The Biggest Threat to Warren Buffett's Cash Machine

A effort to destroy the company's long-term time horizon could ruin Buffett's empire.

Aug 16, 2014 at 1:42PM

Over the past 50 years, Warren Buffett's Berkshire Hathaway has grown into a massive conglomerate with operations spanning from railroads to energy. However, one of the biggest questions about the company going forward is, "What happens to the company after its mastermind, Warren Buffett, is no longer running the show?"

To find some answers, Motley Fool analyst David Hanson recently sat down with Larry Cunningham, the author of The Essays of Warren Buffett: Lessons for Corporate AmericaWarren Buffett himself said of the book, "Larry Cunningham has done a great job at collating our philosophy." Cunningham also has a new book coming out this fall, titled Berkshire Beyond Buffett: The Enduring Value of ValuesThe book explores Berkshire's ability to live on after Buffett. In the following video, Cunningham details what worries him about a post-Buffett Berkshire and how the company's long-term time horizon gives it a special advantage over the competition.

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A full transcript follows.

Hanson: If there's Berkshire shareholders -- and I'm one myself -- anyone listening to us is probably nodding their head, saying, "OK, this sounds good. This makes me feel good as a Berkshire Hathaway shareholder."

I'm going to push back on it a little bit. If Buffett leaving -- stepping down or not being involved in the picture anymore -- is not necessarily a big risk, what is the one thing that keeps you up at night a little bit, that you worry about Berkshire Hathaway going forward? As a shareholder, which I'm assuming you are, what are you worried about?

Cunningham: Yes, I am a shareholder. I have some Class A and some Class B for a pretty long time. With Buffett around, I've got very little worries, other than the extraordinary; some unprecedented insurance event -- a terrorist attack or some disaster like that that could really drain a lot of capital.

But what I worry about, really, is what I wrote this book about, which is what happens after? Here, the scenario to worry about, and I've got a whole section of the book on this, is that afterwards you'll have some activist shareholders who have a very different idea about what should happen at Berkshire.

They'll have ideas about, "Let's make the dividend policy more generous. Let's abandon the old Buffett test of retaining a dollar of earnings so long as you increase market value by that amount, and start being more generous in dividends. Let's not have a commitment to hold every subsidiary forever, but let's start selling some of those that aren't performing as well. Let's put a minimum return on capital in for everybody, and if you're not making that, we sell the company."

Others might advocate for dividing the company into divisions; have an energy company over here, and spin off the retail businesses, spin off the manufacturing businesses. So, you might get people; Carl Icahn or Nelson Peltz, or even Bill Ackman for heaven sakes, who say, "It would be better to break this up or sell a subsidiary," and so on.

Now, against that group will be the stalwarts, the old-fashioned devotees of the Berkshire traditions who say, "This is a disastrous idea," and I'd be in that group. One of the most important things that makes Berkshire special is its commitment to permanence; that when Berkshire acquires a subsidiary, it's forever. We don't sell subsidiaries that are struggling, that need some time to repair and improve. We don't do that.

If someone began to do that, it would destroy one of the most important special cultural features of the place, which is this long-term time horizon. If you did that, it would just be like United Technologies, or Danaher, or Level 3 -- United Technologies, General Electric -- just another good company, but not as distinctive, not as special. It wouldn't have this advantage in acquisitions, and so on.

That's the thing that I worry about, and I explore it in the book, in a thought experiment about how that kind of debate might play out; where the power in the shareholder body would reside, and I entertain some alternative scenarios.

My bottom line is that I can imagine the agitation, but I don't think it will succeed. So long as the leadership of the company embraces these traditional notions and traditional values, and are interested in sustaining this culture, then they will be able to do it. But that's the thing that I'll worry about, as a shareholder.

David Hanson owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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