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Margin of Trust: The Berkshire Business Model
Warren Buffett and his company, Berkshire Hathaway, are legendary for their distinctive investing approach. Yet many equally unconventional but less well known aspects of Berkshire’s managerial practices and organizational structure are rich with lessons for those seeking to follow in Buffett’s footsteps. Margin of Trust is the first book to distill Buffett’s approach to management and corporate life. It provides a definitive analysis of the tenets of the Berkshire system, its costs and benefits, and how it can be adapted for other organizations.
Lawrence A. Cunningham and Stephanie Cuba develop a new account of how Berkshire Hathaway works, showing that the key to its success is trust. Profiling partnership practices and business methods, they contend that Berkshire’s distinguishing feature is a culture in which autonomy and decentralization are core management principles. Cunningham and Cuba provide instructive examples of how this model has been successfully adapted by other companies that share a faith in trust as an organizing principle. They also offer candid commentary on the risks of a trust-based approach and how to mitigate them. Margin of Trust features illuminating analysis of Buffett’s take on the role trust plays in business agreements, what Buffett looks for in great corporate boards, and what lies ahead for Berkshire after its iconic leader leaves the scene.
Lawrence A. Cunningham and Stephanie Cuba develop a new account of how Berkshire Hathaway works, showing that the key to its success is trust. Profiling partnership practices and business methods, they contend that Berkshire’s distinguishing feature is a culture in which autonomy and decentralization are core management principles. Cunningham and Cuba provide instructive examples of how this model has been successfully adapted by other companies that share a faith in trust as an organizing principle. They also offer candid commentary on the risks of a trust-based approach and how to mitigate them. Margin of Trust features illuminating analysis of Buffett’s take on the role trust plays in business agreements, what Buffett looks for in great corporate boards, and what lies ahead for Berkshire after its iconic leader leaves the scene.
184 pages, Hardcover
Published January 14, 2020
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Displaying 1 - 8 of 8 reviews
March 2, 2020
This book is repetitive, with the same examples and quotes appearing in multiple places. It’s a short book of 130 pages that could have been shorter still.
The analysis is surface level, creaming quotes from Buffet or Munger and drawing broad comparisons to other company structures such as private equity and the 3G model. There is little sense that the authors have any special knowledge of Berkshire’s inner workings.
The one exception is perhaps the vignette about David Sokol, one of Buffet’s rising stars, who first purchased $10 million of shares in a company, Lubrizol, and then recommended that Buffet acquire it. Sokol “forgets” to mention his recent “investment” to Buffet. While not found guilty of insider trading by the SEC, his career with Berkshire swiftly ends and the story is meant to illustrate Buffet’s ruthlessness toward anyone who risks the company’s reputation.
The thesis of the book is that Buffet’s company, Berkshire, has survived and thrived as a conglomerate due to the Trust-based culture Buffet has created. He has adopted a partnership model, seeks a win-win, and is loathed to make any changes at his portfolio companies, preferring to defer to the management teams who run them.
A quote from Buffet’s partner Charlie Munger encapsulates the ethos of trust in the context of scandals:
“The greatest institutions … select very trustworthy people, and they trust them a lot … [T]here’s so much self respect you get from [being] trusted and [being] worthy of the trust that [the] best compliance cultures are the ones which have this attitude of trust. [Some corporate cultures] with the biggest compliance departments, like Wall Street, have the most scandals. So it’s not so simple that you can make your behavior better automatically just by making the compliance department bigger. This general culture of trust is what works. Berkshire hasn’t had that many scandals of consequence, and I don’t think we’re going to get huge numbers either.”
In addition to the role of a trust-based culture in preventing bad behavior, Berkshire’s decentralized model allows each CEO to tailor its resources for its unique needs. Centralization, while purporting to avoid duplication of resources, does not always deliver on this promise. Witness the swelling of head offices that grow unchecked in the absence of a cost-conscious manager who is accountable for the “shared resource”.
It is remarkable that amid a highly litigious public company environment, Buffet has been able to operate as he does. His board is a group of his contemporaries and friends, more than a few getting on in years, and amazingly, the board often does not learn of an acquisition until it has been publicly announced.
It’s tough to envision this degree of latitude, earned by Buffet over a half century of market-beating returns, extending to any successor. It seems inevitable that upon Buffet’s passing, the board will shift from passive adviser to the more traditional role of “monitor” over the CEO and management.
While the authors consider the risk that Berkshire will be “broken up” upon Buffet’s passing, they point out that it is a decision that will be taken by its shareholders who tend to see things as Buffet does (as shown by their twice rejecting a dividend in favor of their capital continuing to be reinvested).
If you want to learn about Berkshire, I would pass on this book and instead read Berkshire’s annual letters to his shareholders. They offer more insight into the man and the unique organization he has created. The writing is better too.
The analysis is surface level, creaming quotes from Buffet or Munger and drawing broad comparisons to other company structures such as private equity and the 3G model. There is little sense that the authors have any special knowledge of Berkshire’s inner workings.
The one exception is perhaps the vignette about David Sokol, one of Buffet’s rising stars, who first purchased $10 million of shares in a company, Lubrizol, and then recommended that Buffet acquire it. Sokol “forgets” to mention his recent “investment” to Buffet. While not found guilty of insider trading by the SEC, his career with Berkshire swiftly ends and the story is meant to illustrate Buffet’s ruthlessness toward anyone who risks the company’s reputation.
The thesis of the book is that Buffet’s company, Berkshire, has survived and thrived as a conglomerate due to the Trust-based culture Buffet has created. He has adopted a partnership model, seeks a win-win, and is loathed to make any changes at his portfolio companies, preferring to defer to the management teams who run them.
A quote from Buffet’s partner Charlie Munger encapsulates the ethos of trust in the context of scandals:
“The greatest institutions … select very trustworthy people, and they trust them a lot … [T]here’s so much self respect you get from [being] trusted and [being] worthy of the trust that [the] best compliance cultures are the ones which have this attitude of trust. [Some corporate cultures] with the biggest compliance departments, like Wall Street, have the most scandals. So it’s not so simple that you can make your behavior better automatically just by making the compliance department bigger. This general culture of trust is what works. Berkshire hasn’t had that many scandals of consequence, and I don’t think we’re going to get huge numbers either.”
In addition to the role of a trust-based culture in preventing bad behavior, Berkshire’s decentralized model allows each CEO to tailor its resources for its unique needs. Centralization, while purporting to avoid duplication of resources, does not always deliver on this promise. Witness the swelling of head offices that grow unchecked in the absence of a cost-conscious manager who is accountable for the “shared resource”.
It is remarkable that amid a highly litigious public company environment, Buffet has been able to operate as he does. His board is a group of his contemporaries and friends, more than a few getting on in years, and amazingly, the board often does not learn of an acquisition until it has been publicly announced.
It’s tough to envision this degree of latitude, earned by Buffet over a half century of market-beating returns, extending to any successor. It seems inevitable that upon Buffet’s passing, the board will shift from passive adviser to the more traditional role of “monitor” over the CEO and management.
While the authors consider the risk that Berkshire will be “broken up” upon Buffet’s passing, they point out that it is a decision that will be taken by its shareholders who tend to see things as Buffet does (as shown by their twice rejecting a dividend in favor of their capital continuing to be reinvested).
If you want to learn about Berkshire, I would pass on this book and instead read Berkshire’s annual letters to his shareholders. They offer more insight into the man and the unique organization he has created. The writing is better too.
November 20, 2022
Summary: I liked the book. I think there was a bit of a focus on a specific theme, "trust" and in spots it's a bit oddly squeezed into it. None the less, a short and easy read.
p. x "Margin of safety directs investing only at a price well below value, a rarity that warrants loading up when seen. Similarly, the margin of trust directs dealing with only those people you trust deeply, another rarity that warrants heavy reliance when found."
p. xvi It discusses the difference between how a private equity firm behaves and what Warren does. I think it's really overly summed up in the word trust, but it's accurate.
p. 13 Over half a century, Buffet has consciously sought to attract only those shareholders who have the devotional and intelligence to understand Berkshire.
p. 25 Buffet writes as an uncle might, imagining he's writing to relatives whose trust he has gained and seeks to sustain.
p. 27 "Berkshire's annual report provides a great field guide for those attending the Meeting. It is written carefully and clearly to explain Berkshire's businesses and the economic environment in which they operate to co-owners not involved in the business but motivated to understand it. Those having read the Annual Report are prepared to ask questions, understand the answers, and put both questions and answers in a broader business context. In other words, they are prepared to be a participant in the Meeting and in the weekend's multiple conversations surrounding it." The point is the nature of his shareholders differs from others and this has been cultivated over a very long time.
p. 40 Buffett sizes people up in minutes; deals are sometimes reached in an initial phone call, often in meetings of less than two hours and invariable within a week. Formal contracts are promptly negotiated. Deals - including big ones involving billions of dollars - can close within a month of initial contact.
p. 57 The discussion on Heinz and the issues associated with how it was handled by a 3rd party versus when you deal directly with Warren. It's a bit of a different animal on whether you get to keep your employees.
p. 82 "In the PE model, heavy debt levels and associated debt and covenants not only boost immediate returns but 'impose . . . a stringent discipline on management, forcing executives not only to keep costs down, but also to divest any business that might fetch a price higher than the value they had placed on it."
p. 105 He talks about mistakes that Buffett has made and it was quite costly. General Re
p/ 124 - Size is just a result, it's not their goal at all.
p. 133 - Talks about the sokol incidents and why he has to go.
p. x "Margin of safety directs investing only at a price well below value, a rarity that warrants loading up when seen. Similarly, the margin of trust directs dealing with only those people you trust deeply, another rarity that warrants heavy reliance when found."
p. xvi It discusses the difference between how a private equity firm behaves and what Warren does. I think it's really overly summed up in the word trust, but it's accurate.
p. 13 Over half a century, Buffet has consciously sought to attract only those shareholders who have the devotional and intelligence to understand Berkshire.
p. 25 Buffet writes as an uncle might, imagining he's writing to relatives whose trust he has gained and seeks to sustain.
p. 27 "Berkshire's annual report provides a great field guide for those attending the Meeting. It is written carefully and clearly to explain Berkshire's businesses and the economic environment in which they operate to co-owners not involved in the business but motivated to understand it. Those having read the Annual Report are prepared to ask questions, understand the answers, and put both questions and answers in a broader business context. In other words, they are prepared to be a participant in the Meeting and in the weekend's multiple conversations surrounding it." The point is the nature of his shareholders differs from others and this has been cultivated over a very long time.
p. 40 Buffett sizes people up in minutes; deals are sometimes reached in an initial phone call, often in meetings of less than two hours and invariable within a week. Formal contracts are promptly negotiated. Deals - including big ones involving billions of dollars - can close within a month of initial contact.
p. 57 The discussion on Heinz and the issues associated with how it was handled by a 3rd party versus when you deal directly with Warren. It's a bit of a different animal on whether you get to keep your employees.
p. 82 "In the PE model, heavy debt levels and associated debt and covenants not only boost immediate returns but 'impose . . . a stringent discipline on management, forcing executives not only to keep costs down, but also to divest any business that might fetch a price higher than the value they had placed on it."
p. 105 He talks about mistakes that Buffett has made and it was quite costly. General Re
p/ 124 - Size is just a result, it's not their goal at all.
p. 133 - Talks about the sokol incidents and why he has to go.
April 12, 2023
A SENSE OF OWNERSHIP MOTIVATES PEOPLE.
DECENTRALISED BUSINESS MODELS ARE NOT THE CAUSE OF SUCCESS BUT A CONSEQUENCE OF THE REAL CAUSE: A CULTURE OF TRUST.
WE WOULD RATHER SUFFER THE VISIBLE COSTS OF A FEW BAD DECISIONS THAN INCUR THE MANY INVISIBLE COSTS THAT COME FROM DECISIONS MADE SLOWLY - OR NOT AT ALL - BECAUSE OF A STIFLYING BUREAUCRACY.
Trust is a powerful motivator and autonomy is more value-enhancing than control.
Berkshire management philosophy = margin of trust.
The secret to WB success; his ability to identify outstanding people. He allocates capital to people, not just to companies.
Insurance executive bonuses are tied to underwriting profit and to the cost of float rather than premium volume.
Efficiency follows the BH decentralised model because each manager has economic and cultural incentives to minimise the size of his/her staff.
The boards most important duty according to WB is to select an outstanding CEO.
If you are going to have a spread of very capable people involved in the businesses you had better show them that the avenue of really running their own business is open.
Our decentralised, entrepreneurial culture allows us to be fast, focussed and responsive. Our people are clear about what is expected of them with regard to our business model, our strategy and our values (ITW). Within these confines we empower our business teams to make decisions and customise their approach in order to maximise the relevance and impact of the ITW business model for thier specific customers and end markets.
At Consolidated Software, as with BH, structure was not the cause of success but a consequence of the real cause: a culture of trust.
Autonomy is a manifestation of trust; decentralization is a consequence of it.
DECENTRALISED BUSINESS MODELS ARE NOT THE CAUSE OF SUCCESS BUT A CONSEQUENCE OF THE REAL CAUSE: A CULTURE OF TRUST.
WE WOULD RATHER SUFFER THE VISIBLE COSTS OF A FEW BAD DECISIONS THAN INCUR THE MANY INVISIBLE COSTS THAT COME FROM DECISIONS MADE SLOWLY - OR NOT AT ALL - BECAUSE OF A STIFLYING BUREAUCRACY.
Trust is a powerful motivator and autonomy is more value-enhancing than control.
Berkshire management philosophy = margin of trust.
The secret to WB success; his ability to identify outstanding people. He allocates capital to people, not just to companies.
Insurance executive bonuses are tied to underwriting profit and to the cost of float rather than premium volume.
Efficiency follows the BH decentralised model because each manager has economic and cultural incentives to minimise the size of his/her staff.
The boards most important duty according to WB is to select an outstanding CEO.
If you are going to have a spread of very capable people involved in the businesses you had better show them that the avenue of really running their own business is open.
Our decentralised, entrepreneurial culture allows us to be fast, focussed and responsive. Our people are clear about what is expected of them with regard to our business model, our strategy and our values (ITW). Within these confines we empower our business teams to make decisions and customise their approach in order to maximise the relevance and impact of the ITW business model for thier specific customers and end markets.
At Consolidated Software, as with BH, structure was not the cause of success but a consequence of the real cause: a culture of trust.
Autonomy is a manifestation of trust; decentralization is a consequence of it.
This entire review has been hidden because of spoilers.
September 15, 2020
Bershire code of trust
Can Birkshire thrive without Buffet.
The answer after reading this review is still Maybe. Even if Cunningham tries to convince me that there is a corporate ethereum larger than Munger and Buffet I am not so sure.
IKEA have managed to thrive without Ingvar Kamprad. The succession was done very gradually. That is not the case in Berkshire I really hope that this power transfer now will intensify.
Can Birkshire thrive without Buffet.
The answer after reading this review is still Maybe. Even if Cunningham tries to convince me that there is a corporate ethereum larger than Munger and Buffet I am not so sure.
IKEA have managed to thrive without Ingvar Kamprad. The succession was done very gradually. That is not the case in Berkshire I really hope that this power transfer now will intensify.
January 2, 2020
Interesting exploration of BRK organizational philosophy and structure with trust underpinning both. Also good comparisons with other companies adopting similar principles and the centricity of trust to their systems, as well.
This entire review has been hidden because of spoilers.
February 25, 2020
While the book brings fresh facts about Berkshire, they are few. The text is structured poorly, typos abound (first edition). Stories are repeated several times, as in David Sokol's leaving the company.
Unfortunately, I would recommend a pass on this book.
Unfortunately, I would recommend a pass on this book.
January 24, 2020
This is a wonderful account of Warren Buffet’s Berkshire Hathaway business model. It is full of details and stories on how this legendary investor manage his company.
January 17, 2020
An easy read highlighting the philosophy of Warren Buffett. Interesting to read the behind the scenes account. The Private Equity compare and contrasts were not on target based on my own experiences. Interesting, nonetheless.
Displaying 1 - 8 of 8 reviews