How does Buffett manage Berkshire?

Table of Contents

Berkshire is no ordinary company

Investors must be very curious: Berkshire (ticker: BRK.A and BRK.B), the top five market capitalization constituents of the US stock market in 2021, as I listed in my post of “2022 S&P 500 Constitutent Stocks Performance“. Berkshire includes a large number of subgroups and subsidiaries, employing more than 372,000 employees (according to Fortune magazine in 2021 survey rankings, ranked ninth in the United States), and the scale continues to increase. Buffett is 92 years old, so how does he manage such a huge corporate empire?

What does Buffett usually pay attention to?

In the 2008 shareholder letter, Buffett talked about the important matters that he usually pays attention to Berkshire.

In good years and bad, Charlie and I simply focus on four goals:

(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;
(2) widening the “moats” around our operating businesses that give them durable competitive advantages;
(3) acquiring and developing new and varied streams of earnings;
(4) expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.

Buffett’s two managing principles

In his 1986 shareholder letter, Buffett disclosed in detail that he was only responsible for two tasks in Berkshire:

Attract and keep outstanding managers to run our various operations
Allocation of capital

Attract and keep outstanding managers

The basic principle

This hasn’t been all that difficult. Usually the managers came with the companies we bought, having demonstrated their talents throughout careers that spanned a wide variety of business circumstances. They were managerial stars long before they knew us, and our main contribution has been to not get in their way. This approach seems elementary: if my job were to manage a golf team – and if Jack Nicklaus or Arnold Palmer were willing to play for me – neither would get a lot of directives from me about how to swing.

Some of our key managers are independently wealthy (we hope they all become so), but that poses no threat to their continued interest: they work because they love what they do and relish the thrill of outstanding performance. They unfailingly think like owners (the highest compliment we can pay a manager) and find all aspects of their business absorbing.

We subscribe to the philosophy of Ogilvy & Mather’s founding genius, David Ogilvy: “If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants.“

Unlimited number of people a manager can manage

A by-product of our managerial style is the ability it gives us to easily expand Berkshire’s activities. We’ve read management treatises that specify exactly how many people should report to any one executive, but they make little sense to us. When you have able managers of high character running businesses about which they are passionate, you can have a dozen or more reporting to you and still have time for an afternoon nap.

Conversely, if you have even one person reporting to you who is deceitful, inept or uninterested, you will find yourself with more than you can handle. Charlie and I could work with double the number of managers we now have, so long as they had the rare qualities of the present ones.

We intend to continue our practice of working only with people whom we like and admire. This policy not only maximizes our chances for good results, it also ensures us an extraordinarily good time. On the other hand, working with people who cause your stomach to churn seems much like marrying for money – probably a bad idea under any circumstances, but absolute madness if you are already rich.

Against a retirement age for managers

In an interview with the media after the shareholders meeting in April 2022, he emphasized that his health was “too good to be good”, so he had no plans to remove the CEO of Berkshire.

In his letter to shareholders in 1990, Buffett stated: “We have no mandatory retirement age for directors at Berkshire (and won’t!)”

No corporate meetings, budgets, or performance reviews

In his letter to shareholders in 1987, Buffett wrote:With managers like ours, my partner, Charlie Munger, and I have little to do with operations. in fact, it is probably fair to say that if we did more, less would be accomplished. We have no corporate meetings, no corporate budgets, and no performance reviews (though our managers, of course, oftentimes find such
procedures useful at their operating units). After all, what can we tell the Blumkins about home furnishings, or the Heldmans about uniforms?

Management as prerequisite of acquisitions

In Buffett’s 1982 shareholder letter, he listed “management in place (we can’t supply it)” as one of the six criteria for Berkshire to acquire any company (see my other blog post “Buffett’s Acquisition Criteria”). In particular, excellent management is listed as a condition for acquisitions. Therefore, the companies acquired by Berkshire have already been equipped with excellent and qualified management. This can also save Berkshire a lot of trouble and ensure that the company can continue to deliver excellent performance.

Capital allocation

Buffett’s demands on himself

At Berkshire (capital allocation) is a considerably more important challenge than at most companies. Three factors make that so:

We earn more money than average;
We retain all that we earn; and,
We are fortunate to have operations that, for the most part, require little incremental capital to remain competitive and to grow.

Obviously, the future results of a business earning 23% annually and retaining it all are far more affected by today’s capital allocations than are the results of a business earning 10% and distributing half of that to shareholders. If our retained earnings – and those of our major investees, GEICO and Capital Cities/ABC, Inc. – are employed in an unproductive manner, the economics of Berkshire will deteriorate very quickly. In a company adding only, say, 5% to net worth annually, capital-allocation decisions, though still important, will change the company’s economics far more slowly.

What Buffett asks of his CEOs

In section 2-2 of my book “The Rules of Super Growth Stocks Investing”, on page 87, there is the following paragraph:

Buffett once told the media that he only gave the CEOs of the Berkshire family two tasks:

Continue to do what they have been doing for many years and continue to widen the company’s moat. It is not necessary for the company to be more profitable every year, because sometimes it cannot be done; however, if the company’s moat continues to widen every year , the business will do well.
Send the cash earned by the company to Omaha (the city where Berkshire’s headquarters is located), and he will allocate it uniformly for investment.

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