The Warren Buffett cottage industry is a busy one. There have been many books published in recent years about Buffett, his investing style, and his management of his holding company, Berkshire Hathaway
Robert Miles generously gave his time to respond to insightful questions from The Motley Fool community members who hang out at our Berkshire Hathaway discussion board.
Q. How did the idea for the book come about?
A. Warren Buffett wrote me after my first book to say, "enough writing about me, the real story of Berkshire Hathaway is all the managers that make up the management team." With so much written about Buffett and his investment style (quantitative), I thought it would be an interesting project to interview, research and write about management -- the qualitative aspect of Berkshire. I think the reader will find that there isn't another enterprise quite like Berkshire.
Q. Was it difficult to meet Berkshire Hathaway managers? Did you get the help of Berkshire's headquarters?
A. No, it wasn't difficult, just time consuming. I took most of a year to travel the country to meet each of them. Most of the Buffett CEOs checked with Warren to see if it would be okay to spend a few hours answering an assortment of questions. In typical fashion, Warren said their time was their own and the decision to participate in this book project was entirely up to each of them. They were not encouraged or discouraged.
Q. What was the average length of each interview? How many times did you meet each manager?
A. On average, each interview lasted two hours. Several lasted all day and into the night, as one CEO took me home for a backyard BBQ and to meet his family. One interview was on a summer vacation home porch in rocking chairs overlooking Nantucket Bay, another was all day long while filming a commercial, but most were inside the manager's office during a typical working day. All included at least two follow-up phone calls.
Q. How long did it take you to research and write the book?
A. It took about a year and a half. Interview transcript pages totaled 1,500 pages and additional research added another 1,500 pages, so it took a lot of work to pull out the best material to create a 24-chapter book.
Q. How often do the CEOs meet with Warren Buffett?
A. It's totally up to each manager. Few meet with him in person. Most phone every few weeks if they need advice or want to report in. After the purchase of See's Candies, it was over 20 years before its CEO, Chuck Huggins, even visited Omaha.
Q. Did the CEOs you interviewed have any consistently similar characteristics?
A. Yes, and since they don't know one another they proved to be an excellent case study. I wrote a separate chapter  on the Buffett CEO comparisons. As you would expect, they all are trusted and trustworthy, loyal, energetic, passionate, and smart. They are wealthy, averaging $100 million in net worth, concentrated in Berkshire stock. One manager (Al Ueltschi) is a billionaire and was a member of Forbes 400 richest before his company was purchased by Berkshire. They all had strong mentors and they all give back.
Q. Is there a common pattern of similar competitive advantages in each of the managers' companies?
A. Most are old economy businesses, founded on average about a hundred years ago. All were founded before Warren Buffett took over management of Berkshire Hathaway in 1965. Except for the shoe group, most are leaders and dominate their markets. The Berkshire companies represent more SIC codes (125) than any other business conglomerate.
Q. Do the CEOs have similar leadership styles? If so, could you describe the styles?
A. Most lead by example but vary in their styles of leadership. Bill Child of R.C. Willey Home Furnishings took a call from a dissatisfied customer right in the middle of our interview. He also lists his home phone on his business card. The Tatelman brothers of Jordan Furniture treat their employees like they are the customers. Executive Jet CEO Rich Santulli keeps his small corporate office near New York City while most of his employees and his operational center are in Columbus.
Q. In a nutshell, how did Buffett decide to do business with these "all-star" folks after a few minutes or one hour of conversation (as he is known for doing)? What types of questions did Buffett ask them?
A. Buffett decided before he even spoke with each CEO that he wanted them to be part of his team. He reads about and studies each business beforehand and knows everything he needs to know before he purchases the business. When he meets with them in person he makes sure they are honest, passionate about the business and intend to continue managing it. He asks them if they would like to speak with other satisfied managers. They typically agree on a simple cash compensation plan. Buffett explains his style of macro management and asks for no synergy between existing businesses. No layoffs. No headquarter mandates. Just keep managing the business just like they have always done, except now they can notify their banker that they have a different source of capital.
Q. For the CEO, what are the advantages of being a member of the Berkshire family?
A. It's the best of all worlds. Buffett CEOs report that they can free their estates from estate taxes, insure the long-term survival of their businesses, convert capital that is tied up in their businesses for other purposes, immediately gain the best credit rating enjoyed by just a handful of worldwide companies, have instant access to the best business mind for problem solving, and continue managing their enterprises just as they have always done. As an additional benefit, the CEOs of companies that were publicly traded (Schey, Nicely, and Ueltschi) quantified a savings of 50 days per year spent outside the business that is now allocated inside. In other words, Buffett CEOs can spend more time on their businesses.
Q. Did the CEOs get what they expected from the deal? Did you hear of them being surprised by anything? Did anything differ from their expectations?
A. Since Warren Buffett has never lost a CEO to another competing enterprise, all the managers reported complete satisfaction with their deal and ongoing relationship.
Q. Could you describe the relationships the managers have with Mr. Buffett regarding excess capital? Do they hear from him quarterly for instance, or do they just send him capital they can't allocate above his hurdle rate with minimal interaction with him, or a combination of the two scenarios?
A. Each operating business sends a simple monthly financial report to Omaha. Some businesses such as GEICO are instructed to keep their excess cash for investment and to grow the business; others like H.H. Brown send their excess cash west to Omaha for further allocation.
Q. How does Mr. Buffett motivate some of Berkshire's managers who have enough money to stop working?
A. He trusts them. He doesn't ask them to change the very things that made them successful. He rewards them with a round of golf with Bill Gates at Augusta National or Jack Welch on Nantucket. For those that don't play golf he invites them to a special Washington, D.C. annual dinner with the heads of the administrative, legislative, judicial forms of government, including the current and former President of the United States and the chairman of the Federal Reserve. Warren also has the most widely read annual report and chairman's letter that has become another (and unique) source of manager recognition and reward. Motivating Berkshire's management team is like encouraging Tiger Woods to play better golf.
Q. Why would the owner of a company sell out to Berkshire when they could keep the company and the money it generates for themselves and their family?
A. Most family-owned businesses do not survive from one generation to the next. Even fewer businesses survive to the third generation. Many large businesses need to be sold upon the death of the founder to pay estate taxes. Some businesses end up in the hands of competitors with different management intentions than the founder. Many businesses have all of the family's capital tied up in the business and selling to the right buyer frees up that money. Many business want to expand their operations and selling to Berkshire gives them unlimited access to capital. Some owners sell to diversify stock in their family business to stock in Berkshire, which represents over 100 different businesses.
Q. Did the business managers have any comments on how strategic business decisions are made? Do they interact with Mr. Buffett to make decisions, does he leave them alone, or is it some combination of these?
A. It's a combination depending on the preference of the manager. Most simply manage as they have always managed. If they want to phone Warren, he invites them to do so. No matter where he is, he will return their call promptly. He answers his mail (100 to 200 letters per day) the same day he receives it. Warren approves all major capital allocation decisions, even for some partly owned businesses such as The Washington Post
Q. Does Mr. Munger become involved with the business managers in any way? [Last year, a book was finally published about Buffett's business partner, Charlie Munger.]
A. Charlie Munger (who often answers his own phone) seems to be more of an advisor to Warren on acquisitions than on the day-to-day management of the operating businesses. None of the Buffett CEOs reported any ongoing involvement with Charlie.
Q. Did the business managers ever express any feelings of pressure regarding having to meet Mr. Buffett's expectations (or about possibly letting him down in some way)?
A. Yes, all of them want to make Warren proud. Because he trusts each of them, none of them wants to disappoint him in any way.
Q. On average, how many hours do the Buffett CEO's work every day on their businesses? Do they still have the hunger and burning desire to drive up the business, or are they more or less relaxed or semi-retired enough that the businesses run by themselves?
A. As you would expect, most, if not all, of the Buffett CEOs are driven to accomplish and succeed. Many are working harder than they did before becoming part of the Berkshire family. Some have more time to spend inside the business because they now have a unique long-term owner. Behavior is usually consistent and was evident before Berkshire purchased them. They share a passion for their business that didn't change after they were purchased and will not change. All of them could have retired long ago but now enjoy working for as long as they choose. There are no term limits on the CEOs of Berkshire. One manager, Frank Rooney, developed a business that is now the CVS pharmacy chain and retired -- but he was pressed into service by Warren after selling his wife's family shoe business to Berkshire.
Q. On average, how much of a boost does the brilliant Buffet-run celebrity marketing campaign give to each business? Percentage wise, what's the annual revenue jump after an acquisition, if any?
A. Depends on the business. The Omaha retailers (Nebraska Furniture Mart's Blumkin and Borsheim's Jacques) report their highest store sales during the annual meeting weekend. Executive Jet's Rich Santulli gets personal phone calls from Warren with NetJet customer referrals. Most of the operating businesses do not see a jump in revenue as a result of their new relationship with Berkshire, although their expenses (e.g. interest) usually go down.
Q. How did (or would) any of the CEOs answer the following question: If you had a silver bullet and could shoot one competitor in your industry, who would it be?
A. Interesting question. The furniture retailers see their competition as any discretionary dollar spent outside the home, such as vacation travel and a new automobile. GEICO, Executive Jet, and FlightSafety have such superior business models that they are the targets of a competitor's silver bullet. The Washington Post Co., The Buffalo News, and World Book would probably shoot the Internet instead of a competitor.
Q. Did any of the CEOs have critical (negative) things to say about Buffett and/or his modus operandi? You needn't disclose names, but it would be interesting to hear what, if anything, any of them had to say.
A. All of them were free to speak their minds and what was amazing was the consistency of their answers even though they didn't know how the other CEOs were answering the same questions. Just about everyone reported that they have the best job and boss in the world and it's like having no boss at all. Warren asked that no interview transcripts be sent to him because he didn't want to influence the book in any way. No one asked for manuscript approval and no one asked for any changes in the book.
Q. How deep are the management benches at Berkshire companies? While Buffett has spoken at length about the risk assessment and pricing abilities of Ajit Jain in the reinsurance area and GEICO's Lou Simpson in investing, what can you tell us about any of the lesser-known luminaries?
A. Charlie Munger was right when he said that the top 25 managers at Berkshire could all die at once and Berkshire would continue successfully. Berkshire by its very culture and structure is deeper than any other conglomerate because it doesn't exist with just one CEO. Berkshire is a holding company of CEOs all operating independently of one another. Unlike every other traditional corporation, none of the CEOs has a term limit. All the Buffett CEOs have designated a successor.
Q. What kind of financial expectations do they have to meet as part of the Berkshire holdings? Are there certain return-on-capital benchmarks that the managers must meet in order to keep their cash from operations within the company? If so, what is the benchmark for return on capital and what are the metrics used to come up with the returns? Is Return on Equity (ROE), Return on Invested Capital (ROIC), or Return of Assets (ROA) used, or some other measurement?
A. I didn't ask this question specifically, although it is an excellent line of questioning. Jeff Comment said that after Helzberg Diamonds was purchased, he fell asleep and took his eye off the business. He judged himself by what the business was doing previous to the Berkshire acquisition, put together a corrective plan, presented it to Warren in Omaha, and turned the business back to where he wanted it to be. My guess is the performance measurements and benchmarks are long established and any deviation is explained and accounted for. A good measure of any business is what the competitors are doing.
Q. Do the managers experience any unobvious benefits as Berkshire companies, such as higher credit ratings and lower debt expenses?
A. Yes. One of the first things after the acquisition that Melvyn Wolff of Star Furniture and Jeff Comment of Helzberg Diamonds got to do was fire their bankers. Many enjoy the sterling reputations of Warren Buffett and Berkshire Hathaway.
Q. Did any of the CEOs recommend any well-run companies for investment (either private or public)?
A. Al Ueltschi of FlightSafety said if he knew about an excellent investment (and each CEO is always on the look out), he would tell Warren, not me. Lou Simpson did tell me his biggest "lost opportunity" was Gap
Q. In your view, which two or three CEOs stood out most as being the most interesting or unusual, and why?
A. Tough question. Best to treat all the Berkshire CEOs like Warren does. He considers each to be part of his family, all deserving of the same treatment and to show special favor to one is to disappoint another. That said, Tony Nicely is the ultimate team manager; Lou Simpson is better than Peter Lynch and Warren Buffett at picking stocks; Ajit Jain is one of the smartest guys you will ever meet; Mrs. Blumkin is the female equivalent of Sam Walton; Al Ueltschi is an aviation icon and genuine hero; Rich Santulli has all the qualities to be the CEO of CEOs and fill Buffett's shoes on the operational side of the business.
If you close your eyes, Don Graham speaks and thinks like Warren; Irv Blumkin knows best what CEOs are best for Berkshire; Frank Rooney has one of the most fascinating life stories; you will not meet a more principled man than Bill Child; Melvyn Wolff was the only one to turn the interview around and ask thought-provoking questions; Eliot and Barry Tatelman are outside the box in everything they do; Stan Lipsey has been associated with Berkshire the longest and has the best stories; Chuck Huggins joined See's Candies 50 years ago; Ralph Schey was the only one to retire before this book was published; Susan Jacques is the youngest, prettiest, funniest, and most charming; Jeff Comment knows retailing and managing; Randy Watson and Harrold Melton gave insights on what it is like to be the new kids on the block.
Q. Has Warren Buffett seen the book, and if so, what does he think of it?
A. On a Saturday in August, I was in Omaha to speak at a conference sponsored by the Omaha World Herald and Warren invited another speaker and author, Janet Lowe and myself to his office and to lunch at the Omaha Country Club. It was a fascinating ride in his car and two-hour lunch. After lunch, I gave Warren 400 book pages and he was off to play bridge on the Internet. I assumed it would take him a week to read it and that he would send me a letter. Instead he called me Monday morning (6:50am Omaha time or 7:50am Tampa time) to let me know he found six factual errors. He spent 45 minutes with me on the phone explaining my mistakes and also answered other questions about succession, why no one else has created an enterprise like Berkshire, and how his eventual successor should be judged.
Q. What question do you wished we asked but didn't?
A. What do you hope to accomplish with this book? As a long-term and passionate shareholder, it was my intention to learn more about my lifetime investment and pass along what I discovered to help others who have made Berkshire a major investment. My dream is that some CEO somewhere picks the book up and sees his or her company in it and calls Warren to propose a merger/acquisition.
Thank you for your questions.
If you want to know more about Berkshire Hathaway and Warren Buffett, check out the resources at our discussion board !
Selena Maranjian owns Berkshire Hathaway. The Motley Fool has a full disclosure policy.
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