Lawrence Cunningham Lawrence Cunningham

Just because several stocks in Berkshire Hathaway’s portfolio have seen steep declines over the last few years, don’t infer that Warren Buffett, 89, has lost his mojo, insists Lawrence A. Cunningham, Buffett friend and research law professor at George Washington University, in an interview with Think Advisor.

Cunningham, who edited the international bestseller “The Essays of Warren Buffett: Lessons for Corporate America” (3rd edition-2013) and is business friends with the Oracle of Omaha, phones the legendary investor from time to time to pass along acquisition opportunities. He has attended every Berkshire shareholder meeting for the last 25 years.

In the interview, noting that Buffett is innately “picky” plus cautious about whom he trusts, Cunningham details why Greg Abel, who runs Berkshire’s energy business, is his likely successor. He then goes on to explain the firm’s overall succession plan.

Cunningham’s new book is “Dear Shareholder: The Best Executive Letters from Warren Buffett, Prem Watson and Other Great CEOs” (Harriman House-April 2020).

In our conversation, Cunningham discusses four of the 20 CEOs whose shareholder letters compose the book. He explains why, for example, Buffett wrote: “A hyperactive stock market is the pickpocket of enterprise”; opines that Amazon founder Jeff Bezos could be overzealous in his pursuit of a “lean” company and that Morningstar “may be at an inflection point.”

The professor’s most recent research article (March 3, 2020) is “The Case for Empowering Quality Shareholders” — that diminishing cohort who “load[s] up and stick[s] around,” as Cunningham, quoting Buffett, writes.

Prior to entering academia, Cunningham practiced corporate law in New York City. He is the founding faculty director of GWinNY, a business law program for Wall Street attorneys-to-be.

ThinkAdvisor recently held an interview with Cunningham, speaking by phone from Amagansett, Long Island, New York. Discussing letters written by former IBM CEO and visionary Virginia Rometty, he argued that the business tech firm, “a bit of a laggard” in recent years, is in no need of “revolutionary leadership, just new stewardship.”

Here are highlights:

In an essay you wrote published on May 29, you noted the current debate about whether Warren Buffett, 89, has “lost his touch” based on “big declines” in many Berkshire Hathaway stocks. For the last few years, the portfolio has underperformed the S&P 500. Your thoughts?

I don’t think he’s losing his mojo or his sense for quality businesses or quality people. Yes, Berkshire has lagged for two, three, four years. And I’m sure that will happen again. I’ve seen this debate many times over 25 years when Berkshire has lagged and people said, “The old guy has lost it!” only to see him turn around and prevail. This is a tough time, and he’s not immune.

At Berkshire’s shareholders’ meeting last month — held virtually — Buffett reportedly expressed deep concern and caution. What’s your take?

He was the most somber I’ve ever seen him in the 25 years I know him. He reflected the mood of the moment because of the pandemic. Every business has been hit. Berkshire is invested in every artery of commerce, so I wasn’t terribly surprised that he was blue.

I imagine he was also unhappy that the meeting couldn’t be held in the traditional festive way, correct?

It was just heartbreaking and a psychic blow for him. He was crushed. That meeting is almost a rite of spring.

The word is that Greg Abel, vice chair of non-insurance operations and executive chair of Berkshire Hathaway Energy, 58, likely will be Buffett’s successor. Do you agree?

He’s the most logical person. More than anybody, I think he has the sense of Berkshire and the track record. He’s got the skill set that’s closest to what’s needed. He understands Berkshire’s culture. He’s very smart in an acquisition, and the division he runs is a large, profitable capital-intensive business. He’s done a good job year-in and year-out allocating its capital [by] reinvesting in plants and products as well as making acquisitions.

How do you think Buffett feels about Abel on a gut level?

He’s got Warren’s trust. Warren’s a picky guy. He doesn’t trust a lot of people. But when he does find someone he trusts, he trusts them with his life. Greg is a very sensible, rational person — very much like Buffett. I think he’ll do a great job.

Does the succession plan call for the firm’s leadership structure to remain the same?

No. Warren’s job will be split into basically four pieces: Greg will be making acquisitions. Warren’s role as chief investor will go to an investment manager; he’s been grooming two for a couple of years. The chairman-of-the-board job — high-level decisions and strategies — is going to Warren’s son, Howard.

What about the shareholder role?

Warren has been a controlling shareholder for a long time. His estate will slowly allocate his ownership [to charities] for about 12 years through the Gates Foundation. So, in effect, he’ll continue to be an influential shareholder. Then, gradually [the estate] will sell [the stock on] the market.

Does Charlie Munger, Berkshire’s vice chair and Buffett’s partner for decades, have a role in the succession?

He’s 96. Everyone agrees his brain is sharp as can be, though his body isn’t. He’s on Berkshire’s board and is probably the third or fourth largest shareholder after Warren. If Warren went nuts tonight or died tomorrow, although Charlie might be able to help a bit in a transition-caretaking operation, he can’t possibly begin making capital allocation decisions and evaluations. That will go to Greg.

Will there be a place at all for Munger?

Greg would call him maybe every day or every week, as Warren does. One of Warren’s sources of success was having Charlie as a sanity check. When he had an idea about making an acquisition or investment, he’d run it by Munger. Many times he would say, “That’s a terrible idea. Don’t do it!” In fact, Munger’s nickname is “the Abominable No-Man.”

Is Munger’s function applicable only to his and Buffett’s special relationship?

Greg needs someone like Munger. Maybe it will be the investment people. As the years roll along, one of the most interesting things will be finding that person who’ll play the Munger [role] to Greg.

In your new book, you’ve featured several shareholder letters that Buffett wrote over nearly four decades. What’s his salient theme?

Everything orbits around the idea of ownership. The number one message is that he’s an owner-oriented manager and that the shareholders are partners and owners of the business. He thinks of himself as equal with the shareholders. He doesn’t pay himself anything extra — like stock options — that any other shareholder doesn’t get. He wants to build value for the owners over a very long time; so he doesn’t waste effort on quarterly phone calls or predicting annual results.

In his letter of 1983, Buffett wrote: “Investors should understand that what’s good for the croupier is not good for the customer. A hyperactive stock market is the pickpocket of enterprise.” What did he mean?

He’s concerned about traders and advisors. A lot of investment professionals charge very significant fees for giving advice or managing money, and sometimes they generate even more fees by excessive trading activity. He emphasizes that a lot of these people are honest and hardworking but that as a group or industry, they trade more than they should. That’s what he means by “pickpocket”: They’re charging [too many] fees or costs for all that trading.

He wrote that 37 years ago. Is it still his thinking?

[The issue] is nearly as bad as it ever was: enormous excessive trading, especially these days with artificial intelligence and [computer] programs. There’s a lot of waste, and that’s what Warren is warning his shareholders to say away from.

You’ve included letters from Jeff Bezos, Amazon’s founder and CEO, who stressed in 1997 the firm’s focus on customers and that reducing prices was a goal. Does the latter still hold true?

Driving low costs has been part of his theory of how the company will make more money — to be the low-cost provider able to deliver all products and services at the lowest possible cost. Bezos has stuck with that model, which Buffett shares. Both say they want to run their companies for the benefit of the shareholders — and to do that, you have to look out for the customers. In Bezos’ case, he’s saying, “I want to charge them as little as I possibly can.”

Before the pandemic, Amazon was criticized for allegedly mistreating employees; during the pandemic, it reportedly failed to take sufficient measures to protect workers from coronavirus and has been disproportionately overworking them. How does that square with Amazon’s being such a model company?

The prevailing criticism sounds like a different kind of place from the letter of 2015, in which Bezos was celebrating an employee culture — that they were all pulling in the same direction with scale, efficiency and a customer-first attitude. If that [above] criticism is true, then he’s got a problem. I guess it’s a combination of something true about it along with the overwhelming pressure of the pandemic.

Amid the virus, several employees have been quite vocal about what they termed unsafe working conditions. Does Bezos’ “customer-first” attitude take precedence over the health and safety of his employees?

The business has done gangbusters, which is incredibly hard to do in this coronavirus world. So it wouldn’t surprise me that a machine like that trying to work so hard would have a lot of upset people.

In his 1997 shareholders’ letter, Bezos said he was working to maintain “our lean culture.” Perhaps he has gone overboard on that score?

It might be that some of the leanness is a little bit of zealotry to be watched, or it could be that the company is just such a galactic force that critics will pounce. It’s probably a combination. Amazon has become a lightning rod for criticism for almost anything they do.

Joe Mansueto, who founded Morningstar in 1984, perpetually wrote in his shareholders’ letters that he wanted to ever-expand the firm’s economic moat — that which sets it apart from other companies. Is the firm as differentiated now as it was years ago?  

I think Joe created a competitive advantage that’s hard to beat; for example, “star” branding. Almost every year, he wrote that their strategy was preserving and widening that moat.

When Mansueto passed the CEO baton to Kunal Kapoor in January 2016, Kapoor said in his shareholder letter: “We were one of the original fintech firms.” Now that there are numerous fintech firms, can Morningstar still boast having a unique moat?

I don’t think they were caught flatfooted. They’ve mostly managed to maintain their leverage and leadership. But Morningstar may be at an inflection point of whether what Joe built can last or whether his special skill mattered [to make that difference]. He groomed Kapoor. It will be interesting to see if he’s able to maintain their moat and grow.

Virginia (Ginni) Rometty, who joined IBM in 1981 as a systems engineer, became president and CEO in 2012. This year she was replaced as CEO by Arvind Krishna, and James Whitehurst was named president, effective in April. Rometty reportedly came up short in delivering growth. Why have you included her letters in your book? 

A lot of IBM-ers were disappointed with her tenure as to the bottom line. But I think she was an excellent steward of the IBM culture, and her letters reveal a lot of that. Her views were visionary, and they stand up. She wrote several times that AI is “augmenting” human capabilities, not replacing them. Her take on that was reassuring and sensible. Her letters contain valuable lessons.

She wrote that “cognitive and cloud are two sides of the same coin” and, seven years ago, that the cloud “will reshape our industry.” Krishna was formerly head of IBM’s cloud and cognitive software business. So is it safe to say that he’ll stick with Rometty’s vision, or might he stress something else?

I don’t know for sure. But IBM needs to continue to be the best friend of business — the solution strategist. That’s how they made it.

For so long, IBM was a dominant company. Lately observers have been wondering about its standing and direction. What’s your take?

I think it was a transitional [issue] both before Rometty became [CEO] and during her tenure. IBM is like a giant ocean liner; it’s not as nimble as, say, Amazon or even Apple. It’s a massive operation with a lot of history, and making that kind of [firm] nimble is hard. Rometty energized it. AI and cloud have been doing very well. Overall, the company has been a bit sluggish, a bit of a laggard. But I don’t want to blame her for all of that.

How is IBM doing right now? 

Well enough. It’s not as if they’re a General Electric where it turned out they’re an internal disaster. IBM is robust and strong, thriving and prosperous.

What does it need most?

I think maybe some fresh steering will be positive. It doesn’t really need revolutionary leadership, just new stewardship.

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