Berkshire Hathaway 1994 Annual Meeting Audience Question # 74

Warren and Charlie will never delegate Berkshire’s capital allocation to any staff

Warren Buffett:

Zone 1?

Audience Member:

Byron Wien from New York.

You said that you decentralized the operating decisions, but centralized the capital allocation decisions.

What kind of staff do you have in Omaha to help you with the capital allocation decisions and the stock selection decisions you make? Or do you and Charlie do that, pretty much, by yourselves?

Warren Buffett:

Yeah, we don’t have any staff to help us on it. I mean, basically we tell them to mail all the money to Omaha… and then when we get there, we put our arms around it.

And we allocate all the capital ourselves. I mean, that is our job.

And we don’t feel we should delegate, I mean, we wouldn’t do it anyway. Our personalities aren’t such that we would delegate our… allocating our own money to someone… letting somebody else allocate our own money.

But we feel that’s our job. And it’s interesting, and we’ve… I’ve written about this in the past — that that’s an important job for most managements. There’s some companies where it’s not, but it’s a… it usually is a very important job for most managements.

And if you take a CEO that’s in a job for 10 years, and he has a business that earns, say, 12 percent on equity, and he’s… and he pays out a third, that means he’s got 8 percent per year of equity. I mean, when you think of his tenure in office, how much capital he’s allocated, it’s an enormous factor over time.

And yet, probably relatively few chief executives are either trained for, or are selected on, the basis of their ability to allocate capital. I mean, they get there through other routes.

So, I’ve said it’s like somebody playing the piano all their life, and then getting to Carnegie Hall and they hand him a violin. I mean, it is a different function than most… than the route… than the functions that exist along the routes to the CEO’s job at most companies.

And so many CEOs, when they get there, think they can solve it by either having a staff that does it, or by hiring consultants, or whatever it may be.

And in our view, that is… and that’s a terrible mistake, because it’s… it is, if not the key function of the CEO, it’s one of two or three key functions at say 80 or 90 percent of all companies.

And if you can’t do it yourself, you’re going to make a lot of mistakes. You may make a lot of mistakes even if you do it yourself.

But if you… You know, you wouldn’t want anybody in any other position of that importance in the company essentially saying, “I don’t know how to do this, so I’m going to have somebody else do it,” when it’s their key responsibility. But that’s the way it works in business.

And Charlie and I take responsibility for all capital allocation decisions, other than just, sort of, routine expenditures at the operating businesses. And we don’t get into those at all.

I mean, if our managers are spending three or four million dollars a year on machinery… or if one of them is, I mean… on machinery, equipment, plants, new leases… we have no review process on that. We don’t have a staff at headquarters. We don’t waste the time to do that.

We think those people know how to allocate the money that relates to the actual operations of their business. We think, in terms of the capital that is generated above that, that that’s our job.

Charlie, anything…?

Charlie Munger:

I would say we have practically nobody at headquarters in Omaha. One of the reasons Warren shines up so well is, you know, he’s being compared to practically nobody.

Warren Buffett:

I might say if… one interesting… when we’re having this meeting, for example, I think there’s one person there in the office. I mean, the rest of them are down here helping on the meeting. I mean, it…

Charlie Munger:

Here we are, Warren and I are selling candy and encyclopedias, and so forth. The chief financial officer of Berkshire Hathaway is handling the microphones. I mean, this makes Southwest Airlines look like they don’t understand…

Warren Buffett:

Cost control.

Charlie Munger:

…cost accounting, yeah. It’s a very old-fashioned place.

And by the way, speaking of hawking our merchandise, if any of you have safety deposit boxes full of Berkshire Hathaway certificates, and have children or grandchildren who don’t have World Book in print in the house, you are making a very serious error.

That is a marvelous thing for… to have in the house with…

Warren Buffett:

And the discount only applies…

Charlie Munger:

…full of young people.

Warren Buffett

The discount only applies today… incidentally. I think that’s right.

Charlie Munger:

It is. That is, it may not be selling too well because of the current vogue for encyclopedias on computers. And by the way, those encyclopedias that are available are inferior compared to World Book, which is very user-friendly for children, and I like it that way
myself. And…

Warren Buffett:

We…

Charlie Munger:

That is one product you really ought to buy.

Warren Buffett:

We both use it, personally. I mean, I keep a set at the office, and a set at home. And I…

Charlie Munger:

I give away more of that product…

Warren Buffett:

…I use it a lot.

Charlie Munger:

…than other product that Berkshire Hathaway makes in any subsidiary. It’s a perfectly fabulous human achievement. To edit a thing, to… that user friendly, with that much wisdom encapsulated. It is a… it’s a fabulous thing.

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