“We are given two eyes, two ears, and one mouth, so we should always observe and listen, and talk only 20 percent of the time.”
— Randy Watson, President and CEO of Justin Brands
As value investors, most of us search diligently for opportunities to purchase companies below intrinsic value that offer the prospect of superior returns with minimal downside risk. We look at investors who have a proven track record over many decades and attempt to gain insights into their success and to emulate their approach. No investor is more closely examined than Berkshire Hathaway Chairman and CEO Warren Buffett, yet the normal emphasis is on his stock picks rather than his ability to select managers. Few investors pay much attention to Berkshire’s depth of management talent. After all, Berkshire is simply Mr. Buffett’s show, isn’t it?
While Warren Buffett is clearly the genius behind Berkshire Hathaway’s overall success, the company also has an exceptionally deep bench of management talent. Behind The Berkshire Hathaway Curtain is a new book written by Ronald W. Chan which provides an excellent introduction to several subsidiary managers as well as one director. The idea behind Mr. Chan’s book is similar to The Warren Buffett CEO by Robert P. Miles which was published in 2002. In both cases, the subsidiary managers are highlighted in ways that are often overlooked.
What Drives Management Success?
Those of us who focus on quantitative analysis when searching for investment opportunities may lose sight of the qualitative factors that can make or break a business. Whether a company has management that is capable, ethical, and driven to succeed is a key factor for long term success and the managers profiled in Mr. Chan’s book all fit the bill. Warren Buffett’s hands off management style can only work when subsidiaries are in the hands of capable and ethical individuals.
One interesting aspect of Mr. Chan’s book is the fact that he has chosen to interview several subsidiary managers who are not often in the limelight. Randy Watson of Justin Brands, Cathy Baron-Tamraz of Business Wire, Dennis Knautz of Acme Brick, and Marla Gottschalk of The Pampered Chef are hardly household names and chances are that most Berkshire shareholders who attend the annual meeting on Saturday would not recognize these CEOs if they ran into them in the convention center. However, the qualities that they bring to the table have added great value for shareholders.
Others interviewed for the book include Stan Lipsey of The Buffalo News, Barry Tatelman of Jordan’s Furniture, Brad Kinstler of See’s Candies, David Sokol of MidAmerican Energy, and Berkshire Director Walter Scott Jr. All of the individuals profiled in the book have different backgrounds and faced unique challenges as they rose through the management ranks but they share a common enthusiasm for their business and a desire to make sure that they live up to Warren Buffett’s expectations.
What About Insurance?
One surprising aspect of the book is that Mr. Chan did not interview any of Berkshire Hathaway’s insurance subsidiary managers. While Brad Kinstler, See’s Candies current CEO, has experience within Berkshire’s insurance subsidiaries, we do not get any direct input from managers such as Ajit Jain or Tony Nicely. Given the importance of the insurance business at Berkshire, the lack of such material seems like a significant omission. While the book has some great content, it would be much improved if it had at least one interview with an insurance subsidiary manager.
MidAmerican Voting Interest
The book also contains one error on page 152 related to MidAmerican Energy. Mr. Chan states that Berkshire is restricted to a voting interest of less than 10 percent due to the Public Utility Holding Company Act of 1935. However, the act was repealed in 2006 and Berkshire converted its non-voting preferred stock to common stock on February 9, 2006. As of December 31, 2009, Berkshire had a 89.5 percent economic and voting interest in MidAmerican.
Despite these two issues, the book is well worth reading for anyone who is interested in learning more about the men and women who run the day to day operations at Berkshire Hathaway’s subsidiaries. The future success of Berkshire will depend on the continued performance of these individuals. In addition, Mr. Buffett’s successor will be chosen from the current pool of management talent at the subsidiary level. The book is quick to read and hard to put down. As I write this review, less than 24 hours has passed since my copy arrived.
Disclosure: The author received a complimentary review copy from the publisher. The author owns shares of Berkshire Hathaway and is the author of The Rational Walk’s Berkshire Hathaway 2010 Briefing Book which provides a detailed analysis of the company along with estimates of intrinsic value.