2014: How does Berkshire gain the trust of the companies it acquires?

AUDIENCE MEMBER: Hi, Mr. Buffett—

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: — and Mr. Munger.

My name is Masato Luso (PH) and I’m from Los Angeles, California.

Berkshire is known to buy into whole companies for many, many years. But earlier in your careers, that was not known.

And typically, acquisitions of other companies is very disruptive. Employees fear losing their jobs as a redundancy. And managers really have to think twice and be diligent about it.

So my question is, what do you do to gain the trust of founders or owners of the companies you have bought out in the past?

WARREN BUFFETT: Well, we’ve kept our word to them.

And now we have to be very careful about what we promise, because we can’t promise, for example, never to have a layoff in a business we buy, because who knows what the world holds.

But we can promise that we won’t sell their business, for example, if it turns out to be disappointing, as long as it doesn’t run into the prospect of continuing losses or having significant labor problems.

But we keep — we are keeping — certain businesses that you would not get a passing grade at business school on if you wrote down our reasons for keeping them.

But the reason is, we made a promise.

And we put that — we not only make the promise, we put it in the back of the annual report now — we’ve done it for 30 years or so — where we list the economic principles.

And we put it there because we believe it. But we put it there, also, so that the managers who sell us their— the owners who sell us their business — know they can count on it.

And if we behave differently, you know, the word would get around. And it should get around.

So, we can make promises. We can’t make promises we’ll never change employment. We can’t even make a promise that we’ll keep a business forever.

But we can promise what we do promise, which is that if it turns out to be somewhat disappointing on earnings, but does not promise, sort of, unending losses, or if we have labor problems, we can keep that promise.

And we have kept that promise. We’ve only had to get rid of a few businesses, including our original textile business.

We promise the managers, you know, that they are going to continue to run their businesses.

And believe me, if we didn’t do it, the word would get around on that very quickly. But we’ve been doing it now for 49 years.

And we’ve put ourselves in a class that is hard for other people to compete with, if that’s important to the seller of a business.

A private equity firm is going to be totally unimpressed by what’s in the back of our annual report. They don’t care. And that’s — there’s nothing wrong with that. That’s their business.

But for somebody that’s built up their company over 20 or 30 or 40 years — and maybe their father or grandfather built it up even before that — some of those people care about where their businesses go.

They’re very rich, they’ve accomplished all kinds of things in life. And they don’t want to build up something which somebody else tears apart very quickly believe they handing it over to a few MBAs who want to show their stuff.

So, we do have a unique — close to a unique — asset at Berkshire. And as long as we behave properly, we will maintain that asset. And really, no one else will have much luck in competing with us.

But it doesn’t solve all problems, but — and it — and frankly, it’s the way we want to operate anyway.

So it’s — we’re comfortable with it. The sellers that do come to us that care about their businesses are comfortable with it. And I think it’ll continue to work well.

Charlie?

CHARLIE MUNGER: Well, obviously, we behave the way we do because we like doing it. And number two, it’s worked pretty well and we’re unlikely to stop.

WARREN BUFFETT: OK. (Applause)

You can tell that he doesn’t get paid by the word. (Laughter)