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This chapter considers Berkshire’s future beyond Buffett, a question that has nagged the company’s constituents for two decades. The concern was that the fate of the man and the company he built were one. With Buffett’s demise went Berkshire. But Buffett has institutionalized Berkshire’s attitudes and practices so that it is poised to endure long after his departure. Buffett and the Berkshire board have formalized a succession plan. As updated in 2006, the plan prescribes splitting Buffett’s job in two: management (a chief executive officer) and investment (one or more investment officers). Berkshire’s succession plan also addresses ownership, as Buffett has been Berkshire’s controlling shareholder since 1965. Buffett most recently held 34 percent of Berkshire’s voting power and 21 percent of its economic interest, always representing 99 percent of his net worth. He has been slowly reducing his stake by planned annual transfers to charitable foundations, a process that will continue for many years after his death.

This chapter focuses on the diversified business interests of Berkshire Hathaway. By 1986, Berkshire owned a range of companies, from candy to insurance. With the company’s next two acquisitions came further diversification. The first was the Scott Fetzer Company, which brought in a new mix of businesses, including Ginsu knives, Kirby vacuums, and the World Book encyclopedia. Berkshire’s other 1986 acquisition was the Fechheimer Brothers Company, a manufacturer and distributor of uniforms since 1842, catering to the public service industries: corrections, fire, military, police, postal, and transit. Today, Berkshire’s subsidiaries engage in a multitude of unrelated businesses, each contributing in its own way to Berkshire. In an effort to organize the diversity, four business sectors are outlined in Buffett’s annual letter to Berkshire shareholders, and each sector is broken down into further subdivisions. The first sector, insurance, is Berkshire’s oldest and the most important in terms of historical contributions to business value. The second, regulated or capital-intensive industries, is the newest sector and is becoming increasingly important in terms of revenues and earnings. The third sector is finance and financial products, the smallest of the four, though significant in absolute size. The final sector is a broad cluster of companies, encompassing various types of manufacturing, service, and retailing, including Fechheimer and Scott Fetzer.

This chapter describes the beginning of Warren Buffet’s relationship with Berkshire Hathaway. In 1956, twenty-six-year-old Buffett formed the investment firm Buffett Partnership Ltd., which later acquired Berkshire Hathaway, Inc. in 1965. At the time of its acquisition, Berkshire Hathaway was a New England textile manufacturer. The local press portrayed Buffett’s acquisition of Berkshire Hathaway as a hostile bid, stoking rumors that he was a takeover artist prepared to hasten the liquidation of the struggling company. Buffett recoiled at having a reputation as a liquidator and took pains to avoid acting like one. Yet Berkshire’s textile operations continued to decline for years as the forces of globalization hammered the industry. It was forced to curtail gradually operations through the 1970s, with Buffett finally shuttering the mills for good in 1985. Buffett’s acquisition of Berkshire was a great learning experience for him—learning what not to do. From then on, he made it Berkshire policy never to engage in hostile takeovers and vowed never to liquidate an acquired subsidiary. As a rule, Berkshire would acquire only companies with top management in place, to avoid having to arrange managerial shuffles. Above all, Berkshire would seek businesses with long-term economic value and willingly pay a fair price for them. The remainder of the chapter details Berkshire’s acquisitions from the 1960s through the 1980s.

This chapter explores the first of the Berkshire values—budget consciousness—through the story of car insurance company GEICO. GEICO, established by former United Services Automobile Association (USAA) insurance manager Leo Goodwin in the 1930s, marketed car insurance directly to customers perceived as the least risky drivers, namely U.S. military officers as well as other federal government employees. Goodwin’s business model was simple: low-cost insurance, sold without agents, to targeted risk pools that were given quality customer service. Buffet became interested in GEICO after learning that his professor at Columbia Business School, Benjamin Graham, was chairman of the company. Never having heard of the company in an industry he knew nothing about, Buffet decided to visit GEICO’s Washington headquarters, where he spent several hours learning about the business from GEICO senior officer Lorimer Davidson. Buffett’s key takeaway: “GEICO’s method of selling—direct marketing— gave it a wide cost advantage over competitors that sold through agents, a form of distribution so ingrained in the business of these insurers that it was impossible for them to give it up.” Inspired by his chat with Davidson, Buffett studied GEICO and the insurance industry carefully. He also bought 350 shares of GEICO stock during 1951 at a cost of $10,282, representing half his net worth.

This chapter looks at investees—companies in which Berkshire has a minority interest. Investees may fail, be acquired, reorganize, or become marketable securities that Berkshire sells or trades. Among Berkshire’s former investees which no longer exist due to merger or other corporate mortality are Beatrice Foods, Capital Cities/ABC, F. W. Woolworth, General Foods, and Knight Ridder. Among those Berkshire has sold are Freddie Mac, Kraft Foods, and McDonald’s. Today, 80 percent of Berkshire consists of subsidiaries and only 20 percent investees. Berkshire’s investee portfolio is like a business unit within Berkshire equivalent to a large subsidiary. While investees do not define Berkshire culture, their purchase and sale reflect Berkshire’s values, and many boast strong cultures, big personalities, and fascinating histories. Of particular significance are two of the oldest (Washington Post and Gillette, now Procter & Gamble), two of the largest (CocaCola and Walmart), and two of the most opportunistic (Goldman Sachs and USG). For a glimpse into the future, the chapter also considers another candidate for full acquisition—Heinz—and the novel partnership Berkshire made with a private equity firm to acquire half of it. At 50 percent, Heinz is neither an investee nor a subsidiary, and the transaction defines a new model for the next generation of Berkshire deals.

This chapter discusses Berkshire’s hands-off management approach that stresses decentralization and individual autonomy. This approach was made by choice but became necessary by default—with such a large number of subsidiaries in such a broad range of businesses, strict hands-on control would not be feasible. The choice to operate in a decentralized manner from the beginning reflected a belief in the value of autonomy and a conviction that people properly entrusted with authority will generally exercise it faithfully. And just as Berkshire Hathaway takes a decentralized approach, so do many of its subsidiaries. Every two years, Warren Buffett issues written instructions that reflect a balance between autonomy and authority. The missive states the mandates Berkshire places on subsidiary CEOs and these are: to guard Berkshire’s reputation; to report bad news early; to confer about post-retirement benefit changes and large capital expenditures (including acquisitions, which are encouraged); to adopt a fifty-year time horizon; (to refer any opportunities for a Berkshire acquisition to Omaha; and to submit written successor recommendations.

This chapter discusses the importance of being investment savvy through the stories of the following Berkshire companies: McLane Co. Inc., a grocery wholesaler and distributor; MiTek, a manufacturer of machinery and components that builders need to turn architectural and engineering visions into reality; Lubrizol Corporation, and MidAmerican Energy Holdings Co. For Berkshire, the economic value of subsidiary acquisitions has compounded as their number and size have increased. They are vehicles for allocating large amounts of capital. In the years 2012 and 2013, for example, Berkshire’s subsidiaries made more than two dozen acquisitions with transaction values ranging from less than $2 million to more than $1 billion. Total deal value was $2.3 billion in 2012 and $3.1 billion in 2013. The opportunity to deploy large amounts of capital through a single subsidiary in individual transactions is vivid in the case of MidAmerican (now Berkshire Hathaway Energy).

This chapter considers some of the challenges that Buffett’s potential successors might face. One of these is realizing that Buffett’s unique approach to acquisitions, which has served Berkshire well, is difficult to emulate. Most corporations adopt a formal plan charting desired sectors in which to expand, sometimes even naming acquisition targets. In contrast, Buffett calls Berkshire’s acquisition strategy “haphazard” and “serendipitous,” neither “carefully crafted” nor “sophisticated.” Another challenge is to recognize that, even if all of Berkshire’s traits are desirable, the values will inevitably conflict. Berkshire culture offers guidance on the trade-offs within its own value system. Managers have authority over all decisions except those affecting Berkshire’s reputation or capital allocation.

This chapter focuses on the companies that Berkshire has given permanent homes to. These subsidiaries found refuge in Berkshire after suffering from serial ownership by successive parents, leveraged buyout operators, private equity firms, or bankruptcy trustees—all working under short-term time frames. These companies include Brooks Sports Inc., a manufacturer of running shoes; Forest River Inc., a recreational vehicle manufacturer; Oriental Trading Company, a direct seller of toys and party goods; CTB International Corp., a designer and builder of equipment for poultry and livestock farmers as well as bins for feed and grain storage; and CORT Business Services Corporation, a furniture leasing company.

This introductory chapter provides a general discussion of Berkshire Hathaway and the secret behind its tremendous success. From its humble roots in 1965, Berkshire has become one of the largest corporations the world has ever seen. Its cash alone—$40 billion or more in recent years—exceeds the total assets of all but the largest one hundred American corporations. What has remained a mystery is how Berkshire functions so successfully given that it is made up of such a diverse group of subsidiaries. The Berkshire corporate empire encompasses more than five hundred entities engaged in hundreds of different lines of business. But diverse as they are, a close look at Berkshire’s subsidiaries and the company’s goals in acquiring them reveals distinctive common traits. The most important filter Berkshire applies when evaluating a potential acquisition is whether a company has ways to protect its ability to earn profits. Management experts refer to these as “barriers to entry,” making it difficult for competitors to take market share away. Warren Buffett draws on medieval imagery, portraying a business as a “castle” and such barriers and advantages as “moats.” Berkshire’s moat is its distinctive corporate culture. Berkshire spent the last five decades acquiring a group of wholly owned subsidiaries of bewildering variety but united by a set of distinctive core values. The result is a corporate culture unlike any other.

This chapter examines the advantages and challenges of family businesses through the experiences of the following Berkshire companies: Nebraska Furniture Mart Inc., RC Willey Home Furnishings, Star Furniture Company, Helzberg Diamond Shops Inc., and Ben Bridge Jeweler Inc. Many families selling to Berkshire, such as the Tatelman brothers of Jordan’s Furniture, and the Bridge family, shared sales proceeds with their employees. Intangibles like these—partnership, generosity, fairness—glue family businesses together. Along with valuing soft factors, such as family identity and legacy, these traits help family firms prosper indefinitely, as founders go, second-generation siblings join, and third-generation cousins come to be co-managers. Berkshire seeks out family businesses whose members prize such qualities and offers them autonomy and permanence. The mutual payoff is a durable, multi-generational family business.

This chapter focuses on the Marmon Group. The Marmon Group is a diverse conglomerate comprised of hundreds of different companies in numerous sectors, including financial services, transportation, energy, construction, manufacturing, and so on. The businesses are low-tech and unglamorous but are leaders in their industries. The companies were acquired at different times without any master plan. The conglomerate’s aging chairman and vice-chairman have guided the company during the four decades since its inception. They made essentially all important corporate decisions, with scant oversight from the board of directors. Adhering to a hands-off management policy emphasizing individual autonomy, all other decisions were made by managers of the various subsidiaries. In the mid-1990s the fate of the conglomerate was uncertain after Jay and Robert Pritzker passed away. Many analysts thought that the Marmon Group was too unwieldy for any but the Pritzkers to run and predicted it would perish soon after they left. However, the analysts were wrong. In 2008, the Marmon Group became a subsidiary of Berkshire Hathaway, and it continues to operate pretty much as it had for decades. The Marmon Group can be called a mini-Berkshire, possessing the same cultural traits as Berkshire and its sister subsidiaries. These common traits explain why Marmon, one of Berkshire’s largest and most profitable subsidiaries, fit right in at Berkshire.

This chapter focuses on individuals who embody the entrepreneurial spirit that pervades Berkshire culture. While many associate entrepreneurship with a habit of incubating businesses and moving on to the next one, Berkshire’s entrepreneurs are more inclined to focus on innovation within a business and to toil assiduously in that one domain. Among these is Albert Lee Ueltschi, a Kentucky-born entrepreneur who founded FlightSafety International Inc., the world’s premier pilot training school. Another is Richard T. Santulli, founder of NetJets, who developed a time-share concept for private planes. He began selling fractional interests in given planes to multiple owners; his company would then operate the fleet in exchange for customer service fees. His model of fractional ownership offered ease and freedom of private aviation at a fraction of the cost. The remainder of the chapter covers the following Berkshire subsidiaries: Garan Inc., Justin Industries, Acme Brick, and International Dairy Queen Inc.

This chapter presents some final thoughts. This book has examined Berkshire and its subsidiaries to generate a picture of Berkshire’s corporate culture. It has shown that in all these subsidiaries—despite their number and diversity—are shared values. There is also a common outlook of permanency among all these companies, many of which had faced the travails of serial ownership by corporate parents, leveraged buyout operators, or private equity firms. Once Buffett leaves Berkshire, deals are expected to be handled differently, shareholder letters will strike a different tone, and the annual meetings will feel odd. But Berkshire will always acquire new businesses, readers will continue to study Berkshire’ annual shareholder letters, and shareholders will still flock to the annual meetings. As a new guard leads the evolution of Berkshire beyond Buffett, they will set its course and the company will never be the same. Yet the core values that define it have proven to offer unique sustaining value.

This chapter discusses Berkshire Hathaway’s corporate culture. Corporate culture is defined by a set of shared beliefs, practices, and outlooks that determine a corporation’s expectations and influence the behavior of its personnel toward colleagues, customers, and owners alike. The tone is set at the top and percolates throughout the organization through daily decisions, challenges, and crises. The values of a company are at the core of its culture, as they establish the standards to achieve its goals. At Berkshire, these values first began to take shape from the acquisition criteria Buffett established to identify potential subsidiaries: proven profitability, good unleveraged returns on equity, management in place, basic businesses, and a fair price. Another formal expression of Berkshire’s tone that helped shape its values is a set of owner-related business principles that define how Berkshire and its subsidiaries relate to its shareholders and other constituents. It is an impressive list of fifteen principles that Berkshire’s chief executive lives by. Examples include conceiving of the organization as a partnership despite using the corporate form, minimizing the use of borrowed money, assessing whether to reinvest earnings or pay dividends based on whether a dollar reinvested will increase shareholder value by at least as much, and holding subsidiaries forever.

This chapter discusses the lessons that others take away from Berkshire and its subsidiaries. The stories of these subsidiaries animate a few fundamentals. First among these is to be budget conscious, especially by cost minimization that underlies the business model at GEICO and the furniture and jewelry stores, where low prices multiply volume and profits. Second is to reinvest profits in promising businesses; this is the central bastion of Berkshire culture driving its acquisitions. Third is to nurture entrepreneurship, where rewards can be great, as illustrated by the multiple revenue streams. Fourth is to offer autonomy to business teammates, as they are likely to thrive on it. Fifth is that family businesses must address inherent vexing challenges by promoting the values of family identity and legacy. Sixth is to make lots of money without losing sight of the long term. Seventh is to stress integrity, as seen in many Berkshire stories, including how Clayton Homes watches out for its customers and how NICO provides ironclad insurance promise.

Berkshire subsidiaries are a mix of companies with instant brand name recognition, such as Dairy Queen and Fruit of the Loom, and less familiar ones such as FlightSafety, ISCAR/IMC, and Lubrizol. What unites all of them is a sense of modesty and simplicity. Berkshire’s acquisition criteria state a preference for businesses that are easy to understand, noting that those with a high degree of technology are harder to grasp. But there is much more to this “rudimentary” feature of Berkshire culture than mere personal idiosyncrasies. A focus on the rudimentary reduces the potential for wasting resources. Rudimentary businesses are also more insulated from technological onslaughts compared to technology-driven businesses. The remainder of the chapter discusses Berkshire’s acquisition of Burlington Northern Santa Fe Railway. It also details how many Berkshire subsidiaries share events in their corporate histories in which they learned the hard way the value of sticking to the basics.

This chapter underscores the importance of investing in reputation through the experiences of the following Berkshire subsidiaries: the manufactured housing company Clayton Homes Inc., the furniture company Jordan’s Furniture, the paint maker Benjamin Moore, and the building products manufacturer and marketer, Johns Manville. It argues that integrity is not easy to maintain. While people generally say they want things such as a clean environment and safe workplaces, they are not always willing to pay for them. If they did, all businesses would readily choose the moral high ground and pass the costs on to customers. But reality poses challenges for businesses simultaneously to protect consumers, secure employees, control habitats, and deliver shareholder returns.

Chapter 1 begins by stressing the severity of climate change (CC) and showing how, contrary to popular belief, atomic energy is not a viable solution to CC. Many scientists and most market proponents agree that renewable energy and energy efficiencies are better options. The chapter also shows that government subsidies for oil and nuclear power are the result of flawed science, poor ethics, short-term thinking, and special-interest influence. The chapter has 7 sections, the first of which surveys four major components of the energy crisis. These are oil addiction, non-CC-related deaths from fossil-fuel pollution, nuclear-weapons proliferation, and catastrophic CC. The second section summarizes some of the powerful evidence for global CC. The third section uses historical, ahistorical, Rawlsian, and utilitarian ethical principles to show how developed nations, especially the US, are most responsible for human-caused CC. The fourth section shows why climate-change skeptics, such as “deniers” who doubt CC is real, and “delayers” who say that it should not yet be addressed, have no valid objections. Instead, they all err scientifically and ethically. The fifth section illustrates that all modern scientific methods—and scientific consensus since at least 1995—confirm the reality of global CC. Essentially all expert-scientific analyses published in refereed, scientific-professional journals confirm the reality of global CC. The sixth section of the chapter shows how fossil-fuel special interests have contributed to the continued CC debate largely by paying non-experts to deny or challenge CC. The seventh section of the chapter provides an outline of each chapter in the book, noting that this book makes use of both scientific and ethical analyses to show why nuclear proponents’ arguments err, why CC deniers are wrong, and how scientific-methodological understanding can advance sound energy policy—including conservation, renewable energy, and energy efficiencies.