The SEC’s decision not to pursue a case against Sokol contrasts with the audit committee’s judgment condemning him for violating Berkshire policy. Differences between business judgments and legal conclusions are common in corporate practice because ethics codes are often stricter than legal mandates. Law sets minimum requirements, leaving companies free to refine standards upward. In fact, many command-and-control structures are efforts to comply with the letter of the law; Berkshire’s trust-and-autonomy culture aspires to a higher bar.49
Consistent with the SEC’s conclusion, Sokol’s mistake was less in buying Lubrizol stock than in failing to disclose his recent purchase to Buffett. The audit committee’s reaction underscored Berkshire’s sensitivity to public perceptions, whereas Sokol heralded the SEC’s decision as his vindication. His attorney even argued that what he had done was expressly permitted by his employment agreement with Berkshire.50 Sokol’s infraction was small in relation to the price he paid, illustrating what ruthlessness means.
Bill Child, the entrepreneur who built family-operated RC Willey into a regional furniture and appliance powerhouse, relates the story of a rival who taught him lessons about autonomy.51 The competitor had begun business, just as Willey had, from a building next to his house, with no overhead, low prices, and one-on-one service. The business grew, and he built a store in a commercial zone. He hired employees, and the business grew even more.
But the owner never empowered any of his employees. Instead, he tried to perform every aspect of the business himself, as he had always done. The result: customer service and employee morale both suffered. Finally, the man could not sustain enough sales to cover the rising cost of overhead, and he lost his business. Child draws two lessons from the story:
First, delegation is vital to growing a small business. Second, true delegation only exists when the leader trusts his people enough to allow them to perform their responsibilities without constant interference.52
Berkshire CEOs, in correspondence and interviews for this book, stress the value they assign to Berkshire’s autonomy, which is useful for large corporations as well as small. At Clayton Homes, the large vertically integrated manufactured housing company, for example, Kevin Clayton explained that the company treats its business groups autonomously. Each group—manufacturing, retail, finance, insurance, trailer park—stands on its own. This, he explains, creates long-term economic value.53 The company also embraces the 90/10 rule: junior managers should make 90 percent of the decisions, while senior managers collaborate on the other 10 percent, which involve unusual risk, require special skills, or go beyond the junior manager’s expertise.54
In another interview for this book, Jim Weber, CEO of Brooks, Berkshire’s running shoe subsidiary, said that he has never had so much autonomy in his business career and never felt so accountable and responsible. The lesson: reposing trust and confidence in business managers can be the most effective way to promote desired results.
Lubrizol’s James Hambrick concurs about the value of autonomy at Berkshire and offers insight into making it work. He writes a quarterly report to Buffett.55 Unless there is something notable in it, Hambrick does not hear back. The report covers both the operations of Lubrizol and the activities of Hambrick, who is constantly on the road connecting with the global company’s 7,500 employees and innumerable stakeholders. Supplying the quarterly report means that when Hambrick sees an opportunity needing approval, he can summarize it and get Buffett’s approval within minutes without needing to review the background. This approach is especially valuable to those Berkshire subsidiaries which, like Lubrizol, seek acquisition opportunities, as the next chapter will illuminate.
9
Investor Savvy
McLane Co. Inc., a grocery wholesaler and distributor, generates more revenue than most countries’ gross domestic product: $46 billion in 2013.1 The company’s mammoth size resulted from steady accretive expansion during the late twentieth century, spreading across the U.S. one region at a time. Since its humble nineteenth-century founding, however, the company has done what Berkshire does: reinvest earnings in its most profitable opportunities.
Robert McLane began this practice in 1894, when running a grocery store in the small central Texas farming town of Cameron, and spent the next two decades nurturing the business into a regional player.2 Efficient distribution systems were the central driver of expansion from those early days. A milestone occurred when McLane switched from using horse-drawn carriages to motorized trucks.
Robert and his son Drayton, who joined in 1921, steered the company through difficult periods. They survived adverse weather patterns during the 1920s that battered Texas farmers, who were their suppliers, and then they survived the Great Depression in the 1930s, which battered Texas merchants, who were their customers. Persistence paid off after World War II, as sales crossed the $1 million mark in 1946. The subsequent development of national highways reduced transport costs, stoking growth both within and outside of Texas.