The Management of Berkshire Hathaway; Case Number: CG-16; Publication Year: 2009

Abstract

Berkshire Hathaway is known to many as the investment vehicle of Warren E. Buffett. To some extent, this reputation is well founded, given the investment success that the company has enjoyed under his leadership. Less attention, however, has been paid to the management success of Berkshire Hathaway.

By 2008, the array of companies that Berkshire Hathaway owned was unique in its diversity. It included insurance operations (GEICO, General Re, Berkshire Hathaway), manufactured housing (Clayton Homes), wholesale distribution (McLane), regulated gas and electric utilities (MidAmerican), and many specialty finance, manufacturing, service, and retail companies. Even more unique was the operating structure that the company employed to manage these operations. It was a model based on extreme decentralization of operating authority, with responsibility for business performance placed entirely in the hands of local managers. While many public corporations implemented strict controls and oversight mechanisms to ensure management performance and regulatory compliance, Berkshire Hathaway moved in the opposite direction. The company had only two main requirements for operating managers: submit financial statement information on a monthly basis and send free cash flow generated by operations to headquarters. Management was not required to meet with executives from corporate headquarters or participate in investor relations meetings; nor was it required to develop strategic plans, long-term operating targets, or financial projections. Instead, local managers were left to operate their businesses largely without supervision or corporate control. Vice Chairman Charles T. Munger described the Berkshire Hathaway system as “delegation just short of abdication.”

Many of the company's operating principles were in stark contrast to those generally employed by most public corporations. Company shareholders would have to decide for themselves whether these operating principles posed a risk to long-term performance or whether, contrary to expert opinion, they were a source of competitive advantage that could be sustained in the future.

(Note: This case reviews only the operating principles that govern Berkshire Hathaway. The company’s investment principles are not discussed, other than the extent to which they are based on a common philosophical approach).

Keywords: Corporate Governance, Board of Directors, management controls, compensation, Risk Management, management

JEL Classification: G3