Is it possible to build a huge and successful company and still be an awesome boss? Warren Buffett might be one of the few people on the planet to pull this off.
Through the acquisition of dozens of companies that currently make up the $315 billion Berkshire Hathaway, Buffett has never gotten involved too closely with layoffs, management shakeups and cost-cutting that goes along with acquisitions that usually take place at other firms. Buffett’s particular style let’s underperforming businesses languish and then makes them very unique, but it’s also one of his biggest shortcomings, admitted by the chairman and CEO during the annual shareholders meeting in Omaha, Nebraska this past weekend.
When a shareholder asked Warren Buffett to highlight his weaknesses, he said that as a manager, he can be “sloppy.” “A pure weak point is, I’m slow to make personal changes,” said Buffett on Saturday. “There will be times when what you might call our lack of supervision of our subsidiaries means we’ll miss something.”
Without going into any specifics, Buffett recalls one example. “We had a guy, we loved the guy, and it wasn’t killing us in our business, and how long before we went to somebody else?” (Neither Charlie Munger or Warren Buffett could remember.) “We’ve waited too long on one manager sometimes,” said Buffett.
These comments from Buffett came amidst some grumbling investors visiting Omaha that say the Oracle is much too hands-off. They feel he should take a page from Bill Ackman’s book of Pershing Square Capital, or follow the lead of 3G Capital, a turnaround specialist. A number of the questions from shareholders and analysts this past Saturday focused on whether Berkshire Hathaway, who teamed up with 3G capital to purchase Heinz in 2013, would adopt the hands-on approach of 3G when it comes to future acquisitions.
Buffett certainly praises 3G as a partner (“They’re smart, and they’re focused; they’re very hard-working and determined.”) And he also noted that “they’re never satisfied,” and defended the gentler way of doing things at Berkshire Hathaway. Buffett does not like to tell the other subsidiaries that they need to do certain things or restrict certain actions or get rid of certain employees. “We’re not big disciplinarians,” said Buffett. And as Charlie Munger put it, “By the standards of the rest of the world, we over-trust.”
Buffett trusts the various CEOs at Berkshire Hathaway so much that he doesn’t pay close attention to the amount of money that they send him and when, and he doesn’t even bother to double check that these companies even exist. He’s never actually visited Forest River, the recreational vehicle manufacturer based out of Indiana owned by Berkshire Hathaway, as an example. “I hope it’s there,” joked Buffett. “I could see them saying, ‘What figure should we send Warren this month?’” He said while laughing. (“I don’t want to encourage managers of subsidiaries to do a different way of behaving, if they’re listening,” added the Oracle of Omaha.)
Things will eventually go wrong when you leave companies alone and allow them the run themselves, acknowledged Buffett. But he also took issue with those critics that complain and say that the Berkshire Hathaway returns would be higher if Buffett and company ran a tighter ship. “What they won’t be able to measure is how much on the positive side we have achieved with so many other people because we gave them that leeway,” he said, and made note that Berkshire Hathaway doesn’t have a human resources department or in-house general counsel.
As for the brand of activism initiated by Ackman, Buffett almost looked like he was offended by a potential likeness between the hedge fund manager and Berkshire Hathaway. First of all, unlike Ackman, who has most recently made the headlines for shorting the position Herbalife and a hostile bid to buy Allergan, a Botox manufacturer, Warren Buffett doesn’t trade in derivatives or short stocks. He’s also very skeptical of the fact that the activists’ success is difficult to sustain, and he said that they are typically only looking for something that will cause a short-term stock price swing, not looking to create improvement through permanent change. For his part, Charlie Munger swore off investor activism in general, and said “I don’t think it’s good for America.”
Will Warren Buffett’s successor end up being a hard-line boss? We would not count on it.
One of the most valuable assets of Berkshire Hathaway, reiterated by investors and Buffett alike over the weekend, is other businesses’ willingness to sell to Berkshire Hathaway – and often do so at a lower price than what the private equity firms would pay – because of the trust they have with Buffett minding the store.
As Whitney Tilson, hedge fund manager of Kase Capital Management put it on Friday, “Berkshire is like a museum, like the Met, where people will sell their most valuable art just because they know it’s going to be safe there.”
And Buffett added, “We keep promises, and that means we sometimes end up holding on to some businesses that haven’t lived up to their expectations.”