurance operation.”
“We must again give credit to Phil Liesche, greatly assisted by Roland Miller in Underwriting and Bill Lyons in Claims, for an extraordinary underwriting achievement in National Indemnity’s traditional auto and general liability business during 1977.”
“Our reinsurance department, managed by George Young, improved its underwriting performance during 1977.”
“At Home and Auto, John Seward continued to make progress on all fronts. John was a battlefield promotion several years ago when Home and Auto’s underwriting was awash in red ink and the company faced possible extinction. Under his management it currently is sound, profitable, and growing.”
“In addition to actively supervising the other four homestate operations, John Ringwalt manages the operations of Cornhusker which has recorded combined ratios below 100 in six of its seven full years of existence and, from a standing start in 1970, has grown to be one of the leading insurance companies operating in Nebraska utilizing the conventional independent agency system. Lakeland Fire and Casualty Company, managed by Jim Stodolka, was the winner of the Chairman’s Cup in 1977 for achieving the lowest loss ratio among the homestate companies. All in all, the homestate operation continues to make excellent progress.”
“It is commonplace, in corporate annual reports, to stress the difference that people make. Sometimes this is true and sometimes it isn’t. But there is no question that the nature of the insurance business magnifies the effect which individual managers have on company performance. We are very fortunate to have the group of managers that are associated with us.”
And consider what Buffett wrote about Mr. Harry Bottle the first manager that Buffett had hired and who had done wonders improving Buffett’s Dempster Mills Manufacturing in 1962. The 1962 letter states “Harry is unquestionably the man of the year. Every goal we have set for Harry has been met, and all the surprises have been on the pleasant side. He has accomplished one thing after another that has been labeled as impossible…”
In his December 5, 1969 letter Buffett described the three managers of three “excellent businesses” that he had purchased. The three managers were largely responsible for building each operation from scratch. and were each over sixty. “These men are hard working, wealthy and good — extraordinarily good.”
The fact is Buffett has been making effusive compliments, in public forums, about his best managers, by name, since “day one”. It’s very apparent that this form of motivation has worked very well indeed.
And how does Buffett manage his approximately 60 direct reports?
This is illustrated in his 2010 letter:
“…we possess a cadre of truly skilled managers who have an unusual commitment to their own operations and to Berkshire. Many of our CEOs are independently wealthy and work only because they love what they do. They are volunteers, not mercenaries. Because no one can offer them a job they would enjoy more, they can’t be lured away. At Berkshire, managers can focus on running their businesses:”
“They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years (it’s reproduced on pages 104-105 (click the link here and then scroll to page 7 and click the link)) and call me when they wish. And their wishes do differ: There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A “hire well, manage little” code suits both them and me.”
“Berkshire’s CEOs come in many forms. Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required.” ‘
“Our managers will deliver; you can count on that.”
Here are some interesting exerts from his 1987 letter:
“With managers like ours, my partner, Charlie Munger, and I have little to do with operations. … We have no corporate meetings, no corporate budgets, and no performance reviews… Our major contribution to the operations of our subsidiaries is applause. But it is not the indiscriminate applause of a Pollyanna.”
And how does Buffett find new managers when one of his businesses needs one? As the letter referenced above that is sent to his managers every two years indicates, he hires from within. I suspect that fact is quite motivating to the lower levels of management at each of his companies.
Warren Buffett is truly an extraordinary manager. He has shared his management techniques for achieving the most remarkable results. But relatively few even bother to try to learn how to manage from him. It’s a pity.
Shawn C. Allen, CFA, CMA, MBA, P.Eng.
President, InvestorsFriend Inc.
July 11, 2012 (with minor edits and additions to November 11, 2014)