Source: Financial Times
by Simon Caulkin
May 12, 2013
His name, of course, is Warren Buffett, chairman of Berkshire Hathaway, and he is perhaps the most successful business person ever. He does not write business bestsellers, but he conducts a masterclass via his annual letters to shareholders. Every aspect of Berkshire’s performance shows by opposition all that is wrong with contemporary capitalism.
Buffett is thought of as an investor. But he is more than that. If Berkshire is so successful as a conglomerate – which are as popular in today’s corporate world as purple flares in a fashion house – it is because it is the entity 21st-century capitalism most desperately lacks: a responsible owner with a profound understanding of the management needs of the businesses it invests in.
How shall we count the differences with today’s trends? First, he understands financial success must be approached indirectly, as the byproduct of serving a customer. Greater returns are the result of serving more customers, and serving them better.
This takes time. So Berkshire is patient – its preferred holding period, says Buffett playfully, is “forever” – and it invests bountifully to build, and defend, businesses for the long term.
While many US (and UK) companies are hoarding cash, Berkshire last year spent almost $10bn on plant and capital, 20 per cent up on 2011. After adding 17,600 to the payroll, Berkshire companies now employ 288,500 people (including 24 at Omaha HQ, unchanged since last year – “no sense going crazy”). After some sharpish words for timid US chief executives, Buffett underlines his enthusiasm for putting big money in worthwhile projects. “If you are a CEO who has some large, profitable project you are shelving because of short-term projects, call Berkshire. Let us unburden you.”
Here is the reason why Buffett, although he enjoys receiving dividends from companies he invests in, does not similarly reward Berkshire shareholders. Put simply, Buffett argues that while share buybacks have a place when the company is trading at a discount to book value, Berkshire does far better for shareholders by reinvesting profits in the businesses, rather than by paying them out in dividends. A 20 per cent compound growth in book value over 48 years says he’s right.
Reading his letters, it dawns that what Buffett is describing is a version, refined and updated, of the inclusive capitalism that was the norm until the late 1970s. Continuing to retain and reinvest profits to fuel future growth to benefit all stakeholders, including investors, Berkshire is the last great standout against the “downsize and distribute” policies that now dominate – policies privileging outsourcing, downsizing and the slashing of research and development and capital investment in favour of massive dividend payments and share buybacks to shareholders (including managers who thus allocate the resources). With almost half a century of comparison to go on, we can now safely judge which approach is more successful.
The conclusions contain some towering ironies. Berkshire confirms shareholders do better – much better – under a regime that optimises returns to overall wellbeing than under one that focuses on shareholder value alone. Also striking are the radical results of business conservatism. A world with more Warren Buffetts and fewer quants and masters of the universe would be a wealthier and safer place. There would not be a financial crisis and our pensions would be safer. In 2012, Berkshire made $1.6bn on insurance underwriting despite suffering its largest single loss ever in Hurricane Sandy. If the insurance industry was hit for $250bn by some mega-catastrophe – three times larger than anything it has ever experienced – Berkshire would come through because it has so many streams of earnings, promises Buffett.
Finally, Berkshire Hathaway shows we do not need to do a lot of new things to reinvent management – just to stop doing some bad existing ones. In short, Buffett is the kind of manager who could give capitalism a good name, were it not for all the other capitalist managers.