For years, people have tried to determine how Berkshire Hathaway is so successful and if that success is replicable.
David Larcker and Brian Tayan of Stanford University did a survey of the subsidiary CEOS at Berkshire Hathaway to get a closer look at the conglomerate. Though some of the findings were not surprising – that the company is extremely decentralized and is long term orientated – other things came to light which help gain some perspective on this corporate giant.
1. Companies are Truly Autonomous
Berkshire Hathaway’s level of autonomy is nothing new – it has been one of the differentiators since the beginning. But how much autonomy do the subsidiaries really have? Answer: a lot.
Subsidiary CEOs have very infrequent contact with Warren Buffett. It typically consists of a phone call on a monthly or quarterly basis and there’s no pre-established schedule. Also, CEOs submit monthly financial statements to Buffett, but other than that, there’s no communication.
Most CEOs think that Berkshire Hathaway wouldn’t interfere with their businesses unless the company was severely underperforming or if something happened that would damage Berkshire’s reputation.
This level of autonomy is practically unheard of. But Berkshire Hathaway purposely acquires subsidiaries that don’t need a lot of direction and checking in on because these companies are so “permeated with good ethos.” When you have companies that are morally sound, you can give them autonomy because you know they will run their business ethically.
2. Focus on Succession Planning
One of the key traits of Berkshire Hathaway’s culture is its long term orientation. So it comes as no surprise that they want all of their subsidiaries to have succession plans in place.
All CEOs must have at least one successor and are responsible for selecting that individual. Each leader must send Warren Buffett a letter with their primary recommendation, other potential successors, and the strengths and weaknesses of all candidates.
Buffett recognizes that in order to have a business that lasts forever, you need to plan for the future – something that too many businesses fail to do.
3. Trust – The Common Thread
Berkshire Hathaway gives their subsidiaries autonomy and independence because they trust them to run each company properly.
Same goes for succession planning.
If Warren Buffett did not trust his CEOs to provide appropriate successors, he wouldn’t allow them to choose an heir. Instead, he would just select the protégé himself.
Trust seems to be one of the underlying values that keeps the Berkshire Hathaway ship afloat. Warren Buffett and Charlie Munger trust all of their subsidiaries to run sound businesses and make smart investments. As long as they do, each company has a permanent home and constant access to capital.
As Munger put it, “[Berkshire Hathaway] want[s] to live in a seamless web of deserved trust.” Without that trust, Berkshire Hathaway would not be the powerhouse that it is today.
About the AuthorFollow on Linkedin More Content by Brian Beattie