Berkshire’s Blemishes: Lessons for Buffett’s Successors, Peers, and Policy

Lawrence A. Cunningham is the Henry St. George Tucker III Research Professor of Law at George Washington University. This post is based on a recent paper by Professor Cunningham.

While people routinely laud the value of Warren Buffett’s unique governance of Berkshire Hathaway, I have tallied the costs, highlighting lessons for Buffett’s successors, Berkshire’s peers, and public policy.

The most visible—and measurable—costs of the Berkshire model appear in capital allocation, principally acquisitions and investments. Buffett relies on himself in making these decisions, without board or executive input or oversight. While most such decisions have succeeded, many spectacularly so, some bloopers have appeared. The costs of error from such self-reliance could readily be mitigated by broader distribution of decision-making power.

The more dramatic costs of the Berkshire model arise from executive departures and succession at the subsidiaries. While most Berkshire managers have excelled and the company generally retains managers for lengthy tenures, there are exceptions that become costly because they suggest crisis. The drama of Berkshire executive shuffles arises in part from Buffett being the company’s sole decision-maker, but it is magnified by Berkshire’s lack of formal vetting, training, grooming, and talent review protocols. This problem should be remedied now, while Buffett is at the helm.

Subtler costs arise from Berkshire’s zealous thriftiness that leave it without a centralized communications or public relations department. Given Berkshire’s scale and reach, however, along with relatively opaque disclosure about many operations, it attracts investigative journalists targeting subsidiaries for critical exposure and sometimes political or legal advantage. As laudable the thrifty anti-bureaucratic impulse, the company would nevertheless do well now to hire a professional to handle Berkshire’s overall public relations, for both parent-level communications and to coordinate that of subsidiaries.

The most significant historical cost of the Berkshire model has been widespread treatment of Berkshire as Buffett’s alter ego, a natural propensity given his long-time controlling ownership and dominating leadership. It became a cost, however, as Buffett became outspoken in offering his personal views on a range of hot topics on which Berkshire may act differently—or critics so perceive, and charge hypocrisy.

Although these costs cannot be tackled with Buffett at Berkshire’s helm, successors can avoid them by reticence—executive behavior that clearly distinguishes the company from its personnel, including refraining from offering personal opinions in public debates.

To summarize, the principal sources of the costs of Berkshire’s model are self-reliance, a culture of autonomy and trust, decentralization, thrift, and alter ego. Resulting costs may be categorized as the costs of error, crisis, externalities, reputation, and uncertainty. Corrective measures to enact now are incrementally greater leadership coordination, increased grooming to minimize the costs of succession crises, and hiring of a professional public relations expert to protect reputation. Measures to enact in due course are slightly wider sharing of decision-making power over capital allocation to neutralize error risk; modest strengthening of internal reporting controls to police against externalities; and maintenance of executive reticence on matters of public policy to avoid the costs of treating Berkshire’s leadership as synonymous with the company.

The Berkshire model offers lessons for other companies and policymakers. Given the model’s substantial net success, a fundamental prescription is to allow corporations broad leeway in governance design and organizational structure. In their modesty, Berkshire’s specific blemishes reaffirm the value of such latitude while attesting to the general appeal of the type—but not the degree—of prevailing governance regulation or practice. Leading examples are having some deliberative body such as a board, but accepting the traditional advisory model rather than insisting on the contemporary monitoring model; allowing even iconic chief executives significant, if restrained, autonomy; leaving substantial room for trust as the basis of an organization, complemented by controls tailored to internal needs rather than imposed by general regulation; and permitting the conglomerate form of organization to flourish under conditions such as those Berkshire has nurtured while assuring the capacity for such institutions to defend themselves against hostile onslaught by corporate raiders or shareholder activists.

The complete paper is available here.

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