Berkshire Hathaway’s Citizenship: Culture, Scale and the Future

Editor's Note: The following is an excerpt from the new book, "Berkshire Beyond Buffett: The Enduring Value of Values," by Lawrence A. Cunningham.

By Lawrence A. Cunningham

The companies owned by Berkshire Hathaway, the huge conglomerate that Warren Buffett built, follow their leader in embracing corporate social responsibility, stewardship and sustainability. But the breadth and scale of the sprawling conglomerate can hide both the commitments and periodic problems.

For example, in the early 2000s, before it became part of Berkshire Hathaway, Russell Corp. signed major licensing agreements to produce sportswear adorned with popular logos. It made contracts with scores of U.S. universities and signed a large deal with the National Basketball Association.

The trouble was, the goods affixed with licensed Russell logos were made in factories in China and Honduras that engaged in objectionable conduct. In China, the company’s products were manufactured in sweatshops that violated principles of international human rights; in Honduras, company officials boarded up the plant and ousted the workforce in retaliation for attempts to unionize. Such misbehavior drew the attention of activists across the United States, including a group of college students who demanded that universities terminate the licensing agreements.

These problems persisted, however, even after 2006 when Russell was acquired by Fruit of the Loom, which had become part of Berkshire in 2002. Ultimately, in 2009, a former employee of the Honduras facility took the floor at the Berkshire annual meeting to report on the conditions and demand a response. Russell’s operating activities contrasted with Berkshire’s tenets of integrity and repute; promptly upon learning of the problems, Fruit of the Loom corrected them.

This case highlights the challenges Buffett’s successor will face in overseeing the sprawling array of operations. It illustrates the downside of corporate decentralization. When it comes to potential subsidiary violations of company policy or law, information must reach Berkshire headquarters immediately. But the existing framework is informal. It is based heavily on the mandate of subsidiary managers: Report bad news early. In the distinctive context of Berkshire culture, steeped in integrity, such an approach may be satisfactory. In the spirit of autonomy, it is essential.

But many give Berkshire a pass on certain matters because of Buffett’s presence. His eventual absence will remove this benefit of the doubt. Successors will need to assure both continuity and reliability. Surprises could result in government authorities imposing more radical, less desirable changes, if Berkshire has to contain a controversy, rather than be in front of it. The Russell episode is both an exception to Berkshire’s norm and a reason to consider formal oversight of its subsidiaries.

While Berkshire has won plaudits for good corporate citizenship, critics complain about the absence of conglomerate-wide reporting on items such as social responsibility and sustainability. Many Berkshire subsidiaries — including Brooks, Johns Manville, Lubrizol and Shaw — are in the vanguard of such corporate stewardship. They join elite global companies in the practice of issuing formal responsibility and sustainability statements and audited reports on the corporate treatment of stakeholders, especially employees at home and abroad, and of the environment.

Berkshire is unusual in that its structure does not lend itself to issuing a formal corporate report at the parent level. And the number and size of Berkshire’s subsidiaries can obscure some of their internal measurement and reporting efforts. Critics urge consolidated policies, including a conglomerate statement of responsibility or charter of sustainability. It may unduly interfere with subsidiary autonomy to set corporate-level policy, but a consolidated report will prove valuable in order to highlight the varying ways that Berkshire subsidiaries embrace stewardship—and assure continued adherence.

Shaw Industries, for example, led the carpet industry to newfound appreciation for its responsibility concerning environmental protection and sustainable development. During the 1990s, people began to realize the environmental costs of using non-biodegradable artificial fibers to make carpets; disposing of them presented a significant waste management problem. Shaw then started to promote carpet recycling programs. It began to produce synthetic yarn sourced from recycled plastics such as soda bottles and developed a polyolefin backing material that cut raw material use in half.

McLane embraces a “green advantage initiative” to manage its fleet of trucks that stock America’s supermarkets. The initiative stresses reducing environmental impact and increasing operational efficiency. Efforts include improving gas mileage by lowering truck highway speeds and recycling thousands of gallons of water used to wash produce. McLane installed $7 million of efficient lighting in its distribution centers and invested $100 million in automation scheduling technologies to plan truck shipments, reducing the cost and impact of its fleet.

Acme Brick makes an ecological product: bricks of earthen clay. The bricks provide efficient insulation, thereby reducing energy usage and costs. Since its founding in 1891, Acme has built plants near distribution destinations — an idea codified in today’s environment design protocols that define a five-hundred-mile radius. Recycling incorporates scrap clay and sawdust into the brick. Reclamation programs create wetlands for wildlife and plant whole forests on former production sites. Acme Brick has won numerous industry awards for its environmental stewardship.

Concerning employees, finally, Brooks, like many apparel, footwear and sporting equipment makers, remembers the furor that engulfed Nike, Inc. in the late 1990s and early 2000s when customers learned of abusive labor practices in its Asian factories. They boycotted Nike products in protest, and the company reformed. Many factors contributed to Nike’s transgressions, including relentless cost pressures in its competitive markets. The price of athletic footwear declined rapidly in the late 1990s and early 2000s, and Nike competed by finding the cheapest ways to make shoes, which included inhumane labor practices.

Brooks avoided this vise thanks to a business model focused on a premium brand at premium prices, a piece of equipment for the serious runner, selling higher-priced shoes in specialty stores. Brooks is not the low-cost producer in its industry, and its overseas factories are not the low-cost factories. As chief executive officer, Jim Weber explained in an interview for this book, his customers value the company’s investment in such responsible behavior.

Retaining subsidiary autonomy at Berkshire is important, both as a cultural matter and because the needs of the businesses vary so greatly. For example, jewelry companies focus on the ethical mining of minerals; home furnishing companies on preserving forests; transportation companies on reducing fuel usage and emissions; energy companies on targeting renewable sources. For some companies, priority rivets on internal operations, whereas others look to the supply chain; for some the concern is employee safety while others attend to a particular customer type. At the same time, it may be valuable for Berkshire as a group to collect and publicize results.

The need for internal control systems and consolidated reporting will likely increase as Berkshire expands into the international arena. A few subsidiaries boast major global operations, especially ISCAR/IMC, as well as Gen Re, Lubrizol and MiTek. Others have important overseas operations, including CTB, Dairy Queen, FlightSafety, Justin, Larson-Juhl and MidAmerican Energy. A majority of the companies have at least some operations in Canada and Mexico (e.g., Benjamin Moore, Fruit of the Loom, Johns Manville and the Marmon Group), and many manufacturing companies own or operate facilities in Asia (e.g., Brooks and TTI). Yet until its acquisition of ISCAR/IMC, begun in 2006 and completed in 2013, Berkshire had acquired only American companies.

Given globalization, it will be inviting to enlarge Berkshire’s acquisition universe. The timing may be propitious, as the accumulation and flow of intergenerational family wealth that occurred in the United States during Berkshire’s early decades is recurring across Asia and Latin America. But when going global, the need for centralized internal control and conglomerate reporting will intensify.

Image credit: Flickr/x1brett

Lawrence Cunningham, a corporate law professor at George Washington University and long-time editor of The Essays of Warren Buffett: Lessons for Corporate America, is the author of the new book, Berkshire Beyond Buffett: The Enduring Value of Values, from which the foregoing is adapted.