Berkshire Hathaway recently held their annual shareholder’s meeting and it was a special event at that, celebrating 50 years of Buffett taking control of Berkshire and turning it into the investment empire it is today.
Buffett and other shareholders certainly have much to celebrate, up 2,850,000% since it started. Not only that, the “Oracle of Omaha” has also crafted a not-so-small cult of personality around his folksy personality and value orientated approach. That style has worked well for investors and I certainly salute his success in generating returns for his shareholders.
But on this 50th anniversary occasion, with adulations everywhere, it’s important to take a small critical look at Buffett and Berkshire
and see if it’s worthy of all that praise. Nobody is perfect and to ignore potential failings is a disservice to all. That said, what are some of the most common criticisms leveled against Buffett?
For all the talk from Buffett about the average Joe and their plights, at the end of the day he is not one of you. He is the 2nd richest person in the world with a $70 billion fortune. He also owns many consumer-facing companies that are out for one thing — profit. It may not be the short-term cutthroat profiteering that characterizes some industries like investment banking or cable Internet providers but it is still all about money in the end. Often times that means he’s in favor of management decisions that are cold and calculating.
None may exemplify those tendencies better than Buffett’s recent dealings with Brazil’s 3G Capital with whom Berkshire collaborated on its recent Kraft
, Heinz , and Burger King acquisition deals. Those deals have been rife with massive layoffs, questionable tax-avoidance strategies, and downright hostile employee policies.
At H.J. Heinz, more than 7,000 employees have been axed within 18 months of the acquisition, Bloomberg reports. Hundred have been fired at Burger King, at least 300 from the corporate headquarters alone since 3G took over in 2010, the Wall Street Journal said. And it’s not like 3G’s tactics were any secret: In late 2008 it led InBev’s takeover of Anheuser-Busch, quickly cutting 1,400 jobs.
While mass layoffs are hardly a new occurrence during acquisitions, these stand out for two reasons. One: the sheer size and hard-hitting nature of 3G Capital takes austerity to new levels. With its “zero-based budgeting” strategy, 3G often replaces previous management wholesale, eliminating waste like corporate jets and company freebies. But then 3G goes further by slashing office amenities and scrutinizing trivial matters such as employee use of color printing or bathroom supplies.
These morale killers stand out particularly because of Berkshire’s involvement, a company known for a more gentle hand such as promises to allow management free reign in their operations and to avoid sweeping cuts at companies they acquire. On the contrary, Buffett has on several occasions — including during the Q&A portion of his latest shareholders meeting — complemented 3G on its practices, not quite a gentle loving grandpa figure. Read more on the hard questions Buffett faced.
Another area Buffett where has come under criticism is related to the financial crisis. Despite the often holier-than-thou attitude regarding risk-taking and derivatives, calling them “financial weapons of mass destruction”, he was and is a frequent user of them. During the height of the 2008 crisis, Berkshire sold more than $2.5 billion worth of credit default swaps.
And Berkshire played a role in inflating the crisis itself. Moody’s, the rating agency which counts Berkshire as its largest owner, played a key role in the questionable debt and derivative ratings which inflated the mortgage and subprime market. They were subsequently sued and settled.
Playing on the other side, Berkshire also is the largest stakeholder in Wells Fargo, another key player in the subprime crisis and partly responsible for the resulting housing market collapse. These allegations were also eventually settled to the tune of billions of dollars after lawsuits from various federal authorities. Of course, you wouldn’t hear much of these issues from Buffett; he has after all made a pretty penny on these investments.
In addition, many other allegations have also popped up such as with Berkshire-owned Clayton Homes and its predatory lending policies. Buffett has of course completely rejected any possibilities of bad practices occurring, an interesting assertion considering his self-professed lack of involvement in those businesses.
Though Berkshire is not without its blemishes, at the end of the day none of these faults are a killer issue on the company itself. They alone are not reasons to buy or sell Berkshire’s stock and they don’t implicate Buffett as an evil corporate cutthroat.
No, what these say is that Buffett in the end is a shrewd businessman, not a gentle corporate Santa Claus or a grandpa CEO. So when you’re celebrating Berkshire’s 50th anniversary and cheering your returns, remember that he’s a great investor, not a saint.
View more information: https://www.marketwatch.com/story/just-because-warren-buffett-is-a-success-dont-overlook-his-blemishes-2015-05-12