By Lawrence A. Cunningham
Berkshire Hathaway is simple. Though among America’s largest public companies, it is almost entirely self sufficient. It rarely uses intermediaries – brokers, lenders, advisers, consultants and other staples of today’s corporate bureaucracies. It’s interesting to ponder how and why, but as important to ask why is it so unusual — and what people are doing about it.
While American companies borrow heavily, Berkshire shuns debt as costly and constraining, preferring to rely on itself and to use its own money. It generates abundant earnings and retains 100 percent, having not paid a dividend in more than 50 years.
Berkshire earns some $30 billion annually — all available for reinvestment. In addition, thanks to its longtime horizon, Berkshire holds many assets acquired decades ago, resulting in deferred taxes now nearing $100 billion. These amount to interest-free government loans without conditions.
The principal leverage at Berkshire is insurance float. This refers to funds that arise because Berkshire receives premiums up front but need not pay claims until later, if it all.
Provided insurance is underwritten with discipline, float is akin to borrowed money but cheaper. At Berkshire, float now runs another $100 billion, which it uses to buy businesses that continue to multiply Berkshire’s value.
American corporations tend to design acquisition programs using strategic plans administrated by an acquisitions department. They rely heavily on intermediaries such as business brokers and investment bankers, who charge fees and have incentives to get deals done; firms also use consultants, accountants and lawyers to conduct due diligence before closing.
Berkshire has never had any such plans or departments, rarely uses bankers or brokers, and does limited due diligence. In the early days, Berkshire took out a newspaper ad announcing its interest in acquisitions and stating its criteria — which it has reprinted in every annual report. Berkshire now relies on a network of relationships, including previous sellers of businesses.
Today, corporate America’s boards are intermediaries between shareholders and management. Directors are monitors involved in specific strategic decision-making. They meet monthly, using many committees, which in turn hire consultants, accountants and lawyers.
American directors are well-paid — averaging $250,000 annually — including considerable stock compensation plus company-purchased liability insurance. Berkshire’s board, in contrast, follows the old-fashioned advisory model.