As I blogged a few days ago, I've been reading Larry Cunningham's Berkshire Beyond Buffett: The Enduring Value of Values. The thesis is that Berkshire Hathaway's value will endure beyond its founder, Warren Buffett, because of the larger values of the organization. After making his case he argues (like a good lawyer) that a precedent and analogous case already exists: the Pritzger's Marmon Group.
You know you're a corporate law geek if the mere mention of the Marmon Group made you sit up and take notice. The Marmon Group plays a role in 2 classic corporate law stories. Larry mentions one: every student of corporate law should remember the Marmon Group as the bidder in the infamous corporate law case Smith v. Van Gorkom. If you don't remember the 1985 Delaware Supreme Court case, you didn't have me as a Corporations professor. Spoiler alert: the directors are found to have breached their fiduciary duty and are thus personally liable for potentially millions of dollars in damages.
What many casebooks omit--but not Klein, Ramseyer, Bainbridge, which I am happily using this term--is that the case settled for $23 million. $10 million came from D&O insurance, and "almost $11 million came from the Pritzkers." The Pritzkers had no legal duty to pay for the directors' settlement--but they did it because they felt it was the right thing to do.
The Marmon Group's second corporate law claim to fame is as a player in Barbarians at the Gate, thhe father of corporate tick-tocks. The Marmon Group backed one of the bidders, the First Boston Group. There's this great scene where in a second round of the auction they need to raise more money. First Boston makes a 45-minute presentation to a British sugar company, S& W Berisford, on a Saturday night. First Boston hoped that Berisford could make a decision by Tuesday. 20 minutes later, the company committed $125 million.
One of First Boston's advisors asks "Do these people have any idea what they're doing?... I mean, they're going to commit $125 million. Why should they do it."
Handelsman stared at Finn as if it was the silliest question he'd ever heard. "Jay [Pritzker] asked them to."
The common theme from these two stories? Sophisticated businesspeople regularly act for motivations other than money. Again and again in Berkshire Beyond Buffett, either Berkshire itself or one of its subsidiaries demonstrates that money is not ultimately what drives them. Most notably, many of Berkshire's current subsidiaries turned down higher offers from other acquirers because they valued the reputation for hands-off management that Berkshire promises.
Here's a concrete example I used with my Corporations class when discussing conflicting interest transactions. One of Berkshire's subsidiaries was operated by a devout Mormon whose stores were closed on Sundays. He wanted to expand out of the state, but Buffett was skeptical. He thought the model could work in highly religious Utah, but not beyond. Here is Cunningham quoting Buffett:
Bill then insisted on a truly extraordinary proposition: He would personally buy the land and build the store--for about $9 million as it turned out--and would sell it to us at his cost if it proved to be successful. On the other hand, if sales fell short of his expectations, we could exit the business without paying Bill a cent.
The store was "an instant success", and Berkshire wrote the Bill a $9 million check. Bill refused to take a penny of interest. It's a good example of insider transactions that benefit the firm. It also suggests Larry might actually be right about Bershire's staying power. I can't help thinking there is a lot of value in offering businessmen like this the combination of liquidity and autonomy Berkshire provides, insulating them from the demands of Wall Street.
Larry Cunningham's Berkshire Beyond Buffett is the kind of book I might expect to see produced by a business school academic; it is unsurprising to see that it has been published by an excellent business school press. The book is oriented around an extremely interesting question: does Berkshire offers some sort of competitive advantage beyond that provided by its once-in-a-generation-brilliant chairman Warren Buffett?
Berkshire has invested in a vast array of businesses; in each of those businesses Buffett looks for a "moat." That is, he looks for a market position that will deter competitors from appearing, prevent customers from disappearing, and retain contracting advantages over suppliers, workers, and other inputs.
But what is Berkshire’s moat? Is it the fact that it is good at finding moats? Or is it something else? Larry answers this question in a way that gets at a division in business schools between management-oriented approaches to scholarship and finance-oriented ones. Financial analysis would focus on the existence of barriers to entry (moats); it might also focus on the low cost of capital that Berkshire Hathaway enjoys, given, among other things, its stellar track record. Management departments might look to something else: a strong corporate culture. In this case, Larry reads more as a management scholar than a finance scholar. Larry's describes, through case studies on a number of Berkshire’s subsidiaries, an ethos that focuses on:
- long time horizons
- an approach to management that is hands off but investor-oriented
- an eschewal of complicated financial engineering
- a preference for straightforward products and quiet but respected branding.
In his view, it is this ethos that makes Berkshire a better manager of firms than most.
Can corporate culture explain business success? It is difficult to measure, but obviously it must play some role. If culture was meaningless we could evaluate the quality of a workplace without setting foot inside it, and nobody does that. In my mind, the more difficult question is this: is Berkshire’s culture replicable? Although Larry has developed a translatable story about what works for Berkshire, implementing it may require a certain set of special skills that most managers simply do not enjoy or possess – to describe, in this view, would not result in the ability to do.
Along the way I learned some interesting things about Berkshire. For example, and for what's it worth:
- The firm is not secretly an insurance company with a hobby in acquiring other firms. Insurance revenues form a minority of the revenues of the conglomerate.
- Nor is it a hedge fund, although it does take positions in numerous companies that it does not own. Those revenues, however, are dwarfed by the revenues provided by the firms it does own.
- Nor is Berkshire a story about a few winning companies saddled to a bunch of modest losers, or, at least, it does not seem to be. In its extremely diversified way, the company has enjoyed productivity from almost unit.
GW Law professor Larry Cunningham has a new book coming out, Berkshire Beyond Buffett: The Enduring Value of Values. Two caveats before I begin my review. First, I received a review copy for free. Second, we own shares of Berkshire Hathaway. Don't get excited, people, I'm not rolling in Class A. My husband likes to dabble in stock picking with a little "fun money, and" right out of college, one of the first stocks he bought was Berkshire Class B.
When talk over the dinnertable turns to investments, we've often speculated as to how much our shares will drop in value with the death of Warren Buffett--who is now 84. Cunningham's thesis is that it should not drop much at all, because there is much more to Berkshire Hathaway than the Oracle of Omaha. So I was definitely interested to start this book.
A word about organization: The challenge of organizing a coherent story around a conglomerate is large, composed of 50 subsidiaries. Larry says that the teacher in him organized the traits at issue as a mnemonic spelling out "Berkshire":
- Hands Off
- Investor Savvy
This framing seemed a little forced to me at times. But I understand its motivation: trying to make sense of commonalities among the the many diverse businesses that comprise Berkshire Hathaway.
My takeaway was this: as I tell my students, successful entrepreneurs face two choices for exit: sale and IPO. If you sell, you lose your autonomy. If you go public, Wall Street expects certain returns and will punish you for failing to deliver.
What if you have a family business and are pretty happy with the way things are, but are worried about looming tax problems when the founder dies? Berkshire Hathaway offers the right kind of firm a third path, one that allows the founders to cash out and yet keep the business running as a BH subsidiary just as it had been independently. Nothing is free, of course, and companies regularly accept a BH bid which is less than competing bids, because they know that they will be able to run the company as they choose. But these select firms use the freedom, shelter from the market, and capital that Berkshire provides to flourish.
I was particularly interested to see the book's account of David L. Sokol's departure from the firm. Sokol, a senior Berkshire exec, bought $10 million in shares in the Lubrizol Corporation and then recommended the company as an acquisition target to Buffett. Cunningham, while obviously a Buffett fan, did not sugarcoat his account of Berkshire's initial missteps in handling what burgeoned into a scandal. Although the SEC failed to prosecute Sokol (which he claimed as vindication), the larger point Cunningham underscores is that Berkshire Hathaway's reputation is its chief asset.
I'll have more to say about that in another post. For now, I'll conclude by saying that this was a timely and accessible book, chock-full of insights and enjoyable to read.
Since reading Barbarians at the Gate in the early 1990s, I have been a huge fan of business histories. Although I have read scores (perhaps hundreds) of business histories, my list of "must reads" is still long. Recently, I decided to read one of the books on that list, The Soul of a New Machine, Tracy Kidder's account of Data General's efforts to build a minicomputer in the 1970s. This book was published in 1981, and it deals with events during my high school years, so it is a great trip down memory lane.
Here is an observation about the founders of Data General early in the book:
Some notion of how shrewd they could be is perhaps revealed in the fact that they never tried to hoard a majority of the stock, but used it instead as a tool for growth. Many young entrepreneurs, confusing ownership with control, can't bring themselves to do this.
Hmm. The distinction between ownership and control is a familiar one in corporate law circles, but this Berle-Means concept is typically applied to large corporations. What does it mean in the startup context?
Chuck O'Kelley examines the connection between entrepreneurship and the Berle-Means corporation in his 2006 article, The Entrepreneur and the Theory of the Modern Corporation, 31 J. Corp. L. 753, but I am curious about viewing this from the other direction. As noted by O'Kelley, the separation of ownership and control is used by Berle and Means to describe firms after the decline of the classical entrepeneur, so it seems somewhat surprising to see Kidder use those terms to describe a startup.
Founders often exert a tremendous influence on a company, even when shares are held by other employees and investors. This control may emanate from their formal positions within the company (CEO, CTO) or perhaps from the respect they are paid from other employees. But I think it is fair to say that ownership matters a great deal in the startup context because it is more concentrated than in the public company context. Thus, to a large extent, ownership is control in a startup.
Near the end of Brigid Schulte's Overwhelmed: Work, Love and Play When No One Has the Time (about which I blogged last month) the author talks about "pulsing." The idea is that humans are designed to work in intense and punctuated bursts. Schulte contrasts this model with the 10-hour-day, work-harder work-longer grind that the ideal worker of the 21st century is supposed to emulate.
What a relief!
I've been a closet pulser for years. I always described it as "getting bored easily," but I can't seem to work at one thing--particularly a writing project--for much more than an hour at a time,. I'm much better off with a 2-hour window of time to get something done rather than a 5-hour window. My peers often lament not having long stretches of time to get some "real writing done", and I nod knowingly, because that's what you're supposed to do. I'm faking, though--in my heart I know I work best in concentrated bursts, and that I inevitably fritter away long blocks of time when I do have them. I always chalked it up to lack of focus, but I guess I work best in pulses.
Schulte also shares that Anders Ericsson's study of young violinists--the basis for the theory that it takes 10,000 hours of practice to be expert at something--actually had as much to say about quality of practice as quantity.
Ericsson's study found that not only did the best violinists practice more, they also practiced more deliberates: They practiced first thing in the morning, when they were freshest, they practiced intensely without interruption in typically no more than ninety-minute increments for no more than four hours a day. And, most important...the top violinists rested more. They slept longer at night and they napped more in the day.
The law firm world wasn't as compatible to pulsing as the academic one, but I would slog away at something for hours, then finally leave my desk late at night only to have a breakthrough when on the way home. American culture increasingly values always being available, always being on--but maybe that's not the way towards better quality output--not to mention life.
I do most of my pleasure reading as I drift off to sleep, which is a large part of why I go to bed so early. It so happens that 2 nights ago our younger dog, Sweet Pea awoke me at 12:30 am with some inexplicable yet insurmountable need to huffle at the bedroom door until I let her out in the backyard, where she spent an hour charging around, eating grass, and doing important other things.
I have 3 children under 7, but sometimes it's the dog that wakes me up at night.
Anyhow, as I lay on the kitchen futon (yes, we have a futon in our kitchen; yes, it's awesome), I decided to start on the next book on my list, courtesy of a book club: Brigid Schulte's Overwhelmed: Work, Love, and Play When No One Has the Time.
Schulte sucks you into her harried Washingtonian life, where she's late to a meeting where the grey-haired male academic tells her she has at least 30 hours of leisure a week. Yeah, right. It's a good read, I'm only partway through--largely because even after Sweet Pea emerged from the night and I was ensconced back in bed, thoughts about the book kept whirling through my head. For 2 hours. Not a good book to drift off to.
My reactions thus far are two-fold and completely contradictory. One part is: "sing it, sister." I too spend large amounts of time harried and trying to catch up with everything work-wise, house-wise, child-wise. Here is Schulte on page 2 "I am always doing more than one thing at a time and feel I never do any one particularly well. I am always behind and always late, with one more thing and one more thing and one more thing to do before rushing out the door." Mmm-hmm.
The second, and contradictory reaction is "there but for the grace of God..." Unlike Schulte, I do have leisure time, and I know it. I credit my job, my town and my husband for that.
This is not to say I'm slacker lawprof kicking back with mai-tais while my students toil. I work hard at teaching, and I'm pretty sure my students know that. This summer I am planning on revising an article I sent out in the spring, writing a spin-off essay from that article, and writing a new article. That's a lot. Yet I do have leisure time. I exercise often. I sit down with the paper over breakfast for 15 minutes every day. I have lunch with colleagues sometimes, or take 15 minutes out of my day to lunch, again over the paper. I chose to leave DC and its frantic lifestyle and head to Athens, Georgia, where the pace is slower and nothing is more than 15 minutes drive away. I've never regretted that choice, and Schulte only made me feel better about it.
Oh, and my husband. Here's another quote from Schulte:
As I began to think more about leisure time, I realized that I kept putting it off, like I was waiting to reach some tipping point: If I could just finish picking all the weeds, chopping the invasive bamboo, cleaning out the crayons and shark teeth and math papers and toys and bits of shells and rocks and too-small clothes in the kids' closets, buy more cat food, fix the coffeepot, complete this story assignment...
Well, you get the drift. Again, I found myself nodding. There's always something more to do, if you're willing to do it. And I probably would try, except that my husband is good at leisure. And he reminds me, by word and by action, that there will never be an end to the work of life. So at around 8, after the kids are in bed, we open up a bottle of wine and have dinner and talk. Just about every night.
So far I'm 3 chapters into Overwhelmed, and I don't know when I'll finish it, since apparently I can't read it at bedtime. The last chapter is titled Toward Time Serenity, so Schulte clearly has more in mind than just diagnosing overwhelmedness. If she's figured out an answer, I'll let you know.
Eric's post on Harvard MBAs as bubble predictors references Young Money, by Kevin Roose, and reminded me that I'd never written about it. The book's a good one, following undergrads who take Wall Street jobs and are essentially made miserable by them. I'd put it in the One-L category of books, in that it's meant to be a humanized tell all about what will happen to you if you do this thing. In One-L, the this thing was Harvard Law School. In Young Money, it's analyst at Goldman Sachs.
The book's well-reported, though it wasn't completely easy to care about well-paid people disliking their jobs, which members of the legal profession will hardly find boat-rocking. But certainly there are some home truths there; I do sense that Roose is right when he says, as he told Ezra Klein:
in a lot of schools it's these scared organization kids going to Wall Street. One thing Wall Street does that's really smart is they actually tell you way earlier than other industries if you got a job. They'll let you lock the job down in the fall of your senior year. So you can take that job on Wall Street or you can gamble on getting something after you graduate....[But] you don't have to pay people a ton of money to come to your program after college if what you're giving them still offers prestige and structure and the sense that they're not signing up for something forever. Teach for America has really approximated the banking model without the money. If what you're seeking is short-term rewards there's no way you'd choose teaching in the Mississippi Delta over working at Goldman Sachs but there's something calling people to do work they find meaningful.
It does ring an interesting bell.
My colleague Eric Orts has just come out with Business Persons: A Legal Theory of the Firm, and I must give it my highest recommendation. Eric's argument is that the independent legal status of the firm is critical to making sense of it - and that its legal personhood does a better job of explaining what firms are doing than do reconceptualizations of them as nexuses of contracts, or as a set of principal-agent relationships. "Without the social technology and 'forms' provided by law, business firms would be indistinguishable from informally organized social groups, clubs, or gatherings of people pursuing similar interests," he writes. The books then tours the many ways that law makes firms distinctive.
My colleague Steve Blum has a nice book out on the financial services that can be facilitated through negotiation skills. It is
- a primer on negotiation skills (that's part 1 of the book)
- a creative application of those skills to investment management (that's part 2)
- a reminder of some of the business school basics of investing (that's part 3)
A nice overview in a couple of different ways, plus some sound advice on dealing with investment professionals (or becoming one, an increasingly popular choice for graduates of some law schools). Anyway, it's available here and here. And you can see Steve's blog here, if you want more.
Hello, everyone. Many thanks to my hosts for the opportunity to post, and to Christine for the kind introduction. I’ll get to the meat and drink of my research interests soon, but tonight I want to talk about a less formal subject. Here in Iowa City we are a week away from Spring Break. That means our third-year students are inching ever so close to graduation. One such student recently put an interesting question to me: what book should he read in the transition summer between law school and the start of private practice?
I thought this question should be easy, but the more I thought about it the more uncertain I became. Should I recommend fiction or non-fiction? Something fun, legal, educational, or practical? I read Alan Dershowitz’ The Best Defense during my gap summer on the advice of my favorite law professor. I’m glad I did, and I found it very helpful in my early days as a litigator. But I’m not sure if it’s everyone’s cup of tea, especially for someone planning to do corporate transactional work.
Eventually my thoughts kept coming back to Hemingway, and in particular to my favorite of his short stories:"A Clean, Well-Lighted Place". It ticks several of my boxes. First, it’s all about change. The author takes less than 1,500 words to run the gamut of human transitions: youth to adulthood; work to retirement; love to loneliness; life to death. Second, it’s so short that it fits easily within a bar review study schedule. Finally, and perhaps most significantly, I think it’s important for every new lawyer to ponder the value of clean, well-lit bars, cafés, and restaurants—especially ones that stay open past 3:00am.
Yet I’m still not sure. It’s a fantastic story, but I'm told it strikes many as depressing, and that’s not the feeling I’m going for.
So, I think I need your help. What book or books would you recommend for someone leaving academia behind to enter the world of corporate law practice? Is there a text or two that you found uniquely helpful, inspirational, or transformative when making the same move?
I look forward to your thoughts, as well as to your company during the next two weeks.
After over four years of work, my book Law, Bubbles, and Financial Regulation came out at the end of 2013. You can read a longer description of the book at the Harvard Corporate Governance blog. Blurbs from Liaquat Ahamed, Michael Barr, Margaret Blair, Frank Partnoy, and Nouriel Roubini are on the Routledge’s web site and the book's Amazon page. The introductory chapter is available for free on ssrn.
Look for a Conglomerate book club on the book on the first week of February!
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If you care at all about the considered use of the English language, you will probably wish to remain at least 10 paces from this book. Its sentences arrive as if prefrozen at a warehouse, and picked up by the author after they’ve fallen from the back of a Sysco truck.
Executives here are “honchos” or “bigwigs.” Wealthy people are “moneybags.” Restaurants are “eateries.” Interiors are “swanky.” A death is a “passing.” The author, a journalistic Will Rogers, has never met a cliché he did not like.
How good does nonfiction writing have to be? It’s a complicated question; there are so many variables. One answer, though, is: better than this. Isn’t there cliché-isolating software publishers can put to use? If not, why not? We need an app for this.
Second-rate writing and second-rate thinking tend to arrive in tandem, like the Captain & Tennille. “The Frackers” has little of nuance to say about geology or engineering. You will not come away with a more sophisticated notion of how hydraulic fracturing or horizontal drilling works.
I've been reading some energy literature of late, and, other than The Son, it's pretty grim going. Oil still awaits its Melville (though it may already have its Burrough, I haven't read that one yet), it appears, though do inform me if you disagree in the comments.
If you'll excuse two barely business-related observations:
- The Son, by Philipp Meyer, might do as a novel about business - it's about 170ish years of a Texas family, with a basic theme that getting frontier-rich required fraud and evil-doing. But it's not an anti-business book at all. Recommended, if you like your epics dark.
- When I was a sprightly young lawyer in Washington in the late nineties, I got the Washington Post and New York Times delivered to my door every morning ... and I read the Post first, because it was more fun than the Times. I knew Post reporters, too, young, interesting, and not at all embarrassed that they weren't lawyers (we hadn't really heard of finance back then in DC). It is amazing how much that paper changed, and changed for the worse - and yet it's still the best single source on how business regulation gets done. I'm hoping it has a rennaisance with new ownership.
Coinciding with Con-Op's Larry Cunningham's book of essays on Warren Buffett, said blog has put together a pretty stellar set of contributions about the investor and his world. It has Berkshire insiders:
● Robert Mundheim, who worked with Buffett and Lorne at Salomon and is now of counsel at Shearman & Sterling
● Donald Graham, Chairman and CEO of The Washington Post Co.
And it has professors
● Kelli Alces (Florida State)
● William Bratton (Penn)
● Deborah DeMott (Duke)
● Jill Fisch (Penn)
● Steven Davidoff (OSU)
Among others, too. It's off to a great start, so do give it a look.
Hot off the presses comes a stimulating way to start the summer for corporate law professors. Cambridge recently published Christopher Bruner’s new book Corporate Governance in the Common-Law World. The book builds on his earlier law review work, including Power and Purpose in the “Anglo-American” Corporation and Corporate Governance Reform in a Time of Crisis.
Bruner lays patient, meticulous siege to functionalist accounts that have occupied center stage in comparative corporate law scholarship. The key moves in his gambit:
¶ Disaggregating the idea of “Anglo-American” corporate law by arguing that British, Australian, and Canadian systems give far more power to shareholders than does the U.S. approach;
¶ Arguing that a functional approach (which has led to predictions that differing social welfare and social democracy concerns explains a divergence between continental European systems and Anglo-American systems) fails to account for the differing approaches among these four common-law countries;
¶ Articulating the further differences among the U.K., Canadian, and Australian approaches; and
¶ Providing evidence that politics, not functional concerns, provides a better explanation for the diverging paths within the common-law world.
Bruner also looks at how the crisis has affected these four common-law countries to different degrees. Harder hit, the U.K. and United States have moved to increase shareholder power within corporations. Although in the introduction Bruner sets out to navigate middle course between “functionalism” and “contextualism,” the book hews much closer to the latter. In doing so, he stages a serious challenge to comparative scholarship that poses grander economic arguments to explain differences and similarities among corporate law regimes.
To my mind, the book also raises a challenge of whether a similar political approach might explain divergences within continental Europe. Moreover, might a politics focus provide an explanation for divergences and convergences well before the latter half of the 20th Century?
Bruner’s Introduction is available on ssrn.