Buffetts offer food for thought

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Buffetts offer food for thought

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Shin Jang-sup

American billionaire Warren Buffett is widely considered to be one of the most successful investors. He is referred to as the “Oracle of Omaha” for accumulating immense wealth through long-term investment in companies like Coca-Cola. The company that he owns and serves as the chairman and CEO of - Berkshire Hathaway, headquarted in Omaha, Nebraska - is worth $300 billion, making it the fifth-largest public company in the world. Its Class A stock costs $160,000 a share. The conglomerate’s stock has gained 20 percent annually since 1965.

Berkshire Hathaway is no simple mutual fund. Its wholly-owned subsidiaries range from railroading and insurance to food and beverage and newspaper companies. Companies in which Berkshire Hathaway owns minority stakes purely as investments, such as Coca-Cola and IBM, account for just 24 percent of its assets. The remaining 76 percent are run as business subsidiaries. The conglomerate has about 330,000 employees worldwide.

Berkshire Hathaway was originally a textile company. Buffett, whose clever investment moves made him a millionaire by the age of 30, purchased the company in 1964. He expanded to the insurance industry and acquired Government Employees Insurance Company (GEICO) in the 1970s. His company then collected a range of businesses - wholesale, retail, luxury items, furniture, finance, food and beverage, construction, utilities and media - with odd names like MidAmerican Energy, Burlington Northern Santa Fe, and Acme Brick Company. Ketchup producer H.J. Heinz recently joined the list.

When South Korea was hit by the Asian financial crisis in 1997, chaebol were blamed for causing the liquidity woes and placing the entire economy at risk with their unrestrained sprawling business practices. They were forced by the government and the International Monetary Fund to sell non-core assets. Major conglomerates had to undergo stringent restructuring. Under the same reasoning, Buffett should have been pressed by the U.S. government to simplify his business line.

With his management style, Buffett wouldn’t be able to maintain a lucrative business in Korea. The octogenarian has been at the helm in Omaha for half a century and keeps only a handful of assisting executives. The Omaha headquarters has 25 employees and no human resources department.

Berkshire Hathaway is run entirely by Buffett. The company is almost synonymous with Buffett and it is the only company among the world’s largest whose CEO’s name is more well known than the corporate brand. The helm at the corporate behemoth will be handed down to his eldest son, Howard. It is a case of a hereditary dynasty. But the heir won’t be able to ascend to the chairman’s seat until his father passes away. Buffett is 83, seven years younger than his second in command, Vice Chairman Charlie Munger.

The heir-in-waiting, 59, has not had much management experience. He attended several colleges but never graduated. He ran a farm his father bought near Omaha and worked as a volunteer deputy sheriff. With a handsome inheritance in Berkshire stocks, he started the Howard Buffett Foundation, committed to global conservation and food security issues. Apart from serving as outside director on Berkshire and Coca-Cola, the son has little to assure investors of a solid future at a Warren Buffett-less Berkshire. He won’t be inheriting the CEO title and will serve only as the nonexecutive chairman. But he won’t remain as a mere figurehead. While naming his son his heir, the elder Buffett declared that “Howie” was best suited to uphold Berkshire’s culture and values - preventing a future CEO from turning Berkshire into a “personal sandbox” at the expense of shareholders. He also wants his son to keep alive the unique culture of candor and autonomy in Berkshire subsidiaries.

Howard could interfere in management if he chose. Many Korean chaebol chairmen have wielded influence over subsidiaries without holding a CEO post. Since the financial crisis, Korean group owners had to assume CEO titles for greater accountability in management. The new nonexecutive chairman of Berkshire may take a similar role to that of Korean chaebol owners before the reforms.

Yet few criticize Buffett - or his company - for his unique management and business style. In fact, Buffett’s management style may be more productive and successful than what is taught in textbooks. It could also mean that the uniform prescription for corporate restructuring in Korea may have been wrong.

Many family businesses in America have fared longer and better than companies run by career executives. The same goes for British and French enterprises. There are naturally more such cases in developing countries. The merit of family-run enterprises is that business plans can be drawn up and operated from a long-term perspective.

But the same management style is considered outdated, predatory and unfair in Korea. The stigma undermines the dynamic energy of Korean corporate culture. Once-touted as model rags-to-riches case, Korea now suffers low-growth syndrome. We need to be more open-minded about individual corporate management style.

Translation by the Korea JoongAng Daily staff.

JoongAng Sunday, May 11, Page 31

*The author is an economics professor at the National University of Singapore.

By Shin Jang-sup


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