Margin of Trust

Cunningham, who edits The Essays of Warren Buffett, and Cuba examine Berkshire Hathaway as a management system rather than as an investment record. Their thesis is that Berkshire substitutes trust for the control mechanisms that other large corporations use, and that this produces a real cost advantage.

The specific practices they document are the substance. Berkshire's head office has around two dozen people managing a company with hundreds of thousands of employees. Subsidiary managers receive no instructions on operations, no budgets from the centre, and no requirement to consult on decisions other than capital allocation above a threshold. Acquisitions are made without auction processes, without extensive due diligence, and frequently on a handshake followed by a short contract. Compensation is set individually for each subsidiary based on what that business can actually control, rather than on a corporate scheme or on Berkshire's share price.

The authors argue the cost savings are large and measurable: no corporate staff, no consultants, no investment bankers on most acquisitions, minimal legal expense, and no compliance apparatus beyond what regulation requires. They also argue trust attracts a specific kind of seller, namely family owners who care where their business ends up, which gives Berkshire access to deals at prices auctions would not produce.

The obvious question, which the book addresses but does not settle, is whether this is replicable or depends on Buffett personally, on Berkshire's permanent capital and on its reputation. The authors are sympathetic and the failures, including several subsidiary problems and the Precision Castparts write-down, get less attention than the successes.

Corporate-governance scholar and longtime George Washington University law professor; edits The Essays of Warren Buffett and writes on Berkshire and quality investing.

The Essays of Warren Buffett reorganises decades of Berkshire shareholder letters by subject - governance, accounting, mergers, valuation - turning scattered annual commentary into a usable manual. The later books extend the analysis to Berkshire's decentralised structure and to the traits that make a business durable enough to hold for decades.

University of Delaware, Quality Shareholders Group, George Washington University