No. of Recommendations: 32
A number of operating cost issues have emerged since WEB handed over operating responsibilities to Greg and Ajit.
Gen Re was the first – remember Ajit’s leaked memo that operating costs must be brought down? Now has followed similar issues with Geico. And with BNSF versus UNP.
These were all formerly run by managers that Buffett praised. And when questions arose at a past annual meeting, Munger supported Buffett in saying that they thought BRK ran pretty efficient operations. This all suggests that these wasn’t much cost control efforts coming down from the top.
I’m NOT suggesting that Buffett should have spent more time on operating issues. We shareholders were far better served by him devoting his time primarily to putting BRK’s cash flow to work. But I do suggest that the move to elevating Greg and Ajit to operating managers, a move that I believe Munger had influence on, was a very good move by Buffett. We don’t see highlights but some specifics plus scuttlebutt say that they’re focusing a lot on defining and addressing operating costs. This will become more and more important as reinvestment opportunities for BRK cash continue to be difficult.
From experience with my prior employer, I can witness that operating cost controls can lose focus even within successful corporations. XOM had a reputation of being well managed, so it was a shock to operating managers when new CEO Lee Raymond directed operating costs be reduced by 20%. There was a lot of initial kickback when this happened. Managers protested that there wasn’t 20% room to cut costs. He replied that if they couldn’t he would find managers that could. And costs came down more than the 20% targets. When focus changed, mangers found more opportunities than the target. It just took a different mental model.
And, of course, there were backlash and resentment among the employees impacted. But well qualified people found other job opportunities, there were good separation payments and benefits, and normal attrition (reduced hiring) permitted very significant benefits to shareholders. Billions of dollars. And BRK has a lot more operating costs than did XOM.
I don’t think Greg and Ajit are being this severe. But I do think their efforts are helping improve BRK’s cash flows. And I suspect Greg is being diplomatic with people used to reporting directly to Buffett and generally being left alone. Change takes time.
Now, back to the post title. What happens after Buffett moves on from an organization standpoint?
I don’t think Greg should retain direct operating management responsibilities ex. insurance.. But I do think he should develop an organization of managers to oversee operations. The heads of BNSF, BHE, Ajit, and a new group of managers to oversee MSR operation subdivisions. He must free up time to focus on asset allocation decisions and future strategy for BRK. And play the Raymond role of setting performance targets. He has these capabilities, and BRK will need them going forward.
Put another way, Berkshire should move even further along past the “delegation to the point of abdication” era when Buffett was younger and Berkshire was smaller. Very few people have the capabilities to keep up with the amount of data he could process mentally. He did keep his finger on the pulses of the operating businesses via very frequent written reports. But he rarely seemed to intervene. Frankly, he didn’t like conflict unless it was really necessary. Controlling costs generates conflicts.
Change does bring conflicts. And these could well happen when Buffett moves on. I suspect many already very rich managers will have to decide whether they wish to become more tightly managed. And the Buffett family will have to decide if such changes will fit within the “Berkshire culture.” We could see a significant number of management moves.
I think BRK will need to take such steps as the operating businesses beyond insurance become more important to BRK’s future.
What do you think?
