Abstract
I do not attribute the long term financial performance based on the different styles of leadership between General Electric and Berkshire Hathaway. The main difference that could explain the performance differences is how future-oriented Berkshire Hathaway is. Berkshire Hathaway outperformed General Electric over the past 30 years. The differences between the core values of the culture between GE and Berkshire Hathaway is the freedom to make decisions. Jack Welch became the youngest CEO in GE’s history in 1981. Berkshire Hathaway's CEO is Warren Buffett, and he takes a flat 100k salary every year with no bonuses. At GE decisions are made through a chain of command while Berkshire Hathaway gives autonomy. Yes, GE focuses on being lean but not to the extent of Berkshire Hathaway. I contribute this directly to the financial performance of the two companies because Berkshire Hathaway is it for the long hall. The culture of Warren Buffett’s Berkshire Hathaway is very simple. The CEO of GE’s salary is based on performance. Approach to Acquisitions Berkshire Hathaway has a unique six tier criteria in their ways of acquiring companies
General Electric Company is a multinational conglomerate in the United States headquartered in Boston. General Electric’s broad range of business ventures includes additive materials, healthcare, aviation lighting, oil, power, renewable energy, and venture capital financing. Berkshire Hathaway is another multinational conglomerate company based in Omaha, Nebraska. It is known for its chairman and chief executive Warren Buffett. Berkshire Hathaway outperformed General Electric over the past 30 years. Key differences will be looked at organizational leadership, company culture, compensation of CEOs and executives, management oversight, as well as the approach to acquisitions to see if any specific difference leads to Berkshire Hathaway financially outperforming General Electric Company.
Leadership
Leadership in the business world is a trait that cannot be dormant. With strong leadership, goals can be achieved, and productivity can be maximized. Without leadership, efficiency will be at low, and the business will be put at jeopardy. A leader must provide guidance, motivate employees, initiate action, build morals, coordinate employee and organizational needs, as well as delegate responsibilities. Jack Welch became the youngest CEO in GE’s history in 1981. Welch not only was considered a strategic manager but as a leader. He made his employees see his vision and become passionate about it. Welch wanted to break the chains of formality in business. He encouraged employees to lighten up. Meetings are informal not requiring ties or dress clothes. They would brainstorm and hear ideas from all employees no matter the rank in the company. Welch avoided bureaucracy like the plague. He believed that when there are many layers of management tasks cannot be done efficiently. This allows General Electric to be agile and responsive. Berkshire Hathaway is the 11th largest company in the world. It is led by Warren Buffett. Buffett’s leadership style goes against the norm. Buffett employees are not forced into meetings or pressured about results. Warren does not meet with the staff collectively, but he responds with only specific people annually for reports. These particular people will do whatever it takes to please Buffett. A trait that Warren Buffett has is that he will take ownership of the company's mistakes rather than pawning them off on someone else in the company. His style of leadership allows employees to complete tasks without guidance from superiors. Warren Buffett’s leadership strategy is built upon nine doctrines, “1. Focus on the business, and not on growing staff. 2. Ensure that board members relate to shareholders. 3. Benefits come from splitting the CEO and chairman role. 4. Think of the company and not yourself. 5. There is no room for arrogance, bureaucracy, and complacency. 6. Trust is important. 7. Experience is perhaps the only best teacher. 8. Admit mistakes yet stay humble. 9. Praise the people who work for you.' (Joseph Chris 1) There are many differences between the styles of leadership between these two companies. I do not believe either one style of leadership is better or worse. There is more than one way to skin a cat. It has been proven in many other companies that each version of management has yielded success. I do not attribute the long term financial performance based on the different styles of leadership between
General Electric and Berkshire Hathaway.
Culture
Organizational culture is defined as the underlying beliefs, assumptions, values, and ways of interacting that contribute to the unique social and psychological environment of an organization. General Electric culture is rooted by 5 core values: “Customer centricity (highest priority) Leanness Learning and adaptation Empowerment and inspiration Results orientation.” (Thompson 1). Customer centricity is rooted in customer satisfaction directly correlates to success. Leanness is the way GE simplifies processes allowing them to be rapid and responsive. Learning and adaptation encourage the improvement of employees’ capabilities to remain competitive. Empowerment and inspiration go beyond the walls of General Electric. GE involves employees in empowering and inspiring communities. The last core culture value is being results-oriented. GE is always conducting research on the market as well as future demands. They see their current results but strive to surpass them. The culture of Warren Buffett’s Berkshire Hathaway is very simple. It starts with the autonomy to run the business. Buffett gives each of his business units to run as they best seem fit. Buffett does not interfere with the company as long as financial targets are hit. The leader of the business can operate, and resources and support will be provided with little question. Another culture aspect of Berkshire Hathaway is being long-term oriented. Warren Buffett once said “'Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant.'(Buffett 1) Buffett knows success doesn’t happen overnight and is focused on sustainable long-term growth whether it's acquiring new businesses, growth initiative from inside the company or entering new markets. The most important part of a company’s culture according to Buffett is being honest and ethical. No one wants to do business with someone that isn’t trustworthy. Berkshire Hathaway has a close-knit company culture “a strong corporate culture is vital to us at Volaris. We strive to put our employees first because of people matter. You can have the greatest strategies in the world, but if you don’t have the right people in place to execute those strategies, then it’s all for nothing. We also believe in focusing on the customer because solving their problems and listening to their needs is what drives the business forward. That, along with our long-term orientation, has created a winning culture” (Motley 1). The differences between the core values of the culture between GE and Berkshire Hathaway is the freedom to make decisions. At GE decisions are made through a chain of command while Berkshire Hathaway gives autonomy. Yes, GE focuses on being lean but not to the extent of Berkshire Hathaway. The main difference that could explain the performance differences is how future-oriented Berkshire Hathaway is. Warren Buffett is seen as a superhero in the business world about his knowledge and consistent, sustainable growth over the years. GE often gets into business deals that do not withstand for the long hall but look intriguing at the time.
Compensation
General Electric’s CEO is reeling in a huge page check, and it is based upon if the stock price is growing. According to the Wall Street Journal, “WSJ calculates a 50% rise would push GE’s share price to $18.60 and bring the new CEO 2.5 million shares, which would be worth about $46.5 million. If the share price rises at least 150% for 30 trading days, to about $31 a share, Mr. Culp will receive 7.5 million shares or $232.5 million at that price.”(Fortune 1). According to Glassdoor, an average executive makes 250k a year. Berkshire Hathaway's CEO is Warren Buffett, and he takes a flat 100k salary every year with no bonuses.
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An executive in this company makes an average of 230k a year. The main difference in reading the difference between the 2 companies is CEO compensation. By Warren Buffett taking 100k in compensation sends a message to Berkshire Hathaway saying that he is not in it for the money but as a company. The CEO of GE’s salary is based on performance. From the outside, it looks like the CEO of GE is living in the present just hoping the stock market is up 1 day time. The executives are paid about the same, so there is no difference. I contribute this directly to the financial performance of the two companies because Berkshire Hathaway is it for the long hall. Buffett is not chasing a paycheck. He is exceptionally future-oriented which plays a role in performance for a company.
Management Oversight
Berkshire Hathaway’s unique way of operating and managing their operations is different than the competitors in that their model of operating their operations is based on extreme decentralization of operating authority. According to Stanford Business Journal, their description of Berkshire Hathaway’s management oversight is that “ It was a model based on extreme decentralization of operating authority, with responsibility for business performance placed entirely in the hands of local managers”( Larcker, Tayan 1). The types of management styles that Berkshire Hathaway was enforcing were those that had two distinct requirements; for managers to submit financial statement information on a monthly basis and to also send free cash flow generated by operations to the headquarters( Larcker, Tayan 1). Unlike other Fortune 500 companies, Berkshire Hathaway entrusted their operating managers to simply manage their distinct sections of the company without corporate control or supervision. GE on the other hand is organized and run by their board of directors. The GE homepage describes their management process as, “The primary role of GE's Board of Directors is to oversee how management serves the interests of shareowners and other stakeholders”( GE 1). They do this by having adopted cooperate governance principles in that they strive to have their entire board of directors being classified as independent. They do this to allow the board members to have an outside look into the ways the organization is being run, rather than having inhouse executives. An interesting point that GE has made is that “Each independent director is encouraged to visit at least two GE businesses each year typically without corporate management being present”( GE 1). GE in doing this allows these executives to see how day-to-day operations are being conducted and allowing them to look for changes from the outside. The differences between the management oversight of these distinct companies is that Berkshire Hathaway has entrusted their own local managers to conduct day-to-day operations whereas GE has gone a different route. GE has a Board of Directors made up of independent individuals striving to have an outside look into ways that they can improve. The differences between the management styles cannot be compared in which one is better or worse. Although the numbers that Berkshire Hathaway has put up in recent years portrays that their management oversight and process in terms of numbers and production is better. But there is truly no exact way to compare these companies. So in terms of which one is better, I would argue that both are great ways in their oversight of their separate entities.
Approach to Acquisitions
Berkshire Hathaway has a unique six tier criteria in their ways of acquiring companies. The list includes, “Large purchases (at least $50 million of before-tax earnings), demonstrated consistent earning power (future projections are of no interest to us, nor are 'turnaround' situations), businesses earning good returns on equity while employing little or no debt,
management in place (we can't supply it), simple businesses (if there's lots of technology, we won't understand it), an offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown)”( Berkshire Hathaway 1). Another interesting thing that Buffet himself has said that plays into his decision-making is that you wants to look into the CEO or owners eyes to see what he/she has to say about their organization. This is interesting in that Buffet wants to be one-on-one with the person in charge to truly see and hear what they have to say about their organization. Buffett has also been on record saying, “We basically do no due diligence”( Udland 1). This basically means that Buffett has no financial figures beyond those that are publicly available at the time of purchases. GE’s criteria for acquiring companies is unlike Berkshire Hathaway’s in that they have BDs, also known as business development employees that work under each board of director. “These professionals, many from consulting firms, focus on finding, analyzing, and negotiating acquisitions that will contribute to GE Capital’s growth”( Francis 1). The difference between these two companies is that with Berkshire Hathaway, it is mainly Buffet and his partner Charlie Munger who oversee the acquisitions and they are the ones who are mainly looking into ways of investing. Whereas with GE, it is the board of directors and their BDs that are associated in the process of approaching companies to be acquired. A similarity between the two companies is that both want the companies that they acquire to be run correctly as well as they both want managers that can be involved in the proper running of the organization for the long haul. Although they have different criteria’s when it comes to acquiring companies, the affect that their individual approaches have on the affect in terms of the long-term financial performance is very similar in that they both are looking for companies to acquire that will, in the end, positively affect the pockets of their stockholders.
Conclusion
Summary
The differences between the core values of the culture between GE and Berkshire Hathaway is the freedom to make decisions. By Warren Buffett taking 100k in compensation sends a message to Berkshire Hathaway saying that he is not in it for the money but as a company. From the outside, it looks like the CEO of GE is living in the present just hoping the stock market is up 1 day at a time. I contribute this directly to the financial performance of the two companies because Berkshire Hathaway is in it for the long haul while GE is just working to stay even.
Works Cited
- Berkshire Hathaway Inc. Acquisition Criteria. (2014, July 17). Retrieved April 8, 2019, from http://www.berkshirehathaway.com/20 00ar/acq.html
- Chris, J. (2015, September 14). 9 Warren Buffett Leadership Style Doctrines. Retrieved from http://www.josephchris.com/9-warren-buffett-leadership-style-doctrines
- Dzombak, D. (2014, September 28). 25 Best Warren Buffett Quotes. Retrieved from https://www.fool.com/investing/general/2014/09/28/25-best-warren-buffett-quotes.aspx
- Francis, R. A. (2019, April 04). Making the Deal Real: How GE Capital Integrates Acquisitions. Retrieved April 7, 2019, from https://hbr.org/1998/01/making-the-deal-real-how-ge-capital-integrates-acquisitions
- GE Has a New Turnaround Plan: Make the CEO Incredibly Rich If Its Stock Finally Rises. (n.d.). Retrieved from http://fortune.com/2018/10/05/ge-ceo-compensation-lawrence-culp/
- Governance. (1970, January 01). Retrieved April 9, 2019, from https://www.ge.com/investor-relations/governance
- Investopedia. (2019, March 12). Why Doesn't Berkshire Hathaway Pay a Dividend? Retrieved from https://www.investopedia.com/ask/answers/021615/why-doesnt-berkshire-hathaway-pay-dividend.asp
- Larcker, D., & Tayan, B. (2009). The Management of Berkshire Hathaway. Retrieved April 9, 2019, from https://www.gsb.stanford.edu/faculty-research/case-studies/management-berkshire-hathaway
- Structured for Success: Berkshire Hathaway. (n.d.). Retrieved from https://www.volarisgroup.com/blog/article/structured-for-success-berkshire-hathaway
- Thompson, A. (2017, October 20). General Electric's (GE) Organizational Culture for Customer-Centric Simplification. Retrieved from http://panmore.com/general-electric-ge-organizational-culture-customer-centric-simplification
- Udland, M. (2015, October 13). WARREN BUFFETT: We don't do due diligence - we just look into your eyes. Retrieved April 7, 2019, from https://www.businessinsider.com/warren-buffett-on-berkshires-acquisition-process-2015-10
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