Berkshire Hathaway 2007 Annual Report Download - page 75

Inadequate though they are in telling the story, we give you Berkshire’ s book-value figures because they today serve as a rough,
albeit significantly understated, tracking measure for Berkshire’ s intrinsic value. In other words, the percentage change in book value in
any given year is likely to be reasonably close to that year’ s change in intrinsic value.
You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a
college education. Think of the education’ s cost as its “book value.” If this cost is to be accurate, it should include the earnings that were
foregone by the student because he chose college rather than a job.
For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value.
First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he
would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate
interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.
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 233,000 employees,
only 19 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 foundations that will likely receive the stock in roughly equal installments over a dozen or so years.
At my death, the Buffett family will not be involved in managing the business but, as very substantial shareholders, will help 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. One executive will become CEO and
responsible for operations. The responsibility for investments will be given to one or more executives. If the acquisition of new
businesses is in prospect, these executives 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 my
recommendations for both posts. All candidates currently work for or are available to 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 various foundations 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 and that our unusually
strong and well-defined culture will remain intact.
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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