Larry Cunningham:


011 – Innovative Disruption with Larry Cunningham

011-Innovative disruption with Larry Cunningham Innovation Ecosystem

Larry Cunningham:


011 – Innovative Disruption with Larry Cunningham

Share this podcast

Larry Cunningham has written a dozen books, including The Essays of Warren Buffett, Berkshire Beyond Buffett, and Quality Investing. Today, he talks about what the Berkshire subsidiaries are doing correctly in innovative disruption and why Warren Buffett is unique as a leader. Larry also shares insightful stories of various CEOs of companies behind Berkshire and how they’re able to make their investments profitable.

[2:25] …
[3:55] …
[6:10] …

Summary

Larry Cunningham has written a dozen books, including The Essays of Warren Buffett, Berkshire Beyond Buffett, and Quality Investing. Today, he talks about what the Berkshire subsidiaries are doing correctly in innovative disruption and why Warren Buffett is unique as a leader. Larry also shares insightful stories of various CEOs of companies behind Berkshire and how they’re able to make their investments profitable.

Larry Cunningham

Larry is a consultant on corporate affairs, including board service, governance, bylaws, culture and institutional design, financial regulation, contract negotiation and strategy. He has written 12 books including The Essays of Warren Buffett: Lessons for Corporate America; Quality Investing; Contracts in the Real World; and Berkshire Beyond Buffett: The Enduring Value of Values. He has taught more than 4,000 students in contracts, corporations, accounting, finance, and mergers/acquisitions in 7 U.S. universities and several abroad.

What Was Covered

[2:25] …
[3:55] …
[6:10] …

Hello and welcome to the Innovation Ecosystem Podcast. With me today is Larry Cunningham. Welcome to the show, Larry.

Delighted to be here, Mark. Thanks so much.

When and how do you become interested in Buffett and Berkshire?

IE 011[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=

Looking at the innovative disruption behind Berkshire.

About 25 years ago, so that would be early 1990’s. In my practice in corporate governance and in my research I started to encounter Warren Buffett’s writings, and I found them to be just strikingly lucid, compelling and totally against what everyone else sort of thought and knew, total innovative disruption. It looked like a researcher’s goldmine and so I began reading and digesting the information and it just suddenly became clear to me that we had a very special company, a very special leadership, and a very special personality that deserved much more attention than it had been given back. Twenty-five years ago, Warren was not the household name he’d become in the last two decades, and so I found that his ideas were very important but undervalued. So I began to systematically examine them.

Lots have been written about him as you say. He is a household name, but there hasn’t been a huge amount about Berkshire as an institution, although, of course, if you go to Omaha for the annual general meeting you do get a sense of the culture. As you started your most recent book, Berkshire Beyond Buffett, you did a lot interviews with executives in the 50+ subsidiaries that comprise the Berkshire business. What surprised you most as you interacted with these executives?

How much autonomy that they really do have. That is what I think is the most peculiar and innovative disruption feature of the Berkshire system. Even as one hears about it hears about the talk of it being a decentralized organization where the CEOs of the operating units have discretion to make all operational decisions. To hear about it is one thing. To actually sit down with these men and women who execute on a daily basis and talk about how free they are, how they get to decide basically whether they want to talk to Warren or not, how often they want to report, when they need to clear things with him. It’s an amazingly decentralized system and that’s the thing that surprised me most.

I’d just add to the point that you made that there’s been an enormous amount of study and attention given to Warren Buffett, the person and his particular investment strategies: the style of value investing, the idea of focusing on good businesses at reasonable prices. An enormous amount has been written about that because Warren has been doing that for 50 years. Far less has been written about Berkshire as a company, its corporate culture and these principles that you are developing and discussing. It is partly because Berkshire has only been practicing that for a decade or two. It’s a rich, rich field to plow and I think we’ve only all just begun to do it.

Berkshire has only been practicing this for a decade or so because there was a shift from it being an investment company to being a holding company. I think now 20% of the company is public investments and the 80% are operating businesses. Is that what you mean by your comment about only starting to practice this methodology more recently?

Yes, 20 or 25 years ago as you said, Berkshire was a huge multibillion dollar company but 80% of its assets were in investments. Marketable securities like Coca-Cola, Wells Fargo, ABC, Cap Cities, the Washington Post.

So it had sizable minority stakes but what Warren was famous for was having selected these investments and having monitored them. His approach to analyzing businesses. But at that point, Berkshire had only acquired 100% of maybe 10 or so companies and they were relatively small. Certainly, Warren had practiced this idea that you’re sort of the ecosystem, the decentralized approach but it had not been consequential.

In the past 20 years, Berkshire has generated so much excess cash, so much free cash flow that it has acquired 50 wholly-owned subsidiaries, organized them and operated them in a distinctive way. It has been a spectacular success, a case for innovative disruption, and a huge achievement. The company now ought to be thought of far more as a conglomerate. Berkshire ought to be studied far more for its management style than seen as merely an investment vehicle and him being mostly important for his skill at picking investments. He has been a skilled investor and a studied investor for nearly 50 years. He has assembled this conglomerate and has achieved this managerial record only really in the last 10, 15 or 20 years depending on how you count. I think the record is sufficiently complete that we could say it’s a very successful model as he has designed it. The record isn’t long enough for it to have attracted a robust following and emulators that the investment record has done.

This is interesting. A number of our listeners are leaders or executives in large public companies, dealing with quarterly earnings expectations from Wall Street. Yet, you have got executives who have been given this enormous amount of autonomy. Charlie Munger, the vice chairman, says it stops just short of abdication, this concept of giving them the space they need. What does it actually look like? Do you have examples of conversations you had with an executive in one of the subsidiaries? What does this autonomy really mean for them?

IE 011[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=

Innovative disruption is still based on trust.

I do think that the senior executive in a public company faces pressure from the analyst community and from the securities world that wants to know what the quarterly outlook looks like and what the target for the next half and the final year is. There is an enormous pressure to at least forecast and very often to deliver results on that time-frame, on that schedule. It is very often someone else’s schedule because your business doesn’t necessarily operate that way. You might need longer lead times, you might need to correct through a cycle or take time to push price increases through, and it just may not work out in a 3, 6, 12 month operation. So you get a conflict sometimes between what you’d really like to do and what you feel constrained to do by that external pressure.

At Berkshire Hathaway, the innovative disruption directive from the CEO, from headquarters, from Warren is to ignore that kind of external constraint. If your business cycle operates in a 24-month program or 19-month or some sort of scattershot, that’s okay. You need to work through a period to make adjustments or to make an acquisition, to digest an acquisition, and so you got some hiccups in your performance, in your earnings, that’s okay. As long as you’re working through and working towards a satisfactory objective over multiple yearly periods, that’s fine. It’s a world of difference, and it can happen that way in private companies too, but it is notable that Berkshire itself is a public company and it has followers who look for such results in relatively short periods. Buffett has to resist a little bit of that but he does it by avoiding quarterly conference calls and that sort of thing and has educated a group of investors who appreciate looking out over multiple periods not just single year periods.

An individual person, at one of the subsidiaries, take MiTek, the maker of industrial roofing components, they make acquisitions all the time. Sometimes they immediately add to earnings. Sometimes it takes time to digest and work through and he doesn’t have to account every single quarter or every single year for how that performance is going but rather over a five-year period what have we been building? What have we been delivering? Nor does he have to report on acquisitions under certain sizes, he feels constrained to report to Buffett or acquisitions that are a little further afield than its ordinary business add-ons and bolt-ons and things like that. It’s fairly discretionary. It’s the bottom line over multiple periods of time that matter, not particular business decisions or the results that they achieve.

It’s a totally radically different culture, it’s part of this innovative disruption, and it’s based on trust obviously to give a manager that kind of leeway and that kind of rolling time frame. You got to have the people who are going to be able to discharge that responsibility faithfully over those long periods of time and not be slackers or line their own pockets or so on. You need to get trustworthy people in those positions. You need to have a culture in which being trusted fosters reciprocity so that when Warren says, “You’ve got a lot of leeway here” that person says, “Well, I’m really going to discharge that responsibility faithfully.”

I guess to give you an example of innovative disruption, I mean, that is the most striking thing. I talked to Bruce Whitman, who is the CEO of FlightSafety, which is Berkshire’s subsidiary that trains pilots. He said, “The way that Warren treats me, I feel like this money is my money and so I treat it as if it’s my own.” When you do it that way you’re much more careful about deploying capital effectively, avoiding excess costs and otherwise acting as a faithful steward of capital.

So that’s the innovative disruption culture and to create it, you need that leadership from a guy like Buffett speaking in those terms and then acting by giving power to the leadership teams that can actually execute. Then having those people feel that responsibility, receiving trust that compels a commitment to honor that trust and it works. There are exceptions. There are some people who have been given responsibilities who breached it and have failed and who had to leave. There are costs to this system but if on balance if you are able to assemble a large group like this and create a culture where trust is the most important thing, the cost will be minor in relation to the gain.

Now a lot of the people who choose to sell their businesses, to Berkshire, entrepreneurs themselves, they built up their businesses. There are lots of rags-to-riches stories in your book on this innovative disruption that they have going on. I am interested in the people further down in the organization, what I’d call the intrapreneurs, the innovators within these organizations. What does it feel like? Would they talk in the same way that the chief executives of these subsidiaries might talk about in terms of levels of autonomy, the freedom to think about their role in terms of using their own money versus someone else’s money? That is an analogy that I use in Syngenta where every time you are faced with a difficult business decision, I’d ask the team, “If this was your family’s money, how would you actually choose to spend it?” It’s a nice way of getting people to get completely committed to the decision-making, but what does it mean to be an intrapreneur of innovative disruption in one of these subsidiaries? Any views on this?

I do think that corporate cultures tend to self-propagate and proliferate across and down an organization. What I mean is when Berkshire makes an acquisition, it doesn’t necessarily look for a company that has that same kind of decentralized structure, but it just so happens that the people that Warren feels like he can trust have tended to structure their businesses along the same lines so they’ve got a bunch of people in the organization all the way down throughout it that they can trust. Any Berkshire subsidiary, because it’s got autonomy, the CEO can organize that subsidiary however he or she wants. The tendency that I saw across those subsidiaries repeatedly was to have that same attitude of delegation, autonomy, and decentralization.

I can give you a dozen examples but that company, MiTek, that I was just talking about, construction engineering roof manufacturing company, they had made 50 or so acquisitions since Berkshire bought it about 10 or 12 years ago. They approach it the exact same way with the same innovative disruption management style. When they go out and make an acquisition, they tell the seller, “You will have a permanent home here at MiTek. You will have total autonomy to run your business, whatever it is, making brick façades or curtain walls for skyscrapers or whatever it is, roof terrace, you will be able to run your business just as you have without much or any interference from us. We will be here when you need us, but you will have the ability to innovate. You’re the person who knows what’s best in your market what you should be doing, what changes you’d make, what pitches you should be make, what customers you should see, what bids you ought to calculate and so on. So we are going to let you do it.”

I think that is true across most of the Berkshire subsidiaries. And again another example came from Frank Ptak, who is the chairman and CEO of the Marmon Group which is one of the top 10 largest Berkshire subsidiaries. He told me that his company has always been highly decentralized. It’s a large conglomerate itself with 10 different industrial lines, and he says it’s so big and complicated there is no way I could participate in the day-to-day decision-making of all of those units, so I have presidents of each of them and they call all their own shots – talk about innovative disruption. They have their long time horizons that Berkshire gives Marmon and so it is a bit of a replica of Berkshire.

As Munger has repeatedly said, we don’t insist that our subsidiaries have any particular governance structure so there may be some variation out there but by and large the subsidiaries that I have looked at closely tended to share the values that Berkshire stood for including this one of trying to push power and decision-making down to the place where people have the best knowledge and the greatest incentive to get it right rather than having declarations and bulletins from the C suite down to the operational execution level.

As you walked around these businesses, it sounds like they just felt very, very different from the more traditional publicly quoted, hierarchical corporations that many of us might be familiar with?

Yeah, I mean that is the general pattern at Berkshire. Part of it isn’t in fact that they’ve made 50 acquisitions in the last 25 years, just roughly off the top of my head, probably 40 or so of them have been private companies.

They purchased publicly traded companies, that’s fine. But I think the culture that they are looking for, the kind of leadership they’re looking for, and the kind of marketing position, the kind of attitude and stuff is going to congregate in the private sector where they have been able to operate without the kind of pressure of quarterly conference calls, earnings expectations and that sort of thing.

I am just sitting here thinking about the companies in the Berkshire landscape. I think the ones that have been private tend to mimic the Berkshire style more clearly and closely than the ones that had been public, where I think you just have a little more bureaucracy built in partly because of legal requirements and internal controls and things like that. Within the population of public companies I think that those that have sold to Berkshire and are now part of Berkshire are probably the most loosely-organized, the more streamlined, the more intrapreneurial if you like. That is part of what Berkshire is looking for and a part of what it gets.

IE 011[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=

With innovative disruption, you need to protect the moat.

Can we switch to innovative disruption, the subject, because Buffett talks a lot about moats, these sources of competitive advantage? Many listeners are working in businesses where their moats are getting smaller and shallower. I am thinking of regulated long product life cycle companies that could perhaps be a threat of Uberization or threat of changing consumer demand.

Moats, at some point in time, looked unassailable. Think Kodak, think Blackberry, think Nokia. Very quickly it turns out that they weren’t quite unassailable and they just disappeared. There are two questions here that I am really interested in on innovative disruption. First, do executives talk about moats in some of the subsidiaries? The reason I ask that is that there are companies in the group, like Geico for instance, for which the moat is getting smaller and smaller as the threat of self-driving cars becomes more and more real. Do people talk in terms of moats and how are these conversations evolving given the fact that you can’t open the newspaper these days without hearing about or reading about FinTech and other innovative disruption in mature industries?

I heard that word, moat, across the subsidiaries. The CEOs I talked to and the senior people at various companies and some of the directors they certainly all know the word moat and often use it expressly and even if they don’t use that particular word, they are certainly talking in terms of competitive advantages, the capacity to fend off rivals and also onslaughts of technical changes and so on.

It is part of the vocabulary, it is part of the DNA and I do think it’s something that is important when Berkshire considers an acquisition and evaluates the company’s capacity to sustain its prosperity over decades rather than shorter periods and that’s all about detecting a competitive advantage. I’d say most of Berkshire companies exhibit that strength and over relatively long periods of time few of them have succumbed and have been beaten.

Such as?

I think the most conspicuous example of that is a company called the Pampered Chef. It was a billion-dollar acquisition for Berkshire about 15 or so years ago. It now is worth quite less. We don’t have a micro deed on exactly what it’s worth. I think 15 years ago it might have been earning 400 or 500 million. Today it might be 30 or 40.

That was that the direct-sales model was broken by the internet. Is that right?

Exactly. They have these in-house home parties where neighbors sold spatulas and pans to people and it’s a lovely old-fashioned model but that is not how people buy things anymore. That company, it was great when it was bought, but it has not prospered since. It’s got a lot of problems and I don’t know if they are going to be able to turn it around. They’d really have to soup up their internet presence and that’s not an easy thing to do especially when the gadgetry can be procured by Amazon and sold directly out there. So that business model may be unsustainable, unreliable.

Berkshire bought an apparel manufacturer, shoe company, manufactured products in the United States, right at the time when it became really cheap to move goods across oceans and to pay low wages from places from Honduras to Singapore and so those companies just got crushed. They picked up the remnants and tried to sustain what parts they could by focusing on products that sell well when they’re made in America, like army boots and uniform and things that have to be made in America under municipal laws for police uniforms and things like that.

They were able to salvage a bit of moat, a bit of advantage but a large part of it was just eroded by those onslaughts. On the other side, is a company they still have with a similar a kind of problem, Fruit of the Loom. They make underwear, they have got a branded advantage, and they are sort of low cost because they are made elsewhere but it’s not as if that’s some thick durable moat full of crocodiles and alligators.

The Garanimals brand is a smaller company but likewise it’s an apparel manufacturing toy maker for children’s lines and it’s got a nice moat in the sense that it’s been really successful in carving out a place where parents feel really comfortable educating their children using the products and stuff like that. It’s got some leadership but it turns the manufacturing costs, so that’s not there at the edge.

On the other side, you got a company like Lubrizol which makes petroleum products and additives. It’s got a real moat. It’s got knowledge, scientists, chemistry, products, history, reputation, just enormous capacity to help its clients in the automotive sector in just about every aspect of it. It’s constantly doing innovative disruption, it’s constantly on the edge, and it’s constantly testing products, helping companies make better products. It’s constantly trying to develop new applications for its products. It’s participating in making plastic money instead of having currency made of paper. Many central banks are thinking about making it plastic and how would that work. Lubrizol is very much involved in that.

BNSF Railway, just to take one of the giant companies. They are a leader in innovative disruption just because of scale and consolidation, in the North American rail industry. There still may be a little bit of consolidation to come but they are a power player in that space but they got to compete not just against the other couple of railroads but also against the trucking industry and so how do they do that? They try to be cheaper, cleaner, faster, and more flexible. They are able to do that in part because they are constantly on edge of technology, too. They’re using logistics engineering, computerized traffic networks and stuff and so they are out there fighting. They’re fighting for their market share and fighting for their profitability. I think they do pretty well.

Your Geico example is an interesting one because I do think that the automotive insurance industry is facing some change, like most industries are, and their moat has historically been being the low cost supplier of a commodity product with great advertising budget that backs it up and pretty good customer service. That package has served them well and gradually increased market share over the past 25 or 30 years from 2 or 3 percent to 10 or 12 percent. They have very high premium volume, it’s growing, they usually have underwriting profits but occasionally they hit some bumps. They return any excess profits to the customers in the form of low premiums so they’ve got a moat.

I think the development of the driverless car is a potential threat, and complete innovative disruption. It’s an incipient threat to the moat but I think that the technology is hardly proven and will evolve and develop. From the limited testing that we’ve seen, the driverless car is not going to be accident-free. There are going to be problems, and somebody is going to have to pay for them. We are going to need to develop a risk-allocation system. It may not be the kind of thing that we are used to. Geico and its rivals will participate in shaping it, so they will have forward advantage, I think, in designing whatever that is. It may look different but I think they have got the capacity, the leadership, and edge to try to shape it and still be a leader, maybe a bigger leader than they already are.

Benjamin Moore paints is another one. They may manufacture paint. They have faced a lot of adversity. The big challenge to them was that when Berkshire bought it in 2000, most paint was bought in stores run by moms and pops in middle America. Right then, there was the enormous expansion of the big box retailers like Walmart and Kmart and especially Home Depot and places like that that started to build these huge cavernous warehouse-type of facilities with enormous supplies of paint and other hardware. People started to buy from them.

Benjamin Moore had never sold through those kinds of stores. They only sold through their authorized local dealer network and when Buffett bought Benjamin Moore, he made the personal promise that he would retain that distribution system. Well, in the last 15 years especially during the ‘08 and ’09 household crisis, it was very hard to sell paint at all and where it was getting sold was in Home Depot and these big-box retailers. So it became very difficult to sustain the Benjamin Moore business model, but you couldn’t back out of it because Berkshire and Buffett made a promise.

That’s threading a needle, what they’ve managed to do, and they went through a couple of CEOs. It’s unusual at Berkshire. We currently have Mike Searles as the third CEO in the past 10 years, the fourth CEO since Berkshire bought it. It is very unusual because again you want to give these guys autonomy and let them call the shots and they mostly do. In Benjamin Moore’s case, two of the CEOs said, “Look, I have to figure out a way to sell through to the big boxes” and so they did a little experiment in Canada and when Warren heard about it he went furious. These guys left.

So the current CEO, what he’s trying to do is say, “what is our moat?” What is our advantage and how can we capitalize on it? We cannot sell paint at Home Depot, but what can we do about our local authorized dealership retailers? So what they have done is just plant the flag on that and go out and tell everybody that we are the only paint manufacturer that solely sells through your local authorized dealer who can give you far better service, really think about what the right paint for your home is, working with interior decorators to win their trust and custom, to be the referral or the go-to. They are sort of making silk out of cow’s ears. I think it’s too early to be sure if Mike is able to thread that needle or sustain that moat but that is one way to do it. What is our strength? Let’s build it the best we can on that.

Most of our listeners don’t work for Warren Buffett and his organizations, aren’t part of the Warren Buffett ecosystem. What advice would you give to leaders, for instance, who are setting the cultures of these organizations: how to think about innovative disruption, how to think about innovation in the context of these shifts in the industry that are changing the rules of engagement in some of these marketplaces?

I do think an organizational structure that is designed to promote innovative disruption and protect those kinds of moats is the wise one. It’s pushing responsibility for detection and response or anticipation of disruptive onslaught down to the people who are on the front lines. The people take Benjamin Moore. I want to know the person on Main Street selling those products. What does she see? What is happening, and being in touch with the 2000 of those people around the country and making sure they participate in the decision-making process whether it’s the mixture, the texture, the colors, the supply chain, the speed, whatever it is.

That decision-making is going to be or at least the knowledge and information is going to be coming from that area. Michael Searles, the CEO, he was probably wise to give as much input, give as much autonomy and power down to those people: where should they set up their shops, what inventory should they carry, and how should they mix the paint?

IE 011[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=

“These principles of autonomy and empowerment are important factors and the practices to get them down there are the tone at the top, the statements of formal managerial structure of governance. It’s more about trust than about internal control.”

And I think that principle to maintain moats is most likely going to be coming from the ground up, rather than the C suite down. Another one on innovative disruption we haven’t really discussed too much but animates Berkshire is the sense of self-reliance who is responsible? That’s everybody down the chain and that every person ought to be able to rely on themselves and be empowered, to be responsible and accountable. If they do well they’ll be rewarded. If they fail they’ll be let go or punished or be deprived of internal rewards.

These principles of autonomy and empowerment are important factors and the practices to get them down there are the tone at the top, the statements of formal managerial structure of governance. It’s more about trust than about internal control. It’s more about rewarding innovations, spontaneous response rather than sluggishness, that appreciates generating funds internally rather than borrowing them, that appreciates that making acquisitions sometimes is a process that takes time to prove out. I think those principles and those practices can be injected. A lot of people debate whether Berkshire is so special because Warren is so special that it can’t be replicated and there’s not much to learn and it’s not worth emulating. I don’t think any of us should be foolish enough to believe that any of us could design or create the next Berkshire Hathaway on that scale or with that level of success.

I think there’s no question that many of the principles and practices that they stand for are proven and that they are well adaptable to many other organizations. They have got a very strong logic and very strong basis. All of the empirical literature and behavioral psychology in the workforce attest to the fact that people perform better when they’re given responsibilities. When they are trusted and when they have power in an organization, people do tend to stand up and act on it. Autonomy is more value-enhancing than control. Ask a person at the cash registers. They are more likely to try to achieve this result for the organization. They will more likely do this if they are trusted to do it rather than directed to do it, if they are able to do it in a way that makes sense rather than to check a bunch of forms that show that they comply with the policies. There is a strong basis in logic and policy for all this kind of innovative disruption. The payoffs are huge. You’re sustaining your moat, lower cost of administration, lower cost of capital allocation, and lower cost of acquisitions.

A brief point to make, at this moment is that if you referred to those sellers of companies to Berkshire Hathaway who tend to be entrepreneurial, well, they are indeed and they value retaining that autonomy when they join Berkshire. They are willing to sell to Berkshire at a lower price than they would charge to rivals. That’s just a great advantage, if you are leading or building company like this, if you can really develop this kind of reputation: legitimate, genuine trusting of your managers and giving them leeway.

The final point I just make on this passage is, what’s vital in this community, in this culture, is the ability to trust, that is, the trustworthiness of the people. The big cost, in other words, you will invariably make mistakes and have irresponsible miscreants acting out of a self-interest rather than on an organization’s interest. You do have to weigh this. Berkshire has examples of people that lined their own pockets instead of acting for the company. But again, if you can incubate the right culture, those mistakes are going to be few and far between and be a net minor cost overall.

One final question before we start to wrap this up on innovative disruption, Larry. You talked about their ability to attract the best type of seller, someone who has similar values but also potentially might do a transaction at a slightly lower price. How has this changed, with what I see is probably one of the most significant innovations in the model, which is getting into bed with 3G. Some of the transactions that they’ve done recently have been followed by very aggressive cost-cutting which is at odds with what it meant to be bought by Berkshire in the past. Buffett has said this is potentially going to be an innovative disruption model that we are going to adopt and use more of. Can you say a little bit about that?

The critics have a point that this is not what Berkshire has done and not what it stands for, that is to buy companies, deliberately downsize and squeeze into efficiency out of them. Warren’s response has been, “Well, we never have deliberately maintained a bloated payroll at Berkshire Hathaway.” That’s fair enough, but it’s really only a partial response because they have never gone out and deliberately acquired a company with a bloated workforce and then proceeded to save costs by cutting it. Berkshire does not look for companies that are inefficient. They look for those that are already well managed. It is a very different acquisition model for Berkshire Hathaway. I would discourage Berkshire from continuing to do this kind of thing. My defense of what they’ve done, and I don’t know that Warren is going to exactly put it this way, is to draw a sharp distinction between wholly-owned and minority-owned companies.

Historically, Berkshire bought stocks in McDonalds, Exxon-Mobil and Walmart, and it was not responsible for the day-to-day decision-making of those companies, the policies they had, who they hire, who they fire, whether they have a downsizing, whether they have consolidation or anything like that. Berkshire wasn’t able to control those outcomes or those decisions. It didn’t get a black eye, didn’t deserve a black eye if McDonald’s did this or Coke did that.

Whereas with its 100% owned subsidiaries, it is responsible for the treatment of customers, suppliers, workers, and the effects on communities, taxation and so on. I would draw a sharp distinction between those two, and I would locate these 3G acquisitions, the one of Heinz first, then the acquisition of Kraft on the partly-owned side. It’s more like those minority positions rather than wholly-owned positions and my support for that is precisely that in the contract between Berkshire and 3G about the ownership. 3G has whole operational autonomy. They are just like a Coke or a Wells Fargo or another investee.

IE 011[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=

Even in innovative disruption, you need to treat other businesses with respect.

They make the decisions to downsize, to cut and do these other LBO private equity type things. That’s really their decision. It’s not really a Berkshire decision. That’s how I would defend it and then I will say, “Look, what we will do from the Berkshire holder’s perspective, what is attractive about this, and from Berkshire’s cultural perspective is if after the end of seven years, Kraft, or Heinz doesn’t have a bloated payroll and it’s got these other qualities about autonomy, decentralization, and trust and so on, then Berkshire can buy 3G out”. It will be a Berkshire company. Berkshire can exercise its option to buy the other half that it doesn’t own and then it will continue to be fully responsible for the treatment of the employees, suppliers, customers and so on. It can do so in a traditional Berkshire way. But if Heinz does not like that or Kraft does not like that, Berkshire can sell. That will not violate any Berkshire principle.

Berkshire has always been free under its internal principles to sell common stocks whose economic characteristics start to deteriorate. It has rarely or nearly never sold a wholly-owned subsidiary and the point is not to do so. That’s how I would analyze it. I don’t think that the partnerships are the best ideas they’ve had, but if properly understood they are consistent with Berkshire’s history, practices and philosophy and should not impair its ability to say that to prospective sellers, “We treat businesses we buy with autonomy and respect.” That’s how I would size it up.

That’s fair enough. So wrapping this up, Larry. I sent three questions through to you: what are your morning rituals?

I’m an early morning riser. I like to get up early. I try to read three newspapers every day: the New York Times, the Wall Street Journal and the Financial Times. I don’t always get through all three of them but I like at least the headlines and at least the first few paragraphs of each big story to get a sense. These writers, they’re independent journalists trying to be objective, but they tend to have a little different take on things so I feel like I get the fuller version of the main stories when I have a glance of all three.

I love doing that and then I always try to take a run or have some kind of exercise in the early parts of the day. It’s just a great way to ignite brain activity. I have so many of my better ideas when I’m running and then the day is also off to a good start. It’s part of the routine, most days, I do usually write in the morning all the way up to lunch time and on the good days, I get more writing done by lunch than many people get done in a week. Those are my ambitions for most mornings.

Excellent. Second question, what have you changed your mind about recently?

The most consequential change of mind that I made depends. The word recently, might be plenty. It was about 10 years ago, that might be recent or not. I made a decision. I had been married once and divorced and I just planned on leaving that part of life behind. My eldest brother, sitting at dinner with my nephew, said, “Larry, the best thing in life is being married and having children.” So, I changed my mind, opened my heart and ended up finding a wife and we’ve got two beautiful girls. My brother was right. That’s probably the most important change of mind I have ever had in my whole life and probably the most important one to share with people.

We could spend an hour on that question because this is something that Charlie Munger talks a lot about, about the need to reassess some of your assumptions on a regular basis because we inherit them and we don’t necessarily test them as frequently as we should do. Thanks for that. Finally, what advice would you have for your 25-year-old self?

Right, that’s a great one. I’d think it’s to appreciate that your first job is probably not going to be your only job. That was true 25 years ago. I think it’s even more true today that very few people stay in their first job for the rest of their careers. It sometimes happens but I’d stress to people that it’s an important job. It’s an important first step but very likely you are going to make some switches and changes along the way. Sometimes you might even change careers as I did. I started out as a corporate lawyer, I became a law professor, I got into finance, investing and consulting. So I have just had many different kinds of iterations in my career, most of it all cumulative. So I keep learning and bringing the old skills to the new assignments and so on. I think keeping that in mind as a 25-year-old, if you think of yourself as just a corporate lawyer or just an investment banker or just an investment analyst or just a security officer, whatever it is, I think you might shortchange yourself. I think you should appreciate that you’re in this job now and do the absolute immaculate best you can but always be ready to take what you learned to new places, new firms, new careers and new horizons.

Excellent. Very good and that’s the common theme actually with previous guests who have made similar comments. Where can people get in touch with you, Larry?

Well, they can visit my website, BerkshireBeyondBuffett.com. It has a lot of information about the book that you so kindly brought to their attention. Your viewers can feel free to send me an email. It’s lacunningham@law.gwu.edu. Mention that you heard me talk with Mark on this show.

And we will put those in the show notes. And of course, the obvious thing is that they can go to Omaha at the end of this month and you are going to be there right?

I’m going to be there at Omaha. I will be giving a couple of different presentations, and be at book signings at various places. So I will be at the Bookworm during the annual meeting at lunch, in the exhibit hall, signing books. I will also be on a panel Friday afternoon from 35 at Creighton University. I will be signing books there. I’ve got a new book coming out, that’s an annotated transcript of the symposium I did with Warren and Charlie 20 years ago where we launched The Essays. That’s going to be a fun little product and it’s going to debut at the meeting this year.

It’s been a great pleasure having you on the show to talk about innovative disruption, Larry. I am looking forward to meeting you face-to-face. I can’t make it to Omaha this year. Let’s keep in touch and I’m sure our audience will have enjoyed this as much as I did. Thanks very much for your time.

It was my pleasure, thanks very much indeed, Mark. I look forward to catching up again soon.

IE 011[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=

The Show in 30 Seconds

Follow us & Join the Community