Berkshire Beyond Buffett(6)

In a press interview in May 1991, Buffett announced off the cuff a directive to Salomon personnel that became embedded in Berkshire’s DNA: do nothing that you would not be happy to have an unfriendly but intelligent reporter write about on the front page of a newspaper. He repeated that admonition in related congressional testimony and has reiterated it regularly to the chief executives of Berkshire’s subsidiaries.34

Buffett consciously committed to changing Salomon’s corporate culture. It had a reputation for operating just within the letter of the law, whereas Buffett promoted playing well within the boundaries of propriety. In addition to proselytizing, he established a new tone by appointing hand-picked senior officers, including Deryck Maughan, an esteemed banking executive; Robert E. Denham, a distinguished corporate lawyer then serving as managing partner of Munger, Tolles & Olson; and Robert H. Mundheim, an eminent business law professor and dean of the University of Pennsylvania Law School. The envisioned culture had a key trait found in today’s Berkshire subsidiaries: an investment in reputation and integrity. For Salomon Brothers, Buffett offered an object lesson in the value of values, stressing the kinship of ethics and profits.




In their earliest acquisitions, Buffett and Munger began their lifelong relationship and forged principles that would contribute to defining Berkshire. Their deals demonstrated the difference between price, which is paid, and values, which are exchanged: they underpaid for See’s, while compensating for that with permanence, and overpaid for Wesco in the name of integrity. The early deals showed a willingness to be unconventional despite costs: they were suspected of wrongdoing for overpaying in Wesco and for ignoring due diligence exercises at the Buffalo News. Buffett’s role at Salomon Brothers further etched the importance of integrity into Berkshire culture.

The SEC’s probe after Wesco taught the importance of simplification, as Buffett and Munger clarified their relationship and streamlined the corporate structure. They consolidated the subsidiaries into Berkshire, making it the primary corporate entity for their businesses, and named Buffett chairman and chief executive and Munger vice-chairman. Ultimately, Buffett came to personify Berkshire, leading on acquisitions and shaping culture, and Munger played the Delphic consigliore. Explaining roles in 1999, a few decades into their venture, Buffett said, “Charlie is broader in his interests than I am. He doesn’t have the same intensity for Berkshire that I have. It’s not his baby.”35 Munger agreed: “Warren’s whole ego is poured into Berkshire.”





2


Diversity

By 1986, Berkshire owned a range of companies, from candy to insurance, and with its next two acquisitions continued to diversify. Early that year, the management of the Scott Fetzer Company, led by Ralph E. Schey, had proposed a leveraged buyout. The plan drew attention from takeover artists, including the notorious raider, Ivan Boesky.1 Buffett followed the high-profile battle in the newspapers and finally wrote Schey a letter. He stressed Berkshire’s aversion to hostile bids, and told Schey to call if he wanted to discuss a friendly deal. The acquisition that resulted brought to Berkshire a new mix of businesses, including Ginsu knives, Kirby vacuums, and the World Book encyclopedia.

The company was established in 1914 when George Scott and Carl Fetzer founded a machine shop in Cleveland, where they manufactured flare pistols.2 During the 1920s, they formed a joint venture with local inventor Jim Kirby, of the eponymous vacuum cleaner. The three went into business together, perfecting not only the product but a direct-sales method of distribution through independent dealers. Kirby vacuums became an American household staple, selling millions over ensuing decades. From the 1920s through the 1960s, Scott Fetzer did little else than sell that product.

But in the late 1960s, Scott Fetzer transformed itself into a diversified corporation, riding a wave of conglomerate building that occurred during that period. It soon operated through 31 different business divisions, with offerings from chain saws to trailer hitches, each managed autonomously by division heads. Schey, who became president in 1974, sold off some companies while adding new ones, including the crown jewel, World Book, in 1978.

By 1986, Scott Fetzer was a sizable publicly traded conglomerate bearing modest debt. The combination made it attractive for the era’s raiders and leveraged buyout operators. They could finance a takeover with borrowings repaid by selling off the individual divisions and with additional credit assumed by the target. Yet Scott Fetzer was also professionally managed, with leading products in numerous fields and proven profitability. That combination was, unsurprisingly, attractive to Buffett, as Scott Fetzer was a miniature of what Berkshire would become on a massive scale. Berkshire paid $315 million—plus promises of managerial autonomy to Schey and his team and permanence for the company and its shareholders. Both promises contrasted sharply with what Boesky portended.3