2005: What advice would Buffett give his successor?

AUDIENCE MEMBER: Now, Mr. Buffett and Mr. Munger, my name is Marc Rabinov from Melbourne, Australia.

I think it’s rare for diverse collections of businesses to be successful. And I believe an important part of Berkshire’s success has been your skillful oversight of the wholly-owned subsidiaries.

My question is, what advice would you give to your successor in managing our diverse portfolio of businesses?

WARREN BUFFETT: Yeah, well, it’s a very good point that Charlie and I have been known to rail a bit about companies that go and buy this business and that business. And, of course, that’s exactly what we’ve done ourselves over the years.

I think the motivations have been somewhat different, perhaps, than in many of the cases. And then I think the way we’ve approached it has been different.

We’ve — we have been reasonably successful although we’ve had some notable failures. But we’ve been reasonably successful in creating a climate where the people who built the businesses continue to run them with the same enthusiasm and energy after they sell to us that they possessed early on.

And I think that you can find all kinds of illustrations in the histories of businesses that are diversified. I mean, Gillette bought 20-some businesses. I remember, back in the ’60s, Coke bought all kinds of businesses.

And certainly the cigarette companies did, all kinds of people. The oil companies for a while were doing it. And generally, the experiences were not very good when they got outside of their own fields.

But I think when those companies bought businesses, they really thought they were going to take them over and run them themselves. And Charlie and I are under no illusions that we can run the businesses that we buy as well as, or nearly as well as, the people that have been running them over time.

And, we don’t have group vice presidents that — in Omaha — we don’t have a whole bunch of directives going out. We don’t have companies that were run one way and then we’re going to run them entirely differently, and have them reporting in all kinds of special ways to us, and have a human relations department and a public relations department, then the legal department — all kinds of things in Omaha — telling them how to run their businesses.

We think that destroys — can destroy — many good businesses — certainly can destroy the incentive of the people that have already gotten rich to stay around and make us rich in turn. So, I think that has been an important difference.

I think it’s been demonstrated well enough to all of those around Berkshire that it’s been a very good place, generally, I think, for people, in terms of how they feel about working there. And I think they recognize it works.

So, the successor, to me, will come from within Berkshire. They will have seen how it worked. They will believe in it. They will be surrounded by people who have worked in this manner. And I don’t think it will be the most difficult job in the world to keep that engine going down the tracks at 90 miles an hour.

I mean, it isn’t like they have to create the system. They will inherit a system.

And I would be amazed if any of the three successors that we will talk about with the directors on Monday, if any of them would not recognize the inherent special values in the system as it now works and take up one of these other models that clearly has been disastrous for one company after another that’s diversified.

Charlie?

CHARLIE MUNGER: Yeah. I don’t agree with you that the success at Berkshire has come from our oversight of the subsidiary —

WARREN BUFFETT: No.

CHARLIE MUNGER: — companies. It’s come from our lack of oversight of the subsidiary companies. And I think our successors will be able to provide the same wonderful lack of oversight — (laughter) — that we have provided.

And if you’re not going to use a lot of oversight, you’ve got to be very careful in what you bring into your corporate family. And you’ve got to be very careful in treating, honorably and well, the people who are running the businesses over which you’re not giving any oversight to speak of.

And I think our system is — it’s very different from a General Electric system. And I think their system works very well for them, but I don’t think it’s the only system in the world that works in corporate capitalism. And I think the Berkshire system will work very well after we’re gone.

WARREN BUFFETT: It’s a very simple system. I mean, GE works exceptionally well. But when I go back to some of the conglomerates — and that’s not a term that I shrink from, but most people do because they think it brings down their P/E or something — but we are a conglomerate. And I hope we become more of a conglomerate.

The — we don’t — we haven’t succeeded because we had great complicated systems or some magic formulas we apply or anything. We’ve succeeded because we don’t have — we have simplicity itself.

We take people that know how to play their game very well, and we let them play the game. And it’s just worked in one field after another. And every now and then we make a mistake. And we’ll — you know, there’ll be more mistakes made.

But overwhelmingly, it works. And it doesn’t require some great business insight or anything like that, in terms of whoever’s running this place, to keep that kind of machine in motion. I mean, it is not complicated.

The bigger worry would be that the culture would get tampered with in some way and people would try to oversteer, basically.

But that won’t happen. Our board won’t let it happen. And the ownership won’t let it happen.

And I think we’ve got something that’ll work for a very, very, very long time. And that’s why I’m comfortable with the fact that every share I have will go to a foundation that I care about having — getting good financial results in the future.

And I’m quite happy to have them have 100 percent of their money in Berkshire.