Category: Culture

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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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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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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

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Happy 4th to The Persons of the Divided States of America

shredded flag“Person means a natural person, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated business association, joint venture, governmental entity, or other organization.”

That is from the definitions section of a commercial agreement I happened to be reading today for a consulting assignment.  That type of definition appears in millions of commercial contracts–purchase agreements, merger agreements, loan agreements, leases, licenses, you name it.

In the commercial world, among business lawyers and clients, it is commonly assumed that whenever we reference persons we mean to include every form of organization people have created.   That familiar usage might make the holdings in cases such as Holly Hobby or Citizens United seem natural, with corporations having many of the same rights and duties as people have.

On the other hand, we use the term this way in the business context where the issues being addressed concern commercial obligations and powers, liabilities and indemnities and purchases and sales–not free speech or free exercise of religion.  Moreover, the presence of such definitions in these agreements, despite ubiquity, underscores that it is more natural for persons to be seen only as natural persons, not organizations.

Hard liners on both sides of debates about corporate rights and duties show stupidity, arrogance, or mendacity when declaring either, on the right, “of course corporations are persons” or, on the left, “of course corporations are not persons.” In fact, organizations are not natural persons.  But for some purposes, they should be treated as natural persons are and for others they should not.  (See here for some additional thoughts on Hobby Lobby drawing on the example of Berkshire Hathaway.)

Context is key and hard liners tend to forget context.  In the talk these days about these two SCOTUS cases, it looks as if the Divided States of America is increasingly peopled by hard liners. Alas, that’s not something to celebrate this Fourth of July.

Facebook’s Hidden Persuaders

hidden-persuadersMajor internet platforms are constantly trying new things out on users, to better change their interfaces. Perhaps they’re interested in changing their users, too. Consider this account of Facebook’s manipulation of its newsfeed:

If you were feeling glum in January 2012, it might not have been you. Facebook ran an experiment on 689,003 users to see if it could manipulate their emotions. One experimental group had stories with positive words like “love” and “nice” filtered out of their News Feeds; another experimental group had stories with negative words like “hurt” and “nasty” filtered out. And indeed, people who saw fewer positive posts created fewer of their own. Facebook made them sad for a psych experiment.

James Grimmelmann suggests some potential legal and ethical pitfalls. Julie Cohen has dissected the larger political economy of modulation. For now, I’d just like to present a subtle shift in Silicon Valley rhetoric:

c. 2008: “How dare you suggest we’d manipulate our users! What a paranoid view.”
c. 2014: “Of course we manipulate users! That’s how we optimize time-on-machine.”

There are many cards in the denialists’ deck. An earlier Facebook-inspired study warns of “greater spikes in global emotion that could generate increased volatility in everything from political systems to financial markets.” Perhaps social networks will take on the dampening of inconvenient emotions as a public service. For a few glimpses of the road ahead, take a look at Bernard Harcourt (on Zunzuneo), Jonathan Zittrain, Robert Epstein, and N. Katherine Hayles.

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Trashing, Defending, and Deferring to Yeshiva University

University bashing is in fashion, from the broad-gauged film Ivory Tower to particular attacks on given schools. Some critiques usefully expose problems that need correcting with constructive solutions on offer.  But others seem to trash the academy for other reasons, as with a recent diatribe against Yeshiva University, which seems more calculated to exacerbate the school’s problems than help it find solutions.

In an  expose-style that seems to blow the school’s financial challenges out of proportion, Steven Weiss, who acknowledges having been expelled from Yeshiva in 2002, portrays Yeshiva’s leadership since that year variously as gullible, myopic, conflicted, or greedy.  This piece stung because I am a graduate and former faculty member of Yeshiva’s law school (Cardozo) and I know and have worked with some of the people vilified in the story.  While I am not familiar with all of the factual background of the University’s recent experience, Weiss’s story seems awfully one-sided and therefore the story, as much as the facts about Yeshiva, causes concern.

I share Weiss’s praise for Yeshiva’s former president, Rabbi Norman Lamm, whom I knew, worked with, and admired.  Lamm, and later his VP for business affairs, Sheldon Socol, led Yeshiva from the brink of bankruptcy in 1975 to fiscal soundness and renewed its status for academic excellence and cultural distinction.  (Rabbi Lamm told me how, when he was about to declare bankruptcy, his hand shook so intensely that he could not sign the papers.)

But Weiss then makes a foil out of Lamm,  painting a golden era that ended after 2002 when he passed the baton to Richard Joel, the current president, who has faced a different set of challenges that entices Weiss’s wrath.  In Weiss’s telling, after Lamm’s retirement and Joel’s succession, it’s been all downhill for Yeshiva and its students.  Joel, whom I knew as an able administrator and gentleman when he served as Dean of Business Affairs at Cardozo, certainly has a different style than the rabbi-scholars such as Lamm who preceded him.  But Weiss exaggerates in inexplicably inflammatory tones how this style difference has played out, in a story misleadingly headlined “How to Lose $1 Billion: Yeshiva University Blows Its Future on Loser Hedge Funds.” Read More

Endless Replay, Continued

My post on surveillance creating an “endless replay” has some more playful applications, as well. Consider the “Groundhog Date” now marketed by Match.com: “Partnering with an LA based company … that matches people to dates using facial recognition software, users will be asked to send in pictures of their exes, which will be used to determine who they will be matched with on the site.” Critics are aghast at the prospect of outsourcing our humanity. However habitual our actions may be, no one wants to be typecast as a typecaster.

Surveillance, Capture, and the Endless Replay

Global opposition to surveillance may be coalescing around the NSA revelations. But the domestic fusion centers ought to be as big a story here in the US, because they exemplify politicized law enforcement. Consider, for instance, this recent story on the “threat” of “Buy Nothing Day:”

Fusion Centers and their personnel even conflate their anti-terrorism mission with a need for intelligence gathering on a possible consumer boycott during the holiday season. There are multiple documents from across the country referencing concerns about negative impacts on retail sales.

The Executive Director of the Intelligence Fusion Division, also the Joint Terrorism Task Force Director, for the D.C. Metropolitan Police Department circulated a 30-page report tracking the Occupy Movement in towns and cities across the country created by the trade association the International Council of Shopping Centers (ICSC).

Yes, police were briefed on the grave threat of fake shoppers bringing lots of products to the till and then pretending they’d forgotten their wallets. Perhaps the long game here is to detain members of the Church of Stop Shopping to force them to make Elves on the Shelf for $1 an hour.

More seriously: no one should be surprised by the classification of anti-consumerist activists as a threat, given what Danielle Keats Citron & I documented, and what the ACLU continues to report on. But we do need more surprising, more arresting, characterizations of this surveillance. Fortunately, social theory provides numerous models and metaphors to counter the ideology of “nothing to hide.”
Read More

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The Hand of God

78px-FIFA_World_Cup.svgWith the World Cup underway, I thought I would reprint a post I did at the start of the Cup four years ago that holds up pretty well.

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As the World Cup begins (and a groove on my couch awaits), the thought occurred to me that the Justices are more comparable to those officials than (as Chief Justice Roberts famously said) to baseball umpires. Consider the following:

1. Umpires rarely change the outcomes of a game. Soccer referees do all the time.

2. Baseball is a rule-bound game. Soccer gives the referee lots of discretion (whether to award a penalty kick or not, whether to red card somebody or not, etc.)

3. Soccer fans often accuse the ref of being biased. You rarely hear that about umpires.

4. An umpire can have his call corrected by his colleagues. There is no appeal from a soccer referee’s decision.

Which of these sounds more like a Supreme Court Justice?