BUFFETT CEO

BUFFETT CEO: TONY NICELY, GEICO INSURANCE
Berkshire Hathaway

Warren Buffett is often credited with building one of the most legendary portfolios of listed stocks, which has returned about 23.8% annually and beating the S&P 500 index in 33 of the last 37 years. However, he receives less credit for his acquisition strategy. Buffett often buys entire businesses, and a key part of his acquisition strategy is to select talented CEOs... and then stay out of their way and allow them to continue doing what they do best under a protective Berkshire umbrella. He is loyal to his CEOs, and they are loyal to him. No other Fortune 500 chief executive can match Buffett’s record for keeping his CEOs. In fact, over 35 years some Buffett CEOs have retires, but not one has ever left to join a competing enterprise.

Warren Buffett’s Berkshire Hathaway is one of the largest and most diverse business empires in America. To understand Berkshire, you must appreciate the relatively unheralded operating managers who are part of this huge corporation. With over US$140 billion in assets, Berkshire Hathaway is more than just Warren Buffett’s well publicized public shareholdings, which include 8% of Coca-Cola, 9% of Gillette, and 11% of American Express. Today, Berkshire is made up of 70% operating companies (100% acquisitions) and 30% equities--and is expected to reach 90% wholly-owned operating companies.

While most corporate managers are free to allocate their own capital and expand their business whenever they can, Berkshire businesses centralize this activity to the world’s undisputed champion of capital allocation. This unique management structure has led to superior investment and management successes and has proven to be Buffett’s finest cultural and structural strategy.

Berkshire’s businesses are distinctly old-economy: bricks, candy, furniture, jewelry, encyclopedias, vacuum cleaners, air compressors, newspapers, footwear, and insurance. Each Buffett CEO exhibits the highest ethical standards and integrity. Buffett has said, Make an honest mistake and I will be understanding, but lose the reputation of the enterprise and I will be ruthless...Never do anything that can’t be printed on the front pages of your local newspaper.

Buffett CEOs do not deal with the responsibilities of typical chief executives. There are no meetings with analysts or with shareholders, no press interviews, no expansion requirements, no limitations on available capital, and no headquarter mandates. These CEOs instantly obtain the highest credit rating and the financial strength enjoyed by only seven other corporations in the world. Buffett CEOs have the unique ability to focus completely on internal affairs and completely on the long-term success of their business, with no outside distractions.

Warren Buffett is the lowest paid of all Fortune 500 CEOs, with a base salary of US$100,000 per year and no stock options. However, all his Berkshire CEOs are better paid, and they all have direct financial interest in their businesses. Their compensation plans are simple and are directly tied to the results of their own enterprise.

CEO Selections

Warren Buffett CEO selection and management parallels its approach to stock selection and management. Deciding to purchase a company also involves a decision to select its managers. Knowing that it will not replace management, it wouldn’t buy part of a company through the stock market without considering the manager. Buffett and Company does not buy a whole company any differently. Berkshire never has invested (and never will) in a company if the manager doesn’t meet the same exacting standards.

Buffett explains his approach: At Berkshire, our managers will continue to earn extraordinary returns from what appear to be ordinary businesses. As a first step, these managers will look for ways to deploy their earnings advantageously in their businesses. What’s left, they will send to Charlie and me. We then will try to use those funds in ways that build per-share intrinsic value. Our goal will be to acquire either part or all of businesses that we believe we understand, that have good, sustainable underlying economics, and that are fun by managers whom we like, admire and trust.

One of the true secrets of acquiring a Buffett CEO is the built-in fact that because Berkshire is acquiring both the business and the manager, the CEO is more likely to put a fair price on the deal than a top price. Fair prices don’t come back to embarrass the seller; they create more trust from the buyer. Once a business is acquired, Buffett manages wholly-owned CEOs much the same as CEOs of his public investments. No one looking over their shoulder. No micro management from headquarters. Complete loyalty. Ample recognition.

As Buffett himself said, At Berkshire we feel that telling outstanding CEOs how to run their companies would be the height of foolishness. Most of our managers wouldn’t work for us if they got a lot of backseat driving. (Generally, they don’t have to work for anyone, since 75% or so are independently wealthy.) Besides, they are the Mark McGwires of the business world and need no advice from us as to how to hold the bat or when to swing.

Nevertheless, Berkshire’s ownership may make even the best of managers more effective. First, we eliminate all of the ritualistic and nonproductive activities that normally go with the job of CEO. Our managers are totally in charge of their personal schedules. Second, we give each a simple mission: Just run your business as if: (1) you own 100% of it; (2) it is the only asset in the world that you and your family have or will ever have; and (3) you can’t sell or merge it for at least a century. As a corollary, we tell them they should not let any of their decisions be affected even slightly by accounting considerations. We want our managers to think about what counts, not how it will be counted.

Very few CEOs of public companies operate under a similar mandate, mainly because they have owners who focus on short-term prospects and reported earnings. Berkshire, however, has a shareholder base--which it will have for decades to come--that has the longest investment horizon to be found in the public-company universe. Indeed, a majority of our shares are held by investors who expect to die still holding them. We can therefore ask our CEOs to manage for maximum long-term value, rather than for next quarter’s earnings. We certainly don’t ignore the current results of our businesses--in most cases, they are of great importance--but we never want them to be achieved at the expense of building ever-greater competitive strengths.

The Warren Buffett CEO, Robert P. Miles, 2002, John Wiley & Sons