Berkshire Hathaway 2004 Annual Report Download - page 79

Some graduates will find that the book value of their education exceeds its intrinsic value, which means that
whoever paid for the education didn’ t get his money’ s worth. In other cases, the intrinsic value of an education will far
exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is
meaningless as an indicator of intrinsic value.
THE MANAGING OF BERKSHIRE
I think it’ s appropriate that I conclude with a discussion of Berkshire’ s management, today and in the future. As our
first owner-related principle tells you, Charlie and I are the managing partners of Berkshire. But we subcontract all of the
heavy lifting in this business to the managers of our subsidiaries. In fact, we delegate almost to the point of abdication:
Though Berkshire has about 180,000 employees, only 17 of these are at headquarters.
Charlie and I mainly attend to capital allocation and the care and feeding of our key managers. Most of these
managers are happiest when they are left alone to run their businesses, and that is customarily just how we leave them. That
puts them in charge of all operating decisions and of dispatching the excess cash they generate to headquarters. By sending it
to us, they don’ t get diverted by the various enticements that would come their way were they responsible for deploying the
cash their businesses throw off. Furthermore, Charlie and I are exposed to a much wider range of possibilities for investing
these funds than any of our managers could find in his or her own industry.
Most of our managers are independently wealthy, and it’ s therefore up to us to create a climate that encourages them
to choose working with Berkshire over golfing or fishing. This leaves us needing to treat them fairly and in the manner that
we would wish to be treated if our positions were reversed.
As for the allocation of capital, that’ s an activity both Charlie and I enjoy and in which we have acquired some
useful experience. In a general sense, grey hair doesn’ t hurt on this playing field: You don’ t need good hand-eye
coordination or well-toned muscles to push money around (thank heavens). As long as our minds continue to function
effectively, Charlie and I can keep on doing our jobs pretty much as we have in the past.
On my death, Berkshire’ s ownership picture will change but not in a disruptive way: None of my stock will have to
be sold to take care of the cash bequests I have made or for taxes. Other assets of mine will take care of these requirements.
All Berkshire shares will be left to one or more foundations. In this way, Berkshire will be left with a long-term, very
substantial shareholder, guided by the same philosophy and objectives that now set our course.
At that juncture, the Buffett family will not be involved in managing the business, only in picking and overseeing
the managers who do. Just who those managers will be, of course, depends on the date of my death. But I can anticipate what
the management structure will be: Essentially my job will be split into two parts, with one executive becoming responsible
for investments and another, who will be CEO, for operations. If the acquisition of new businesses is in prospect, the two
will cooperate in making the decisions needed, subject, of course, to board approval. We will continue to have an
extraordinarily shareholder-minded board, one whose interests are solidly aligned with yours.
Were we to need the management structure I have just described on an immediate basis, our directors know who I
would recommend for both posts. All candidates currently work for Berkshire and are people in whom I have total
confidence.
I will continue to keep the directors posted on the succession issue. Since Berkshire stock will make up virtually
my entire estate and will account for a similar portion of the assets of the foundation for a considerable period after my death,
you can be sure that the directors and I have thought through the succession question carefully and that we are well prepared.
You can be equally sure that the principles we have employed to date in running Berkshire will continue to guide the
managers who succeed me.
Lest we end on a morbid note, I also want to assure you that I have never felt better. I love running Berkshire, and if
enjoying life promotes longevity, Methuselah’ s record is in jeopardy.
Warren E. Buffett
Chairman
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