Courtesy of Scripophily.com — The Gift of History.
Berkshire Hathaway Inc. stock certificate, dated March 17, 2010.
front-running: a form of insider trading
in which he bought shares in a publicly
traded stock, Lubrizol, ahead of pitching
the company as a Berkshire acquisition
candidate. While the scandal prompted
questions about Berkshire’s lack of formal vetting and grooming of top executives, Buffett’s response also raised eyebrows. After Buffett learned of Sokol’s
front running, he drafted a press release
himself. The release, which spoke of
Sokol’s “extraordinary” contributions to
Berkshire and expressed Buffett’s opinion
that Sokol had done nothing illegal, drew
sharp criticism, given Buffett’s traditional
high standard of rectitude.
The approach reflected Buffett’s antipathy
to corporate bureaucracy, which similarly
translates into substantial net savings, but
with costs. For instance, Berkshire has no
centralized departments such as communications, human resources or legal. Yet such
frugality can leave subsidiaries flatfooted
in response to the inevitable investigative
journalism targeting them. One such exposé
attacked Berkshire’s practice of generating substantial funds from float, suggesting
it gives personnel at National Indemnity
perverse incentives to avoid or delay paying
legitimate claims — even in bad faith.
Another piece challenged Clayton
Homes, arguing that its employees pressure customers into unaffordable financing arrangements and follow up with
aggressive collection practices. After publication, both subsidiaries and Berkshire
corrected errors in the stories, but the
damage had been done. A full-time professional who makes engagement with
journalists a top priority would likely have
altered the shape of the original reports, a
better outcome than the thrust and parry
that now defines the public record. Berkshire acts as if it is small, but it is a Goliath
to reporters and readers alike.
Buffett is critical of Wall Street and
other financial intermediaries primarily for unnecessary complexity and
corresponding costs. His core message
for Wall Street remains valuable: simplicity. Parsimony and frugality underpin the
Berkshire model which, while imperfect,
has delivered substantial net gains, thanks
to these hallmarks: investment in reputation; commitment to trust, loyalty and
autonomy; avoiding hostile or leveraged
acquisitions; self-reliance in corporate
administration; and permanent ownership of subsidiaries.
Fifty years after Buffett took control of
Berkshire, the 85-year-old Omaha denizen
still has much to offer Wall Street, in capital and wisdom alike. He is certainly more
Peck than DeVito.
Lawrence A. Cunningham, a professor
at George Washington University, is the
co-author and publisher of The Essays
of Warren Buffett: Lessons for Corporate America and author of Berkshire
Beyond Buffett: The Enduring Value of
Values.
www.MoAF.org | Fall 2015 | FINANCIAL HISTORY 19