Berkshire Hathaway 2009 Annual Meeting Audience Question # 45

Business conditions can change such as to necessitate temporary or permanent layoffs

Warren Buffett:

OK, Andrew?

Andrew Ross Sorkin:

So this question comes from three shareholders who happen to be employees of Berkshire portfolio companies. They’ve asked not to be named in the… they ask the following question.

They say, “We are concerned with both the financial condition of the company and the stability of our jobs. Could you discuss your attitude towards the use of layoffs as a means of responding to short-term downturns in company profits?”

Warren Buffett:

Yeah, these are investee companies or subsidiaries?

Andrew Ross Sorkin:

These are… I imagine they are investee companies. They…

Warren Buffett:

Yeah.

Andrew Ross Sorkin:

And they are shareholders and employees.

Warren Buffett:

Yeah, I wouldn’t have a different attitude. I was just clarifying it.

The… there’s no question that business conditions can change such as to necessitate temporary or permanent layoffs.

I mean, there’s… scales of businesses change. We’re fortunate, in a place like GEICO, where our business is expanding. So we’ll probably add at least, I would guess, a thousand jobs, net, at a GEICO.

But at the same time, we probably have close to half of our brick plants closed in the Southwest, because people just aren’t building houses now. Now, that business will come back. And we’ll rehire people.

On the other hand, our textile business never came back. And we employ fewer people at the Buffalo News than we did a year ago. And we are not going to regain those or get back to previous levels.

So there are some businesses that may permanently contract. And you have to face up to that, in terms of layoffs.

There’s other businesses that have severe cyclical-type contractions, and they are going to face significant layoffs.

There are other businesses that are suffering a little bit during a period like this, but very little. And we will resist the idea of having layoffs.

We… you know, nobody gets any joy out of it. And generally, you do it, probably, a little too late, even, because you keep hoping the business will bounce back up or something of the sort.

But, you know, it… if the business changes in a material way, you’d better change your business model. Or, you know, somebody else will. And then you’ll even have more changes facing you.

On balance, we hope we get into businesses that don’t face those kind of problems.

But certainly, in our construction-related businesses… we’ve had layoffs at Shaw, we’ve had layoffs at Johns Manville, we’ve had layoffs at Benjamin Moore, we’ve had layoffs at Acme Brick, and there’s really no alternative. I mean, it… and our competitors all have had also.

And you know, in the textile business, we got into it in 1965. In the end, we laid off everybody. I mean, it… we… it had contracted enormously before we got there. We tried all kinds of things. And we finally gave up.

You know, there… capitalism… you know, is creative destruction. And sometimes, you’re on the short end of that.

This year, in terms of the businesses we have, you know, our employment will probably be reduced even… I’m almost sure it will… even though GEICO will expand.

It will not be reduced dramatically, because it just hits in certain areas. But it will be reduced. And our managers have to look at the reality of the current situation.

Charlie?

Charlie Munger:

Yeah. Some of our businesses have a shared-hardship model, where they don’t layoff, at least not yet. And the businesses with that model tend to be very strongly placed, economically.

So I guess it shows that Benjamin Franklin was right, when he said, “It’s hard for an empty sack to stand upright.”

And, so we’re all over the map on that, and so is all of industry. And…

But I do think the… an ideal model would be a business so strong that it could operate in the shared-hardship mode instead of the layoffs.

Warren Buffett:

Yeah, some are doing that, where they… you know, you give up hours. And… but a lot of operations don’t lend themselves to that very well, either. So…

Charlie Munger:

ISCAR’s operating that way.

Warren Buffett:

Yeah, ISCAR’s operating that way. And, in other cases, you basically have to close down whole plants. I mean…

Charlie Munger:

Yeah, sure.

Warren Buffett:

Yeah, that’s just the nature of it. It’s better… you really can’t operate every plant at 50 percent and have it work as effectively as shutting down the least-productive plants.

Charlie Munger:

In a world where you sometimes have to amputate a limb to stay alive, you can’t expect that every business can stay exactly as it is.

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