Private equity investors often take the “father knows best” approach to working with their management teams. To me, this is crazy — particularly when the management team has years of experience with the business, the investors are new to the business, and the track record of the management in that business can be easily reviewed (presumably it is good or the investor would not be interested).
This difference between Berkshire Hathaway and other investors comes across very clearly as I have been reading (again) Warren Buffett’s annual letters. The Berkshire Hathaway annual meeting is two weeks away — if you are going, please let me know. This time re-reading his letters, I started with the year 1965 when I had previously only started with the year 1977. Buffett really doesn’t get the writing mojo and style that he uses now until the early 1980’s when his big bets during the 1970’s began paying off, but that’s a topic for another day.
Berkshire Hathaway Management Structure & Similarity to Other Successful Ones
Please see this quote from Buffett’s letter in 1979 talking about the decentralized management structure at Berkshire Hathaway:
“Berkshire is run on the principle of centralization of financial decisions at the top (the very top, it might be added), and rather extreme delegation of operating authority to a number of key managers at the individual company or business unit level. We could just field a basketball team with our corporate headquarters group.
“This approach produces an occasional major mistake that might have been eliminated or minimized through closer operating controls. But it also eliminates large layers of costs and dramatically speeds decision-making. Because everyone has a great deal to do, a very great deal gets done. Most important of all, it enables us to attract and retain some extraordinarily talented individuals — people who simply can’t be hired in the normal course of events — who find working for Berkshire to be almost identical to running their own show.
“We have placed much trust in them — and their achievements have far exceeded that trust.”
Decentralized operational decisions is also one of the core themes of William Thorndike’s book The Outsiders, a study of the common characteristics among CEO’s who outperformed on average the S&P 500 by 20 times and their peers by over 7 times during their careers. In Thorndike’s study, he found that “although they developed these principles independently, it turned out they were iconoclastic in virtually identical ways. In other words, there seemed to be a pattern to their iconoclasm, a potential blueprint for success, one that correlated highly with extraordinary returns.” This is very similar to Berkshire Hathaway’s management structure. Thorndike writes that one of his example CEO’s (Henry Singleton)
“believed in an extreme form of organizational decentralization with a wafer-thin corporate staff at headquarters and operational responsibility and authority concentrated in the general managers of the business units. It turns out that the most extraordinary CEO’s of the last fifty years, the truly great ones, shared this mastery of (human) resource allocation.
“. . . . There is a fundamental humility to decentralization, an admission that headquarters does not have all the answers and that much of the real value is created by local managers in the field. At no company was decentralization more central to the corporate ethos than at Capital Cities. The hallmark of the company’s culture — extraordinary autonomy for operating managers — was stated succinctly in a single paragraph on the inside cover of every annual report: ‘Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs. All decisions are made at the local level .’”
I also believe in the power of decentralization to attract great management teams and help organizations make better decisions. With this in mind, I have structured my investment fund, Greybull Stewardship, such that it can be an ideal home for companies where the management teams are staying in place, have a lot of equity, and want the freedom to run their own show. I have found wonderful management teams who are thriving with this philosophy and structure, and I am grateful for all that they do every day.