Hath Berkshire a Way?

I read a fascinating critique of Berkshire Hathaway by Francine McKenna.  Francine suggests that Berkshire is so decentralized that Warren Buffett and the other 20 people working in his headquarters can’t possibly plan and control the operations of 260,000 employees.  Even considering its legendary returns on investment, Berkshire has made some monumental blunders: GE, General Re and (as Francine reminded me by Twitter last night) Salomon Brothers. 

First of all, I deeply respect Warren Buffett.  I have taught his “fundamental analysis” approach in my own financial statement analysis course for almost ten years.  I’ve read Roger Lowenstein’s biography of Buffett, The Making of An American Capitalist, and it is sitting on my shelf right now.

Consider this:  At first impression, Buffett’s ubiquitous Letter to Shareholders seems folksy.


“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 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.”

On reflection, it looks downright scary.  Who is minding the store?  Shouldn’t managers have some “financing worries?”  Shouldn’t they receive communication from Headquarters more often than once every two years?  How could Buffett go a year without speaking to any of his managers?

What do you think?

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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

5 comments

  1. I have yet to read "The Making of an American Capitalist", but I read "The Snowball" about a year ago and I found it fascinating. It gives you a completely different view and changes one's perception on Mr. Buffet. I also read "The Intelligent Investor" by Mr. Graham a while ago and will definitely sign up for the Financial Statement Analysis class next semester.

  2. I don't think anyone can really question Warren Buffet's management style. Based on his history, it works pretty well. By not having managers worry about things like financing and constantly reporting back to headquarters, allows them to focus on their business. The more time they have devoted to focusing on and developing their business, usually leads to new innovations, products, and making the business more efficient. I think this is what Warren Buffet wants out of the managers of the companies he invests in and so he gives them the opportunity to do so by taking some of the corporate responsibilities off their plate.

  3. Although a decentralized culture encourages creativity and flexibility among an organization, Warren Buffett’s management style seems a little too decentralized when he speaks to some managers as little as every two years. I greatly respect Warren Buffett and this management style seems to work for him since it allows his subordinates to gauge how often it is necessary to communicate with him. However, when it comes to financial concerns, among other things, I believe that there should be a little more instruction and guidelines should be set in place by Buffett. On a side note, I am actually taking your financial analysis class this semester and am interested to learn about Buffett’s “fundamental analysis” approach.

  4. In my opinion, with such an unmatchable sound investing nohow, Warren Buffett's management style really should not be questioned. His confidence in the caliber of managers he hires is summarized in his own words when he says,"our trust is in people rather than process. A “hire well, manage little” code suits both them and me." Also, Buffett in his financial investment wisdom says, "the basic ideas of investing are to look at stocks as business, use the market's fluctuations to your advantage, and seek a margin of safety. That’s what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing." This leads me to believe that a centralized management approach to doing business is not critical for success, but the aforementioned fundamental principles. Moreover, I believe that Buffett has "SMART" goals in place which are strictly adhere to be his managers, since they are evidently efficient and effective at what the do – increase shareholder value.

  5. While Buffet's method of having a decentralized culture in the workplace is ideal in the sense that it relies on having trust in people rather than giving direction consistently which could frustrate managers, there is one major problem that I am finding with this system. When running a business, there has to be uniformity. To your point, "Who is minding the store?", if from one store to another, or from one manager to another in a company there is no direction from headquarters on a regular basis, then there is no uniformity; hence chaos for the clients and employees. In order to maintain the image of the company, there should be direction that the employees are given more than once every 2 years so that procedures are in place and are followed consistently from manager to manager.

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