Author: Lawrence Cunningham

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Berkshire Beyond Buffett in Print and on Shelves

BBB at barnes & NobleBook publication day always feels like a big deal, enough of a professional achievement to announce it to the world, so here goes: Berkshire Beyond Buffett: The Enduring Value of Values is now available from Barnes & Noble, Indie Stores, Target, Walmart, and other shops across Europe and North America. Thanks to my wife Stephanie for the picture at left from a B&N in New York City (bottom shelf, middle, next to the new Google book).  Of course it’s online at B&N.com (ships immediately), Amazon (ships October 21), and CEO-READ.Amazon BBB Book Cover - Copy

Visit the book’s web page for a free sample chapter and other free cool stuff, including details of the multi-campus book tour. It spans from my beloved GW, to my alma maters U. Delaware and Yeshiva U., and to universities coast-to-coast from Columbia to Stanford as well as Northwestern, Wash U and many others (thanks again, diligent patient hosts!). There’s also an Author-at-Google talk which should be very interesting, and they promise a You Tube posting afterwards.

On the tour, I’ll be joined to discuss Berkshire Beyond Buffett by several Berkshire directors, numerous Berkshire subsidiary CEOs, and a number of Berkshire’s largest shareholders (thanks Sandy Gottesman, Don Graham, Tom Russo et al!). The theory? As with the book’s portrait and thesis, we’ll hear a wide variety of diverse voices singing the same singular song of a strong and distinctive corporate culture.

The reviews have begun, including a particularly comprehensive one this morning by Kevin LaCroix, as well a recap interview by ThinkAdviser yesterday. Media appearances begin with radio next week (American Talk Radio on Monday, The Motley Fool on Wednesday, Bob Brinker at the weekend) and television the following week (Betty Liu on Bloomberg Tuesday, Liz Claman on Fox Business Wednesday, and others).

While the anticipation of all these events and dialogue is exciting, there is something simply special about grasping the physical volume in hand, inky aroma, cream-soft pages, firm bound spine, and well-edited narrative. The feeling reminds me how much I love books, which makes it extra cool to write them and to behold their physical beauty, as well as their intellectual sustenance.

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The Campus Book Tour

If you are publishing a new book–as almost all Co-Op bloggers seem to be doing, including Danielle, Frank, and me–getting the word out entails effort across mainstream media, social media, niche blogs, radio and TV, and, of course, old-fashioned book tours.  While technology and industry change have opened other media to more authors and others in the marketplace of ideas, the book tour has lost ground with the rise of ebooks and etailing and the decline of the traditional bookstore.

Into that void, however, the university is stepping. And not just for campus books like William Deresiewicz’s Educating Sheep,  in the swing of a 20-stop university based tour.  By reaching out to friends across the academy, a book tour can be fashioned to reach relevant communities. Targeting the open minds that ideally characterize university gatherings, the campus tour might even be more consequential than you could have done criss-crossing the country’s old Borders, Barnes & Noble, and Books-A-Million stores.

Thanks to the generosity of a network of professorial friends, such a book tour for Berkshire Beyond Buffett: The Enduring Value of Values, starts tomorrow at the University of Delaware. This is first in a series for a 20-stop tour, most at universities or other learned societies, as well as one in the Author at Google / You Tube series.  The banners or pennants of many of the schools appear below and a full regularly updated list can be found here. School Pennants

While what I most enjoy is preparing my lecture and then engaging in Q&A, putting the trip together also has its rewards, especially connecting with so many wonderful colleagues across so many schools.  But I know it’s a lot more work for them than me, so I want to use this blog post to shout out my deep gratitude to all those who are helping with this, listed specifically below.

For those authors now thinking about organizing a campus book tour, I should mention that it takes considerable effort, entails some frustration, and, like most everything in social life, should include a commitment to give at least as much  you hope to get in the exercise.   When I have a complete list of tips to pass on after this tour its completed, I’ll write them up in a blog post here.  For now, I can say that the wonderful people helping with this have made it thoroughly worthwhile.  Looking forward to seeing everyone on the road! Read More

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Chapter 8 of Berkshire Beyond Buffett: An Excerpt and Link

untitledThe following is an excerpt from Chapter 8, Autonomy, from Berkshire Beyond Buffett: The Enduring Value of Values; the full text of the chapter, which considers the case for Berkshire’s distinctive trust-based model of corporate governance, can be downloaded free from SSRN here.

. . . Berkshire corporate policy strikes a balance between autonomy and authority. Buffett issues written instructions every two years that reflect the balance. The missive states the mandates Berkshire places on subsidiary CEOs: (1) guard Berkshire’s reputation; (2) report bad news early; (3) confer about post-retirement benefit changes and large capital expenditures (including acquisitions, which are encouraged); (4) adopt a fifty-year time horizon; (5) refer any opportunities for a Berkshire acquisition to Omaha; and (6) submit written successor recommendations. Otherwise, Berkshire stresses that managers were chosen because of their excellence and are urged to act on that excellence.   

Berkshire defers as much as possible to subsidiary chief executives on operational matters with scarcely any central supervision. All quotidian decisions would qualify: GEICO’s advertising budget and underwriting standards; loan terms at Clayton Homes and environmental quality of Benjamin Moore paints; the product mix and pricing at Johns Manville, the furniture stores and jewelry shops. The same applies to decisions about hiring, merchandising, inventory, and receivables management, whether Acme Brick, Garan, or The Pampered Chef. Berkshire’s deference extends to subsidiary decisions on succession to senior positions, including chief executive officer, as seen in such cases as Dairy Queen and Justin Brands.

Munger has said Berkshire’s oversight is just short of abdication. In a wild example, Lou Vincenti, the chief executive at Berkshire’s Wesco Financial subsidiary since its acquisition in 1973, ran the company for several years while suffering from Alzheimer’s disease—without Buffett or Munger aware of the condition. “We loved him so much,” Munger said, “that even after we found out, we kept him in his job until the week that he went off to the Alzheimer’s home. He liked coming in, and he wasn’t doing us any harm.” The two lightened a grim situation, quipping that they wished to have more subsidiaries so earnest and reputable that they could be managed by people with such debilitating medical conditions.   

There are obvious exceptions to Berkshire’s tenet of autonomy. Large capital expenditures—or the chance of that—lead reinsurance executives to run outsize policies and risks by headquarters. Berkshire intervenes in extraordinary circumstances, for example, the costly deterioration in underwriting standards at Gen Re and threatened repudiation of a Berkshire commitment to distributors at Benjamin Moore. Mandatory or not, Berkshire was involved in R. C. Willey’s expansion outside of Utah and rightly asserts itself in costly capital allocation decisions like those concerning purchasing aviation simulators at FlightSafety or increasing the size of the core fleet at NetJets.

 Ironically, gains from Berkshire’s hands-off management are highlighted by an occasion when Buffett made an exception. Buffett persuaded GEICO managers to launch a credit card business for its policyholders. Buffett hatched the idea after puzzling for years to imagine an additional product to offer its millions of loyal car insurance customers. GEICO’s management warned Buffett against the move, expressing concern that the likely result would be to get a high volume of business from its least creditworthy customers and little from its most reliable ones. By 2009, GEICO had lost more than $6 million in the credit card business and took another $44 million hit when it sold the portfolio of receivables at a discount to face value. The costly venture would not have been pursued had Berkshire stuck to its autonomy principle.

The more important—and more difficult—question is the price of autonomy.  Buffett has explained Berkshire’s preference for autonomy and assessment of the related costs: 

We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that [disagreeable] operating and capital decisions are occasionally made. . . . Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly—or not at all—because of a stifling bureaucracy.

Berkshire’s approach is so unusual that the occasional crises that result provoke public debate about which is better in corporate culture: Berkshire’s model of autonomy-and-trust or the more common approach of command-and-control. Few episodes have been more wrenching and instructive for Berkshire culture than when David L. Sokol, an esteemed senior executive with his hand in many Berkshire subsidiaries, was suspected of insider trading in an acquisition candidate’s stock. . . .

[To read the full chapter, which can be downloaded for free, click here and hit download]

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U Delaware Chaplin Tyler Lecture

I’m honored to be giving this lecture at my alma mater, and thanks go to Charles Elson for the opportunity and Kim Ragan for organizing the event.  It’s the first in the book tour that will take me to many other great universities with thanks to many more wonderful colleagues nationwide.  More details as they are finalized.

Poster U Delaware-page1

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GW’s C-LEAF Annual Call for Papers from Newer Business Law Scholars

The Center for Law, Economics & Finance (C-LEAF) at The George Washington University Law School has announced its fifth annual Junior Faculty Business and Financial Law Workshop and Junior Faculty Scholarship Prizes. Here are the details:

The Workshop will be held on February 27-28, 2015 at GW Law School in Washington, DC.  The Workshop supports and recognizes the work of young legal scholars in accounting, banking, bankruptcy, corporations, economics, finance and securities, while promoting interaction among them and selected senior faculty and practitioners. By providing a forum for the exchange of creative ideas in these areas, C-LEAF also aims to encourage new and innovative scholarship.

Approximately ten papers will be chosen from those submitted for presentation at the Workshop pursuant to this Call for Papers. At the Workshop, one or more senior scholars and practitioners will comment on each paper, followed by a general discussion of each paper among all participants. The Workshop audience will include invited young scholars, faculty from GW’s Law School and Business School, faculty from other institutions, practitioners, and invited guests.

At the conclusion of the Workshop, three papers will be selected to receive Junior Faculty Scholarship Prizes of $3,000, $2,000, and $1,000, respectively. All prize winners will be invited to become Fellows of C-LEAF. C-LEAF makes no publication commitment.

Junior scholars who have not yet received tenure, but have held a full-time academic appointment for less than seven years as of the submission date, are cordially invited to submit summaries or drafts of their papers. Although published work is not eligible for submission, submissions may include work that has been accepted for publication. C-LEAF will cover hotel and meal expenses of all selected presenters.

Those interested in presenting a paper at the Workshop should submit an abstract, summary or draft, preferably by e-mail, on or before October 17, 2014. To facilitate blind review, your name and other identifying information should be redacted from your paper submission. Direct your submission, along with any inquiries related to the Workshop, to:  Professor Lisa M. Fairfax, Leroy Sorenson Merrifield Research Professor of Law, George Washington University Law School, 2000 H Street, NW, Washington, DC 20052, lfairfax@law.gwu.edu.

Papers and Junior Faculty Scholarship Prizes will be selected after a blind review by members of the C-LEAF Executive Board. Authors of accepted papers will be notified by November 24, 2014. Please feel free to pass this Call for Papers along to any colleagues who may be interested.  For more information on C-LEAF Fellows, please visit  here or contact us at cleaf@law.gwu.edu. The Workshop and prizes are supported by grants from the Schulte Roth & Zabel law firm.

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Coming Soon: Law School Tuition $11,000

coquillette While today’s Harvard Law students are about to pay the hoary institution as much as $54,580 in annual tuition, a new law school designed on the original Harvard Law model plans to charge $11,000.  I have just received an offer to join its faculty and find the model intriguing.

Designed by the renowned legal historian, Dan Coquillette, once Dean of Boston College and former colleague of mine, the new school will have no administrators but rather an automated system, no books but a digital library, and two faculty members who will teach three courses per semester to a class of thirty-five students.  There will be no ABA accreditation and the school will have to compete on the apprenticeship model.

Dan’s idea arises from his research for his magisterial history of Harvard Law School, where Dan has long been the Charles Warren Visiting Professor of American Legal History.  Called “On the Battlefield of Merit,” Harvard University Press will publish this multi-volume history, volume one telling of how apprenticeship competition nearly  destroyed the infant law school.

In Harvard Law’s golden age, there were just two faculty members, Joseph Story and Simon Greenleaf, who taught all the courses. With a faculty-student ratio of 17.5:1, Story also published a treatise a year.

As Dan explained in his appointment offer to me:

The students of the Story-Greenleaf School read like a Who’s Who of the New Republic, and they uniformly praised their Law School experience, particularly the close mentoring and inspiration they got from their two teachers.  Of course, Story and Greenleaf knew every student in the School. The physical plant was terrible; the Library, open to Harvard Square, often lost more books a year then it gained; and the only nonacdemic employee was a janitor who spoke Latin.  The students did not care, as long as there was Story at one end of a log, and a student at the other.

If we replicated that School exactly, setting faculty salaries at today’s levels and including all overhead, student tuition would be 20% of what they pay now. I am ready when you are.

I believe that this offer is non-transferable but, hey, you never know.

BC Book Club

Annual Book Author Party, BCLS Faculty (2004): Zyg Plater, Frank Garcia, Dan Coquillette, Jim Repetti, Paul McDaniel, Larry Cunningham, Bob Bloom, David Wirth, John Garvey.

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Ace Greenberg, RIP

Ace GAlan C. (“Ace”) Greenberg has died at 86 (e.g., Crain’s NY Business, Money, Bloomberg, WSJ, USA Today).  A force behind the rise to prominence of Bear Stearns (which he headed from 1978 to 1993), Ace was a friend to me. He gave generously to Cardozo Law School, from which his wife Kathy graduated (in 1982), and contributed intellectually to programming I conducted there while directing the Samuel and Ronnie Heyman Center on Corporate Governance

Ace’s delightful little book, Memos from the Chairman, contains profound and pithy insight into business management, drawn from his famous memos to staff, that I’ll relish forever.  His book about the downfall of his beloved firm is also a nice contribution to our understanding of the financial crisis of 2008.

Ace kindly wrote a blurb for one of my early books on investing, How to Think Like Benjamin Graham and Invest Like Warren Buffett.  He said that the book “puts the ABCs of common sense valuation back into the business of investing” and was “the place to look for insight and guidance in the age of volatile markets and colliding ideas.”

Ace epitomized common sense and was a practical, generous, funny, and clever man.  He was also scrappy, tough, shrewd, and frugal.  Best of all, he was a champion of the underdog, just like me.   We’ll miss Ace.

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On National Ice Cream Day, Thanks Dairy Queen

DQIn honor of National Ice Cream Day (July 20), here is a brief celebration of Dairy Queen, an institution of American culture—entrepreneurial, legal, literary, and familial—that helped put this cold concoction on the national calendar. I developed these reflections when researching my upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values (Columbia U. Press 2014), which provides deep looks at the corporate culture of Berkshire Hathaway’s fifty-plus subsidiaries, including Dairy Queen.

While full treatment must await publication of the book (which can be pre-ordered now), here are a few passages along with many outtakes—i.e., sections that did not make it into the final book because they are too technical, but may appeal to readers of this blog interested in the history of franchising businesses and intellectual property rights.

Dairy Queen’s roots date to 1927’s founding of Homemade Ice Cream Company by John F. (“Grandpa”) McCullough (1871‒1963) and his son Alex near the Iowa-Illinois border. Innovative ice cream makers, they experimented with temperatures and textures and eventually pioneered soft ice creams. One discovery: ice cream was frozen for the convenience of manufacturers and merchants, not for the delight of consumers.

At first, the McCulloughs were unable to interest any manufacturer in building the necessary freezers and dispensers to serve soft ice cream. Luckily, however, Grandpa happened to see a newspaper ad in the Chicago Tribune describing a newly-patented continuous freezer that could dispense soft ice cream. Grandpa answered the inventor/manufacturer, Harry M. Oltz, and the two made a deal in the summer of 1939.

The McCullough-Oltz agreement entitled Oltz to patent royalties equal to two cents per gallon of soft ice cream run through the freezer; the agreement also granted the McCulloughs patent licensing rights in the Western U.S., while Oltz retained them for the Eastern part of the country. The agreements that McCullough and Oltz made with licensees seemed to cover only the patent, rather than the DQ trademark, and contained few quality controls.

After World War II, DQ stores hit their stride, drawing lengthy lines of increasingly loyal customers enjoying the cooling effects of soft ice cream all sultry-summer long. The customer throngs at one store in Moline, Illinois caught the attention of Harry Axene. An entrepreneurial farm equipment salesman for Allis-Chalmers, Axene wanted to invest in the business. He contacted the McCulloughs and acquired both the rights to sell the ice cream in Illinois and Iowa as well as an interest in the McCullough’s ice cream manufacturing facility. Read More

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Truth, Candor, and Crisis at Yeshiva University

Among universities in trouble, the darkest cloud hangs over Yeshiva University, a venerable Jewish institution founded in New York in 1886. The University acknowledges huge economic losses and failed investment policies and is taking extraordinary steps to balance its books, including ceding control over its one-time crown jewel, Albert Einstein College of Medicine, which has close friends of its law school, Benjamin N. Cardozo School of Law, very concerned.  Critics, moreover, see a death spiral and question the leadership’s candor.

Amid calls for the resignation or dismissal of Yeshiva’s president, Mr. Richard M. Joel, he says the University will no longer engage with the media on fiscal questions. The Wall Street Journal reports that the University has hired the crisis-management communications firm, Kekst & Co., but any benefits from that hiring are not yet obvious.sunlight

In a familiar pattern facing other organizations in crisis, what both sides miss in this dangerous heightening of tensions is the importance of trust to any institution’s health. To resolve this crisis, as always, the institution’s leadership must regain trust by explaining how its current fiscal stewardship advances the institution’s mission. Critics must not rush to judgment and hear the leadership out on what it has learned from recent problems and plans for the future.

Like other investors, part of Yeshiva’s problems are due to the financial collapse of 2008, but its roots are a bit deeper and offer broader lessons. Since at least 1993, the board of trustees oversaw Yeshiva’s endowment and made investment decisions. University policy permitted trustees to invest endowment in funds the trustees managed, despite conflicts of interest, so long as they made full disclosure.

During the early 2000s, the trustees increasingly allocated endowment to their own hedge funds, which were heavily weighted in risky securities. By 2008, the endowment, valued at more than $1 billion, held riskier investments than those of peer institutions. The financial upheaval of 2008 thus hit Yeshiva even harder than most peers, shrinking its endowment by more than $300 million, including $100 million due to the Ponzi scheme of Bernie Madoff, whose top victims also included a Yeshiva trustee.

While it appears that the trustees and the administration acted in good faith, even if no laws were broken, poor judgment abounded. The loose conflict-of-interest policy certainly was a mistake, as a trustee’s personal involvement skews his judgment. Reputable and durable institutions scrupulously avoid the remotest appearance of impropriety. For stalwarts like Yeshiva, this principle of integrity, coupled with an ethic of prudence, should govern investment decisions.

The University learned its lesson from this calamity and has adopted new policies that may serve as a model for other endowments. It created a professional investment office to set strategy, updated oversight protocols, and established a rigorous conflicts policy. While thus implicitly recognizing earlier weaknesses, the University has not offered a mea culpa nor has it identified particular past faults—whether sins of omission or commission, of process or substance, or whether the product of mere haplessness or of actual chicanery. That reticence allows unimpressed critics to overlook the significance of these reforms.

It is hard to measure objectively the exact economic costs of Yeshiva’s policies or market onslaughts from which it has suffered. One result of this difficulty is wildly different numbers being reported by the University and critics—ranging from $300 million to a staggering $1.3 billion. However, it is less important to achieve consensus on financial figures than to find common ground on productive next steps.

At stake is advancing the institution’s core mission, which is not to maximize endowment or earn a profit but to promote knowledge and teach students. The fiscal drama becomes a superficial distraction from fundamental academic judgments about the relation among current and future pedagogical, scholarly, scientific, cultural and religious needs and resources.

Constituents would rightly like to know more about Yeshiva’s finances as well as the academic thinking behind decisions concerning building or closing facilities and forming or ending joint ventures and programs. For example, when Yeshiva recently ceded managerial control over Einstein College of Medicine to another institution to cut costs, it did not publicly detail the educational rationale. Critics jumped on the move, assuming and asserting that it was a sign of distress rather than a shrewd maneuver that promotes the University’s goals.

When institutions are imperiled in this way, the best course of action is to make certain that the operative facts are publicly known, to identify lessons learned, and to act on them. In that spirit, the University might do well to form an independent task force with unlimited access to University information charged to report a public assessment of where things stand and where they are going. Lifting the cloud over this 128-year old bastion of Judaism, such a look would enable Yeshiva University to move forward with its important business of education.

Lawrence A. Cunningham, a graduate and former faculty member of Yeshiva University’s law school (Cardozo), is a professor at George Washington University and the author of the forthcoming book, Berkshire Beyond Buffett: The Enduring Value of Values.

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The Babe Ruth of Good Business Today

baberuthOne hundred years ago this week, on July 11, 1914, George Herman (“Babe”) Ruth made his major league debut, for the Boston Red Sox at two-year old Fenway Park. Over the course of his baseball career, The Great Bambino set many records, including leading the league in home runs for twelve seasons; most total bases in a season (457); and highest slugging percentage for a season (.847). In all, he hit 714 home runs, a record that stood until 1974, when Hank Aaron of the Atlanta Braves claimed the title. But that is not why the Babe is immortal.

Other home run kings have achieved nothing like Ruth’s iconic status. Many decade-leading hitters—such as Harry Davis, Gavy Cravath, or Jimmie Foxx—are barely known. Even falling short of Ruth’s stature are the two players who passed him in home runs, Aaron and Barry Bonds (Pittsburgh Pirates and San Francisco Giants), who took the top spot in 2007. Nor is Ruth’s immortality due entirely to the fact that he also excelled as a pitcher: for forty-three years he held the record for consecutive scoreless innings pitched in World Series play and his overall win-loss ratio (.671) remains the seventh best of all time.

Ruth’s immorality, rather, is due to how, through such extraordinary feats, he changed the game of baseball. He brought power to the sport at a time when typical strategy was to move players around the bases one small hit at a time. While baseball was thriving as an American pastime before he played, the Babe’s bold style, vast generosity, and utter unpretentiousness won the public’s adulation. His deep sense of ethics helped to rescue baseball from the damage done by the miscreant players who threw the 1919 World Series.  His strength and optimism gave hope to millions during the Great Depression. Ruth made baseball a richer sport with a wider and enduring following, which is why we all recognize his name a century after his rookie year. And people venerate the Babe despite his many bad personal habits, such as gluttony, promiscuity, and pugnaciousness.

In American business, we have likewise enshrined transformative figures like Ruth despite faults. Andrew Carnegie, John D. Rockefeller, and Cornelius Vanderbilt built the nation’s infrastructure while J. P. Morgan and Henry Ford forged its business structures and methods. We condemn the cheaters to memory’s hell—from Charles Ponzi to Bernie Madoff—or at least purgatory, as with Michael Milken. We remain ambivalent about the likes of Jay Gould and others still derided as robber barons. Read More