Berkshire Hathaway has only two main requirements for operating managers: submit financial statement information on a monthly basis and send free cash flow generated by operations to headquarters. For the large part, local managers are left to operate their businesses without supervision or corporate control. This gives the local managers more leeway to operate their businesses how they see fit.
This method is in stark contrast to what many leading companies view as an effective management style. The decentralization of supervision has the innate risk of allowing management to engage in “self-serving behavior.” However, this decentralization allows the local manager a certain autonomy that does not exist in any other firm. In addition, this allows managers to take pride in the value their office adds to Berkshire Hathaway. This has provided a competitive advantage to Berkshire Hathaway and has been an effective style of management thus far.
Before the 2000s, Berkshire Hathaway had concentrated on large equity investments in publicly held companies. However, in the 2000s Berkshire began to concentrate on acquiring companies outright. Buffett claims that he makes acquisition decisions based on companies that: 1)Berkshire Hathaway can understand, 2) with favorable long-term prospects 3) operated by honest and competent people, and 4) are available at an attractive price. These “great” companies that Berkshire invests in are generally characterized by: high levels of free cash flow and by not requiring extensive investments of capital for expansion. In addition, most of these companies operate in a fairly stable environment so that their cash flows will be consistent in the long-term. Because these investments require less difficult investment decisions, Buffett views them as being few and far between. Due to this, Berkshire has to be ready to act and invest quickly.
Berkshire believes that it was purchasing the manager along with the business and, in fact, would not make a purchase if it did not come with good management. In management, Berkshire looked for an ethical quality coupled with a proven track record of success. Buffett relies on three qualities in management: 1) Integrity 2) Intelligence and 3) Energy. In addition, Buffett also looks for attributes often found in family run businesses which include:
1) The ability to apply themselves with enthusiasm and energy (2) defined with extraordinary realism their area of special competence and act decisively on all matters within it; (3) the tendency to ignore propositions falling outside of that area of competence; and, (4) unfailingly behave in a high-grade manner of professionalism. Buffett believes that management with these qualities will not only flourish, but will extol the values of Berkshire Hathaway as well. Because Berkshire Hathaway does not micromanage the companies it owns, these qualities are paramount for the success of the subsidiary and Berkshire itself.