Composed of friends and family, they are directors because they are interested in Berkshire. They do not oversee management but provide support and advice. There are few committees, no hired advisers, and only two or three meetings a year. Berkshire pays its directors essentially nothing and provides no insurance. Berkshire’s directors are significant shareholders and bought the stock with their own cash — which is why they are there.
Most American corporate equity is owned by large financial institutions — mutual funds, hedge funds, pensions, money managers and other intermediaries. Stock trading is frequent and portfolios are rebalanced regularly to maintain diversification. All this action generates significant fees for intermediaries and frictional costs for investors.
Berkshire’s shareholders are mostly direct owners of the stock — individuals, families, family offices — or hold it through a family-oriented firm that concentrates in Berkshire stock. Berkshire’s share turnover is very low and, for many shareholders, Berkshire is their largest holding. All this inaction minimizes the role and costs of numerous intermediaries, from stockbrokers to stock exchanges.
Most sizable American corporations use centralized procedures and departments, middle managers meeting regularly, along with consultants, directives, supervision and second-guessing. Berkshire has none of that — no centralized accounting, personnel, legal or technology departments; no hierarchies for reporting or budgeting; no middle managers or consultants.
All such functions are handled in the individual units. In fact, Berkshire headquarters employs just 25 people. And while Warren Buffett is personally responsible for a great deal of this practice, it has been internalized across the institution and is likely to endure long after successors assume control.
The more interesting question is not whether such habits can endure at Berkshire but why they are not more widely practiced. The difference is attitude: Berkshire takes a partnership attitude toward its shareholders whereas most corporations are hierarchies, with shareholders seen to own a residual claim on firm assets, an equity stake after liabilities are covered by assets.
Boards and managers treat shareholders accordingly, as inputs in a production function. In that world, lenders, bankers, brokers, boards, and middle management help executives in the guise of helping shareholders but introduce agency costs that shareholders pay.
Buffett defined Berkshire as a partnership from the outset: “While our form is corporate, our attitude is partnership.” This views the corporation as a conduit through which shareholders own its assets, not merely an equity stake. Buffett and his shareholders are on the exact same page.
I’m seeing many more managers striving for this attitude, seeking advice on how to develop the internal culture of simplicity and self reliance. It turns out to be easier than they think — and generates vastly greater profits. Consider it!
This article was republished with permission from Value Walk.