Warren Buffett is regarded as the best investor of this era, even the "god of stocks", but his management record is also unparalleled. He took over Berkshire Hathaway in May 1965, exactly 50 years ago. To this day, he is still the head of the company. This is an extraordinary achievement. Alfred P. Sloan is probably the most legendary CEO in American business history. He has been in charge of General Motors for 23 years. John D. Rockefeller has been in charge of Mobil for 27 years. In the near future, Bill Gates served as the CEO of Microsoft for 25 years.
But that's the problem. Although investors around the world are eager to imitate Buffett's investment method, it is no exaggeration to say that his management mode has no impact on the company culture. Charlie Munger is an old comrade of Warren Buffett and a vice president of Berkshire. In his view, the "Berkshire system" is the key to the company's success. However, Munger wrote in his public letter to shareholders in 2015, "No big company I know has half the elements of this system."
One of the characteristics of Buffett's management style is to pay special attention to capital allocation. For Buffett, adding a company to the Berkshire system is the same as adding a stock to his portfolio. However, once the acquisition is completed, Buffett will almost never sell and give the company's managers great autonomy.
Another feature is to avoid bureaucracy. Berkshire has not implemented a standardized process for its more than 60 companies. This huge consortium with 340000 employees does not have a company wide budget.
The third feature is that we do not engage in corporate rituals that are common and that, in Buffett's view, only breed short-term thinking. Therefore, the company never issued performance guidance, did not often engage in stock splits, and did not have stock options.
Of course, we should admit that not every aspect of Buffett's style is suitable for all industries, and some of these elements may lead to a variety of problems (this will continue to be discussed below). But in the half century since he took the helm, Berkshire's share price has risen 12000 times, while the Dow Jones Industrial Average has risen only 18 times in the same period. At present, Berkshire's market value is up to 350 billion US dollars, ranking the third among listed companies in the United States. From this, we can imagine that he must have some aspects worth learning from some managers.
Of course, I must clarify that I personally invested in Berkshire. I am a member of the board of directors of a mutual fund that owns shares of the company, and also the author of Buffett's biography. So don't expect me to have an impartial outlook on Berkshire's prospects.
Strangely, when he bought Berkshire, Buffett did not use his signature strategy of friendly acquisition of excellent companies with good leadership. In his recent letter to shareholders, he told the story. At that time, Berkshire was just a textile enterprise in deep trouble under the siege of low-cost rivals. Buffett bought this company on impulse. After his partnership investment company bought the shares of the company, Buffett became more and more disappointed with his management strategy, and finally bought the controlling shares and drove the CEO out of the company. It was 1965, and Buffett was 34 years old (now he is 85 years old).
By observing the mistakes of the former CEO of the company, Buffett learned the first lesson: Never invest useful money in bad business, even if it is your own business. Berkshire has struggled in the textile industry for more than 20 years. After a lot of efforts, the company's meager profits gradually become rich. By the time he closed the factory in 1985, Berkshire had a considerable stake in insurance, newspapers, candy and manufacturing, as well as a large common stock portfolio.
By then, Buffett's partnership investment company had paid off: its investors had acquired Berkshire shares, and Buffett became the largest shareholder of the company. The partnership legacy is important because Berkshire still operates under this system. The directors of the company receive only symbolic remuneration and no liability insurance. They buy a lot of stocks. This kind of institutional arrangement, which is almost unheard of in the history of American companies, means that directors must be deeply convinced of their mission.
Buffett's relationship with shareholders also reflects the essence of partnership. Buffett never does anything to boost the stock price in the short term (such as issuing performance guidance), because he wants to establish a long-term shareholder relationship. He rarely uses shares to pay for acquisitions, because he does not want to dilute shares.
Buffett also does not engage in equity incentives, because doing so will decouple the interests of executives from those of ordinary investors. In fact, Berkshire is also very different from traditional practices in terms of executive compensation. Buffett and Munger are paid only $100000 each, and there is no bonus. Today, many CEOs can earn $100000 only every day.
If the inner greed is the reason why those peers are unwilling to adopt Buffett's salary model, then there is something else - it can be called the insecurity of the management - that makes them not want to follow his detached attitude towards short-term performance. Many CEOs are so scared of Wall Street that they dare not disappoint investors, and they are often satisfied with obtaining some ostentatious surface value. Splitting stocks to improve liquidity is a manifestation of this mentality, as is stripping corporate assets to "release" value.
How to manage the company like Buffett
Warren Buffett's three management secrets of controlling Berkshire Hathaway for 50 years:
- Let managers be independent - the managers of more than 60 companies owned by Berkshire have great autonomy, which also makes them willing to serve the company for a long time.
- Bureaucratic habits must be eliminated - corporate decision-makers encounter red tape at the budget, legal and public relations levels, which means you will miss many opportunities.
- Don't manipulate the stock price - performance guidance, stock splitting and asset stripping are short-term behaviors, and they have little or no effect on shareholders' interests in the long run.