The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [285]
The turnaround of the Buffalo Evening News meant that Buffett and Munger no longer had to debate whether Blue Chip’s largest asset was worth more dead than alive. The News would live; it now threw off a steady stream of profits. In 1983, they finally agreed on a value for Blue Chip, and Berkshire swallowed it whole—the last step of the great untangling.6 Buffett and Munger were now full partners for the first time—although Munger was the junior partner by miles.
Buffett made Munger, who now owned two percent of Berkshire, the company’s vice chairman. Munger also now took over as president and chairman of Wesco, a wee thing compared to the now-swollen Berkshire, but Munger’s own. It dangled like a tiny strand of spaghetti from the corner of Berkshire Hathaway’s mouth, the only morsel that Buffett had yet failed to swallow. Wesco’s shareholders eventually figured out that he would get to it someday, and inevitably they began to value Wesco’s stock at a forbidding price.
Munger’s influence on Buffett’s thinking had always far outweighed his financial clout. They thought so much alike that the main difference between their behavior in business was that Munger on occasion would veto deals that the more easily enraptured Buffett might have struck. Their attitude toward their shareholders was identical. With the merger done, in the 1983 annual report the two men spelled out to Berkshire’s shareholders a set of principles from which they would operate. They called them the “owner-oriented principles.” No other management told its company’s owners these things.
“Although our form is corporate, our attitude is partnership,” they wrote. “We do not view the company as the ultimate owner of our business assets, but, instead, view the company as a conduit through which our shareholders own the assets.”7
This statement—deceptively simple—amounted to a throwback to a former generation of corporate governance. The modern-day corporate chief viewed the shareholders as a nuisance, a noisy or quiet group to be appeased or ignored. They were certainly not his partners or his boss.
We don’t play accounting games, Buffett and Munger said. We don’t like a lot of debt. We run the business to achieve the best long-term results. All of these sounded like simple truisms—except that so few managements could honestly make all of these statements.
Incidentally, Buffett also wrote that year, “[r]egardless of price, we have no interest at all in selling any good businesses that Berkshire owns, and are very reluctant to sell sub-par businesses”—even if that hurt performance—“as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations.”8 That was a warning in the guise of a hint to Gary Morrison, who took over from Ken Chace at Berkshire in 1982 after the exhausted Chace retired. By then, Buffett had shut down the Manchester mill and cut back on production in New Bedford by one-third.
“The textile business would make money for about ten minutes each year. We made half the men’s suit linings in the country, but nobody ever went to a tailor and said, ‘I’d like a pin-striped gray suit with a Hathaway lining.’ A square yard of cloth that came out of our mill cost more than a square yard from somewhere else, and capitalism’s frugal that way. We’d get awards from Sears, Roebuck as supplier of the year, and we took them fishing, and supplied them during World War II, and I was personal friends with the chairman of Sears, and they’d say, Your products are wonderful. And we’d say, How about another half a cent a yard? And they’d say, You’re out of your mind. So it was a terrible business.”
Instead of “generating cash,” Morrison begged Buffett to give him cash so that he could upgrade the mills. Buffett said no.
And yet he clung to the beleaguered mills. Thus,