How being in Berkshire adds value to its subsidiaries
Good afternoon, Mr. Buffett and Mr. Munger. I’m Patrick Wolff, formerly from Cambridge, Massachusetts and soon to be from the San Francisco area.
Like many people around the world who want to learn about business, I’ve read all of your letters to the shareholders. And like many people here in this room, I was so impressed that I bought a piece of the company.
But I must admit that, in studying Berkshire Hathaway, there’s one element that I didn’t quite understand, and I’d love it if you could please explain it. And that is the following.
How does Berkshire Hathaway add value to the various wholly-owned companies in the manufacturing services and retail division?
And the reason I ask this question is, as you yourself said earlier this morning, it’s very difficult in negotiated purchase agreement to buy a company for anything other than what it’s truly worth.
So if Berkshire Hathaway is going to create value by buying such fantastic companies as the Nebraska Furniture Mart, or See’s Candies, or any of the other fantastic businesses we have, there must be some way in which Berkshire Hathaway adds to that value. Could you please explain how we do that?
In certain specific cases, the case of General Re being the most recent example, we actually laid out in the proxy material why we thought there was at least a reasonable chance that the ownership by Berkshire would add value.
And we got into various reasons about the ability to use the float, and tax advantages, and the ability to move faster around the world, and that sort of thing. So we’ve actually spelled that out in that case.
I think in the case of something like Executive Jet, you might well figure that there are some reasons why association with Berkshire would put Executive Jet on the map and in the minds of people who could afford to buy fractional ownerships of planes, faster than might otherwise be the case.
But usually the situation… so there are specific cases where we bring something to the party. But the biggest thing we bring to the party on a generalized basis is what I spelled out a little bit in the annual report this year in talking about GEICO.
We enable terrific managers to spend, in many cases, to spend a greater percentage of their time and energies on what they do best, and what they like to do best, and what is the most productive for owners than would be the case without our ownership.
In other words, we give them a very rational owner who expects them to spend all of their time focused on what counts for the business and eliminates the distractions that often come with running a business, particularly a publicly-owned business.
I would guess that the CEOs of most public companies waste a third of their time, at least, in all kinds of things they do that really don’t add a thing to the business… in many cases subtract, because they’re trying to please various constituencies and waste their time with them, that take the company backwards.
But we eliminate all of that. So, we simply can create an ownership… we think we can create the best ownership environment, frankly, that can exist… other than maybe owning it a hundred percent yourself… for any business.
And that happens to also go along with how we like to lead our lives, because we don’t want to run around and attend a lot of meetings and do all of these things that people do. And that’s… that can be a significant plus.
I think that GEICO has probably grown a fair amount faster as a subsidiary of Berkshire than it would have if it had remained an independent company, although it was a hell of an independent company and would have continued to be one.
But I think billions and billions of dollars will be added to the value of GEICO, over and above what would have happened if it had reminded a public company. Not because, as I put in the report…
Now we haven’t taught the management one thing about the classification of insurance risk, or how to run better ads, or anything of the sort. We’ve just let them spend a hundred percent of their time focused on what counts. And that is a rare occurrence in American business.
Yeah. Just not having a vast headquarters staff to tell the subsidiaries what to do… that helps most of the kind of subsidiaries that we buy. They are not looking for a lot of people looking over their shoulder from headquarters, and a lot of unnecessary flights back and forth, and so on.
So, I would say most of what we do, or at least a great part of what we do, is just not interfere in a counterproductive way. And that non-interference has enormous value, at least with the kind of managers and the kind of businesses that have joined us.
And a great many… you have to see it to believe it… but in a great many corporate operations, the importance of a large group of people is tied to how much they meddle in the affairs of other people who are out there doing the work.
And, you know, we stay out of the way. And we’re appreciative owners and we’re knowledgeable owners. We know when somebody has done a good job and we know when they’ve done a good job when industry conditions are terribly tough.
So, we can look at our shoe operations, for example. And, you know, they are in tough industry conditions now. We’ve got some absolutely terrific people. And we are knowledgeable enough about that, so we don’t go simply by a bunch of figures and make a determination whether people are doing the right thing.
So, we’ve got… we’re knowledgeable owners and we have no one whose job at headquarters is to go around and tell our managers how to run their human relations departments, or how to run their legal departments, or a dozen other things.
And not only do people have more time to work on the productive things, but I think they probably actually appreciate the fact that they’re left alone.
So, I think you even get more than the proportional amount of effort out of them than would be indicated simply by the amount of time you free up, because I think you get even an added enthusiasm for the job.
And I think having people in a large organization that truly are enthusiastic about what they’re doing, that doesn’t happen all the time. But I think it does happen to a pretty good degree at Berkshire.
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