Site Meter

Author: Lawrence Cunningham

2

The Responsibility of Autonomy: More on Berkshire and Benjamin Moore

Autonomy does not mean carte blanche; its operational companion, hands-off management, does not mean abdication.  The concepts entail complex relations between power and responsibility. Autonomy is an act of trust whose disappointment  prompts its revocation.  The saga of Benjamin Moore, about which my recent blog drew two thoughtful comments,  illustrates.

Beginning in 1883, the company’s paint was sold solely through a network of small distributors operating with extraordinary autonomy, as owners of their own businesses.  In 2000, when Berkshire Hathaway acquired the company, its famously hands-off chairman, Warren Buffett, assured distributors of continuation of that tradition.

As the grip of the Great Recession in 2008 stunted sales growth, however, a new CEO at Benjamin Moore (Denis Abrams) began displacing the distributorship tradition through new arrangements with chain stores (including big-box retailers).  Abrams altered the distributor relationship to respond to competitive changes, including dictating tougher terms on financing inventory and charging for advertising. Distributors complained about this to Buffett, but Berkshire’s practice of vesting autonomy in its CEOs prevented direct or immediate intervention.

Ultimately, however, Abrams’s repudiation of distributor autonomy prompted Buffett to make an exception to the autonomy Berkshire usually gives Berkshire CEOs, and fired Abrams.  To replace him, Buffett delegated much of the task to a new Berkshire employee, Tracy Britt Cool, a recent business school graduate he had just named chairman of Benjamin Moore.  Her choice, Bob Merritt, began correcting the errors that Buffett believed Abrams had made, especially restoring distributorship autonomy.

Last month, however, Merritt was fired too.  Who fired him (Buffett or Britt) is unclear and the exact reasons have not been disclosed. It may be a replay, a business disagreement about distribution or involve (per press gossip) issues of gender bias and locker room humor among company management.  Merrit’s replacement, meanwhile, was chosen jointly by Britt and Buffett. 

So there are several marks on the long winding story of autonomy in the Benjamin Moore saga.  The distributors had autonomy, which Berkshire promised they would keep, yet Abrams impaired; distributor complaints to Berkshire first met resistance in the name of CEO autonomy until Berkshire lifted its usual deference to that practice; Buffett gave Britt considerable autonomy to choose Merritt, who ran with it until he didn’t have it anymore; and, most recently, she enjoyed far less autonomy in the case of selecting his successor.  

People claiming that Buffett is a hands-off manager or gives his CEOs extraordinary autonomy are right, so long as they appreciate how that entails a strangely awesome burden.  People who are trusted, and who are trustworthy, often excel and avoid problems precisely because autonomy is a huge responsibility.

2

Benjamin Moore and Berkshire: Centuries of Repute

Sometimes the up-to-the-minute nature of contemporary life obscures ancient principles. A case in point is the news surrounding last week’s and last year’s firings by Berkshire Hathaway of the CEOs of its subsidiary, Benjamin Moore & Co. But the values that Benjamin Moore has embraced for more than a century and those Berkshire has embraced for nearly half a century speak louder than the gossipy whispers associated with these two sad episodes (hat drop to New York Post).

In 1883 Brooklyn, twenty-seven-year-old Benjamin Moore, along with his forty-three-year-old brother Robert, created the paint company that remains in business today. He articulated several business principles to guide his company:

  1. A fair deal for everyone.
  2. The giving of value received without any graft or chicanery.
  3. Recognition of the value of truth in the representation of our products and an effort at all times to keep the standard of our goods up to the highest mark.
  4. The practice of strict economy without the spirit of parsimony, and the exercise of intelligent industry in the spirit of integrity.

Moore’s motto was “quality, start to finish.” It charged a premium price for it, even when that sacrificed market share. To reinforce its investment in quality, the Moore brothers began the practice of selling paint through independent distributors. Other paint makers might sell in hardware stores, or as private-label products of customer retailers, or in their own retail stores. Benjamin Moore & Co. always strictly adhered to the model of distributing exclusively through certified dealers. Those distributors, in turn, have invested considerable effort in building their businesses to keep their end of the bargain. Read More

1

A Priest’s Mission He Never Talked About

The following commentary recently appeared in the Catholic Star Herald, a publication of the Catholic diocese in Camden, New Jersey. It was written by Monseigneur Ciaran P. O’Mearain.

One year ago Father James Barry, retired pastor of Salem, died in the Lord. Priests are easily forgotten and their good deeds “oft interred with their bones.” But, for me, there was a defining event in Father Jim’s life rendering him forever memorable. . . .

During the troubles in Northern Ireland, 1968-98, there was a period of internment, 1971-75, during which 1,981 young people, mostly from the Catholic minority, were arrested and imprisoned without trial. Unfortunately, internment only led to outrage in the minority community.

It was during the internment period Father Barry spent his vacation at my sister’s home in Belfast. He went out every day, trailed by an army helicopter, to visit those distraught young people who languished in jail. It was a dangerous undertaking, and a secret mission he shared with no one.

It was only after his return to America my sister began to receive calls from parents of the interned thanking her for Father Barry and the consolation he brought to their sons and daughters.
In death he was embraced by the One who was also arrested, who stood with people of little significance; pushed off the road of life and relegated to the margins. Perhaps He whispered gently into Jim’s surprised ear: “I was in prison and you came to visit me” (Mt 25:36).

* * * * *

I was grateful to read this piece, because Father Barry was my Uncle Jim.  I remember discussing many aspects of the Irish situation with him during the period Msgr. O’Mearain refers to. Uncle Jim shared his prodigious knowledge of the religious, political and historical aspects of the Troubles. Although I knew that Uncle Jim traveled to Ireland many times during and after this period, I cannot recall him ever mentioning these secret missions.

A high school classmate of mine who knew Uncle Jim, Bill Tillinghast, sent this clipping on to me with this note: “A seemingly simple mission to minister to the imprisoned, but in context as dangerous as any Ranger or Recon mission.”  Thanks Bill. I’ve forwarded it to all my siblings and cousins and wanted to post it here as a tribute to my late Uncle and perhaps an inspiration for others.

11

Good Riddance Spitzer

The virulent narcissist Eliot Spitzer should now slink quietly back into political obscurity.  Having been decisively defeated in yesterday’s Democratic primary race for comptroller of New York City, Americans can breathe a sigh of relief that New Yorkers had the sense to repel the preening scion.

The hypocrite, who made his name by falsely accusing others of wrongdoing that turned out to be the kind of misbehavior he had engaged in, threatened to use the same bullying tactics running New York City’s finances. This would have meant flexing muscles to attack corporate America indiscriminately in the interest of Spitzer’s self-promotion.

The sideshows he promised involved waging battles against corporations in which NYC invests to effect corporate governance makeovers on terms Spitzer would approve. Such distractions would not only have ruined reputations of corporate managers, but would have impaired corporate productivity, cost American economic output and diminished employment prospects and retirement funds of people across the country.

A majority of NYC Democratic voters saw through Spitzer’s arrogant duplicity. He is the man, after all, who proclaimed to the utmost integrity yet humiliated his wife by elaborate infidelity, scarred his three daughters for life by screwing (literally) girls their age for years and furtively broke federal banking laws repeatedly while publicly punishing others for similar transgressions.

One hopes that Spitzer, myopic and thick-headed, will finally take the hint that people do not think liars and cheats like him should be in public office.  Good riddance.

0

GW Law’s C-LEAF Jr. Faculty Workshop

The Center for Law, Economics & Finance (C-LEAF) at The George Washington University Law School is pleased to announce its fourth annual Junior Faculty Business and Financial Law Workshop and Junior Faculty Scholarship Prizes.  The Workshop and Prizes are sponsored by Schulte Roth & Zabel LLP. The Workshop will be held on February 7-8, 2014 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, but chosen papers will be featured on its website as part of the C-LEAF Working Paper series. Read More

6

ABA Task Force on Legal Education: Down with Status

aba status merceGood news for law professors now submitting articles seeking offers from high-status journals: the importance of status in American law schools is over-rated and is about to be reduced. At least that is the urging of an American Bar Association Task Force Working Paper released last Friday addressing contemporary challenges in U.S. legal education.

Obsession with status is a culprit in the woes of today’s American law schools and faculty, the Working Paper finds.  It charges law professors with pitching in to redress prevailing woes by working to reduce the role of status as a measure of personal and institutional success.  The group’s only other specific recommendation for law faculty is to become informed about the topics the 34-page Working Paper chronicles so we might help out as needed by our schoools. 

Much of the rest of the Working Paper is admirable, however, making the two specific recommendations to law faculty not only patently absurd but strange in context.   After all, the Working Paper urges reform of ABA/AALS and state regulations with a view toward increasing the variety of law schools. It calls for serious changes in the way legal education is funded, though it admits that the complex system of education finance in the U.S. is deeply and broadly problematic and well beyond the influence of a single professional task force.

The Task Force urges US News to stop counting expenditure levels as a positive factor in its rankings.  It stresses problems arising from a cost-based rather than market-based method of setting tuition. It notes a lack of business mind-sets among many in legal education.  It questions the prevailing structure of professorial tenure; degree of scholarship orientation; professors having institutional leadership roles; and, yes, faculty culture that makes status an important measure of individual and institutional success.

But amid all that, law professors have just two tasks: becoming informed and demoting status.  So there must be some hidden meaning to this idea of status as a culprit and the prescription for prawfs to reduce the importance of status as a measure of success.  I am not sure what it is. The Working Paper does not explain or illustrate the concept of status or how to reduce its importance.

I’ll to try to be concrete about what it might mean.   Given the other problems the Task Force sees with today’s law faculty culture (tenure, scholarship and leadership roles), I guess they are suggesting that faculty stop making it important whether: Read More

0

Warren Buffett: Not Bullish on the Newspaper Business

The Washington Post Co., in which Warren Buffett’s company Berkshire Hathaway has been  a large shareholder for decades, is selling its flagship asset, The Washington Post, to Jeff Bezos.  Buffett was not interested in bidding for the paper, despite the price Bezos is paying of $250 million, a sharp discount from historical valuations.  The Boston Globe, which The New York Times bought two decades ago for $1.1 billion, has just sold to John Henry for a mere $70 million. Buffett was not interested in that franchise either. Nor is he interested in buying other papers recently up for sale, such as the Chicago Tribune, the Los Angeles Times or the Philadelphia Inquirer.  I’d be surprised if he cared to bid on The Wall Street Journal or New York Times when they go on the block.

These might be good newspapers, but they are not good businesses.  Buffett’s Berkshire Hathaway has bought numerous small newspapers this year and last. They are very different animals. They are known less for outstanding national journalism than for local beats and especially local information and advertising.

Despite these realities, journalists just five months ago (and one at the New York Times this morning, Andrew Ross Sorkin!) congratulated themselves and their industry after they thought they read Buffett saying good things about them.  As I wrote then (March 19, 2013), the journalists read things Buffett didn’t write.  He is not bullish on newspapers; but quite bearish.   In light of recent events, herewith that post updated.

* * * * *

In case you missed it, journalists have been saying that Warren Buffett is bullish on newspapers, with the New York Times running a headline reading “In His Annual Letter, Buffett Plays Up Newspapers.”  They cite the fact that he devoted 1800 words of his March 2013 missive to Berkshire Hathaway shareholders to the topic of newspapers. They stressed how Berkshire invested $344 million in the industry in the past 15 months. The Oracle of Omaha was putting his mouth where his money was, newspaper insiders reported.

The trouble with this narrative is that it’s not exactly what Buffett’s letter said, suggesting a dose of wishful thinking among practitioners of the trade. True, Berkshire has made the indicated investment and Buffett expresses his belief that newspapers, especially local newspapers with local niches, have a vital role which should translate into profitability. That was followed by a huge qualification: IF they can find an appropriate business model that marries traditional print and advertising with on-line distribution and revenue. But none has done so yet, Buffett’s letter reminds everyone.

Buffett’s allocation of three pages of his letter to newspaper investments seemed more an explanation of why Berkshire would invest such small sums, for its size, in anything, whether newspapers or some other industry. The letter stressed the continuing decline in circulation, profitability and cash flows of the newspaper business, though mentioning that Berkshire’s own newspapers have done better than most.  The letter also made clear that, should the economics of the newspaper businesses Berkshire owns continue to deteriorate substantially, they will be candidates for sale.

The newspaper business, in short, remains in serious trouble. In fact, the real information content of this year’s Berkshire letter may be another point that Buffett emphasized: the only way buying a newspaper business makes sense today is if it can be bought for an extremely low price compared to earnings.  Berkshire’s acquisitions met the stringent test.

That mindset reflects the market’s sense about the value of the newspaper business as well, suggested by such examples as the lack of buyers a few years ago for the Seattle Post-Intelligencier and Rocky Mountain News (Denver) and what has become notoriously clear were wildly excessive valuations of Rubert Murdoch when be acquired the Wall Street Journal in 2007 and of the New York Times when it acquired the Boston Globe two decades ago.

Civic mindedness, noblesse oblige, or a desire to be relevant and in the mix may stoke the appetites for some potential buyers of newspapers, such as Murdoch, the group of businessmen who bought the Philadelphia Inquirer last year, Mort Zuckerman, or even the Hearsts, Sulzbergers and Zells of the world. Today: add Jeff Bezos and John Henry. But despite Buffett’s obvious personal fondness for newspapers, that isn’t his style. Journalists who thought Buffett was saying he’d play that role should likewise think again.  As I read the letter, the real message is that the newspaper business, like many others being throttled by rapid disruptive change, faces profound challenges.

15

Prawf Musings and Query on the Value of Values

My Mother, God bless her, had a hard time understanding why I’d trade a higher-paying job for a lower-paying one.  This happened in the early 1990s.  I had begun my career as a high-paid corporate lawyer at the prominent New York law firm of Cravath, Swaine & Moore. There I had at least some chance of becoming partner and an excellent chance of becoming partner at some such firm upon leaving Cravath.

Then another future appeared: an offer to become a law professor, first at Cardozo Law School and later at Boston College and George Washington University.  The pay at Cravath or another law firm dwarfs the pay at GW, BC or Cardozo (though longer term, when book royalties and consulting fees are added, being a law professor remains a reasonable living).

My Mother wondered: “aren’t you supposed to move up, from lower-paying jobs to higher-paying jobs?”  I explained that there are compensating values of the professorial position. Chief among these, for me, were tenure and academic freedom.  I was willing to trade the higher pay in part for those commitments of permanence and autonomy.

There are many other such compensating values too. Those who are thrifty by nature may like the budget-consciousness of a school compared to the lavishness of the kind of private practice I had. I valued the earnestness and sincerity of legal pedagogy and scholarship (calling things as I seem them) over the advocacy of law practice (whose bread I eat, his song I sing), true even when I take consulting assignments.

Many find the academy more congenial in the sense of boasting a shared mission and aspiring to morals above those of the marketplace.  In contrast to many law firm cultures, I welcomed the opportunity for entrepreneurship: academic entrepreneurship of hosting innovative conferences, writing on unusual topics, pioneering programs, redesigning curriculum, building institutions, leading student learning.

Some like professorial life because it exists at the basic level in the legal profession, the gate-keeping end where new lawyers are vetted and trained. Something about that rudimentary point is more enticing than working to add new clients to an old practice or derive new sub-specialties from there.

I explained to my Mother how some sellers of companies feel the same way and analogized to a situation my Dad once faced.  He once had to choose between two business opportunities, one that paid more but the other that put his name on the door, put him in charge and gave him a sense that his business would be around forever.  That recall helped my Mom get why I was moving from Cravath to Cardozo.  

I  wonder how other professors (or aspiring professors) might answer their parents or spouses or kids when explaining why they wish to take a lower-paying job over a higher-paying one.  Not only what the factors are but how to interpret them commensurately.  If you could earn $60 million in a 30-year partnership career at Cravath but only $6 million in the same time period as a Cardozo professor, does that mean the value of tenure and autonomy and the rest is something like $54 million?

2

A Lament on Corporate Governance

The following essay, which I wrote for a book with Hank Greenberg about AIG, laments recent decades of changes in corporate governance and is excerpted from the current issue of Directors & Boards, as adapted by its editor, Jim Kristie.

AIG’s founding corporate board in 1967 included luminaries who made AIG into the largest insurance company in the world. In the ensuing decades, AIG enlisted some of its most distinguished corporate officers to serve on its board of directors. Those traditional officer-directors not only knew the company and the insurance business well but were world travelers who understood the demands of building a global financial services company.

The early board appreciated the appeal of nominating some directors from outside AIG for election by shareholders. Such nonemployee directors offered fresh perspectives, opened doors to business opportunities and made decisions when employee directors faced conflicts of interest.

Outside directors who served during the 1970s through the 1980s included former cabinet officials, international business executives, foreign service officers, central bankers and financial accountants. In general, these outside directors served as senior advisors, without intending to second-guess managerial judgments, particularly concerning arcane insurance industry matters beyond their expertise. Outside director Dean P. Phypers (1979–1999), chief financial officer of IBM, noted that this was the standard corporate governance model of the period, at AIG and elsewhere: a collegial body operating in an atmosphere of trust and informality.

A changing model

That model began to change in the 1970s—just as American Home launched its thriving directors and officers (D&O) insurance business. Routinely ever since, in response to national scandals involving corporate misconduct, Congress passed new legislation and the New York Stock Exchange—where AIG listed its shares in 1984—adopted rules that increasingly required corporations to add outside directors to the board. The authorities also first suggested and later required increasing numbers of committees whose membership was limited to outside directors.

These changes were aimed at checking management shirking and enhancing corporate performance, though empirical research never provided much support that such reforms achieved such objectives. Legislators, regulators, and judges seemed to believe that, at the very least, outside directors would be able to exercise independent judgment. On that basis, as a “reform” to respond to crisis, elevating the number and power of outside directors helped forge political consensus. It did not matter whether directors had knowledge of a company’s operations or industry or any other expertise.

Letting political expediency dictate business practice is always dangerous and such universal regulation necessarily overlooked variation among companies. Concerning AIG, its roots as a private company, its long-standing entrepreneurial culture and engagement in the complex field of international insurance all pointed in favor of an inside board. Nevertheless, throughout this period of increased enthusiasm for outside directors on corporate boards, AIG successfully recruited capable people who added the value of their business judgment and experience and put the interests of AIG and shareholder prosperity first. Read More