October 22nd, 2014
“Although Berkshire is one of the world’s largest and most famous corporations, few people understand it as an institution that will be Buffett’s legacy.”—Lawrence Cunningham
The following post is by Lawrence Cunningham, author of Berkshire Beyond Buffett: The Enduring Value of Values. For more on the book you can also read an interview with Lawrence Cunningham.
While everyone knows that Warren Buffett modeled himself after Ben Graham as a stock picker, few know that as a manager, he modeled himself after Tom Murphy.
Murphy is the legendary executive whose skillful acquisitions and leadership resulted in the Capital Cities communications empire. In 1985, he engineered the acquisition of ABC, Inc. for $3.5 billion, among the largest takeovers of the time, and a decade later facilitated its acquisition by Walt Disney Co. for $19 billion.
When I asked Buffett who should write the foreword to Berkshire Beyond Buffett, he immediately suggested Murphy. Warren, an early investor in Capital Cities who later asked Murphy to join Berkshire’s board, explained that “everything I know about management I learned from Tom.”
Judging by Berkshire’s operational success over several decades, Buffett clearly knows a lot about management. Reading Murphy’s foreword together with my book, it’s clear that the management principles Murphy exemplifies animate Berkshire as well. Among those principles, three stand as bulwarks against skepticism of Berkshire’s size, governance, and durability: a commitment to permanence dismisses calls for Berkshire to shrink by divesting some businesses; a belief in autonomy explains its unusual approach to internal control; and a savvy acquisitiveness proves the track record of its deep managerial bench that will sustain its future.
Permanence: Observers ask whether it might be desirable to divide Berkshire’s 50+ direct subsidiaries into multiple corporations or spin-off certain businesses. Some argue that size is an albatross that limits growth and that vastness is a veil that obscures the real value of many subsidiaries. See’s Candies, for instance, would fetch billions if auctioned to Hershey or Nestlé, but Berkshire’s stock market price might not register such value.
The answers to petitions to shrink or break-up Berkshire are an emphatic no and no. Doing so would undermine two sources of value contributed by the bedrock principle of permanence. First, permanence elongates managerial time horizons to enable increasing long-term value in excess of short-term gain. Second, the promise of permanence offered when acquiring new businesses enables Berkshire to pay a cash price less than business value. Divisions and divestitures are antithetical to both sources of value.