Berkshire Beyond Buffett(26)

Despite the problems asbestos caused, Johns Manville ran a profitable business. It boomed during World War II when the government used asbestos in building warships and fighter jets—while fully informed of the risks and providing warnings to personnel.42 Johns Manville’s prosperity continued after the war and through 1970, though it faced challenges including bouts with sluggish growth. In response, it expanded into additional businesses, including many unrelated to asbestos.

During the 1950s and 1960s, employees filed workers’ compensation claims based on illnesses tied directly to asbestos exposure.43 In the 1960s, the mainstream press popularized scientific research demonstrating the dangers of asbestos. The bad publicity prompted the company to add product warnings but did not stimulate any further action.

A blow struck in 1973 when a federal appellate court, affirming a jury finding of negligence and awarding large damages, excoriated the company for its callous indifference to the devastation its products caused.44 This result attracted more lawsuits, most of which settled, which begat more lawsuits, ad infinitum. By 1977, Johns Manville had exhausted its insurance coverage, and no insurer would write a new policy. The company was on its own.

Asbestos began to consume the company, as a 1979 Fortune magazine story noted that managing litigation had become “almost a separate business.”45 Meanwhile, Johns Manville’s operations continued, growing revenues, adding products, and acquiring companies. But the legal problems mounted, with thousands of cases pending and average settlement amounts rising. Actuaries predicted total exposure of $2 billion over ensuing decades, twice the company’s assets.46

To manage these staggering realities, the company filed for bankruptcy in August 1982, then the largest in U.S. history. An elaborate restructuring plan resulted. As an operating company, Johns Manville exited the asbestos business and would be shielded from further claims; concurrently, to pay asbestos-related liabilities, independent trusts were formed, whose principal assets would be a controlling interest in the operating company’s equity.

The plan offered a fresh start. But Johns Manville’s public image was destroyed, the company having lost the trust of employees and customers. To regain favor, management implored employees to focus on operating the company conscientiously and oversaw the management of the trusts to assure scrupulously fair administration of claims. Both efforts continued during the protracted period of the bankruptcy process, which lasted until 1988.

A totally new Johns Manville emerged from the ruins. It reversed the cultural backwash that drowned it in asbestos liability. The company sought input from employees and provided them with more generous medical monitoring and protection. During a decade of corporate rehabilitation, the company gradually turned a corner to become the Johns Manville of today that embraces corporate integrity and reputation.

Those managing the trusts, meanwhile, wished to diversify their concentration in the stock of Johns Manville. In June 2000, they agreed to sell the company to a leveraged buyout operator for $2.4 billion. But on a Friday in December, the deal was aborted after financing fell through. The following Monday, Buffett called the trust’s chairman, Robert A. Falise, and made an all-cash offer of $1.9 billion with no financing contingency.47 The trustees accepted the next day, and both sides signed a contract a week later.

Johns Manville’s “incredible and multifaceted odyssey,” as Buffett characterized it,48 did not end with its takeover by Berkshire. Under incumbent CEO, Charles L. (“Jerry”) Henry, through his retirement in 2004, and his successor Steven B. Hochhauser, Johns Manville achieved record profits of $334 million in 2005 and $345 million in 2006. 49 That string was interrupted in 2007, however, when David L. Sokol, then Berkshire’s roving troubleshooter, joined its board and replaced Hochhauser with a MidAmerican Energy colleague, Todd M. Raba, who navigated the company through the construction downturn and ensuing recession.50 Succeeding Raba in 2012 was Mary Rhinehart, a 34-year veteran of Johns Manville, eager to prove the compatibility of profits and integrity.

Despite continuing challenges, Johns Manville’s contemporary corporate culture is committed to integrity, an about-face from the culture of obfuscation that plagued the business for so long. Johns Manville overcame adversity and healed self-inflicted wounds, showing it is never too late to learn. Berkshire could not have acquired the old Johns Manville, but the new one fits the Berkshire model, and Berkshire’s culture helps to reinforce its commitment—now decades old—to being a reputable business.

The Johns Manville story spotlights the value of values. The company’s harrowing corporate history taught it the value of commitments to employee and customer health and safety. Until bankruptcy in 1982, it overemphasized immediate profit seeking, but today appreciates that economic prosperity is sustained by commitment to broader, longer-term concerns. The Johns Manville story provides a business case for driving shareholder returns while taking responsibility for health and environmental safety.51