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Berkshire Hathaway: 50 Years of Conscientious Capitalism

The trek to Omaha for the Berkshire Hathaway annual meeting did not disappoint. Warren Buffett, and partner Charlie Munger, celebrated 50 years managing one of the most successful companies in history. At ages 85 and 91, the two appear to have found the fountain of youth.

Their success is undeniable. In 1965 Berkshire’s stock traded for $11 and was a dying textile mill. Over fifty years the duo, and their team, acquired the largest stake in household names such as Coca-Cola, Wells Fargo and American Express. They have also acquired 100% of GEICO insurance, the Burlington Northern Railroad, Pampered Chef, Dairy Queen and about 80 other businesses.

Their brand of intellectual, but practical, capitalism has handsomely rewarded shareholders. Today that $11 per share investment is worth more than $215,000, making Buffett, Munger and their legion of faithful shareholders wealthy in the process.

However, the Berkshire story is not another Wall Street saga of rich people stepping over others to get even richer. From inception, Buffett and Munger have treated shareholders as partners with a razor sharp vigilance for honesty, integrity and frugality.

Despite the festivities where more than 40,000 people descended upon Omaha, the meeting always starts the same--a C-Span clip of Buffett testifying before Congress in 1991. At the time, Buffett was a passive shareholder in the investment firm Solomon Brothers. Unbeknownst to Buffett, Solomon employees had broken many securities laws in a bid-rigging scandal. Buffett acted by assuming the helm as Chairman and CEO of Solomon to rescue the company.

As such, he assured Congress he would clean house. He guaranteed that if his people lost money for the firm, he would understand. However, if they caused the firm to lose a shred of reputation, he would be ruthless.

That concept, ethical behavior, has been at the core of every annual meeting I’ve attended over the past ten years.

In a world mired in scandal and deceit, Berkshire’s culture reinforces very simple, but extremely important virtues.

Berkshire is a meritocracy. Top performance is nicely rewarded—but only within a code of conduct.

This structure is not luck, but rather the product of careful reinforcement of desirable characteristics which start at the top. If the CEO and senior leadership are ethical and demand ethical behavior, that structure will be “self-affirming.” Less honorable people will not stick around. However, people who are top performers in an environment of integrity will gravitate towards businesses that breed honesty and fairness.

Furthermore, this mandate must be in writing and reinforced verbally. When desirable virtues are followed that behavior must be rewarded. Conversely, ethical breaches must be punished.

In elaborating, Buffett stated, “A child sees what you do and say and will mimic your behavior.” Businesses and employees are no different.

Furthermore, the pair added that when you get old, you will have the reputation you deserve. You may be able to fool people over short time frames. However, ultimately, Berkshire’s long term reputation has not only been a helpful asset in growing their business, but arguably their most valuable.

This culture has attracted top talent to work for the firm and made Berkshire the first call for extremely successful family businesses seeking a permanent home for their crown jewel.

All of this has been carefully cultivated over decades. This is another key Berkshire differentiator —an extremely long time horizon. In a world looking for the “quick kill” Buffett and Munger are incredibly patient. Their vision allows them to look decades down the road.

This mentality also buys time, allowing decisions to work out if they stumble over shorter periods.

Berkshire has intentionally avoided certain things—even if they would have allowed the firm to grow much larger or faster. Munger stated you shouldn’t do financial things that make you sweat at night, adding that if they used more leverage they could have grown much faster. However, it would have put the firm at risk for complete disaster. This is a constant theme at Berkshire—debt kills.

On the flight home I pondered the wisdom dispensed over the weekend. Although age-old themes, they matter:
• Treat others as you would have them treat you.
• Focus on long term value creation.
• Debt kills.
• Guard your reputation as your most valuable asset.

Not only are these “golden rules” to live by, but they’ll probably make you wealthier in the process. It has certainly worked for Berkshire Hathaway.

Originally published May 6 2015, Victoria Advocate