Totem Talk’s Guide for Company Research – Berkshire Hathaway Inc.

Company Research – Berkshire Hathaway Inc.

Who among you have heard the name Warren Buffet? I bet people on value investing world are raising not only their hands but also their feet. But do you know that aside from the fact that he holds the title of “Oracle of Omaha”, there’s this company toounder his management? What is it? It’s Berkshire Hathaway Inc (BRK.B)

So for the much needed information regarding the background and management of the company, here’s Karla and Meriam from our Stories team to present their company research report. So what are we waiting for? Let’s get started.

Who started the company and why?

Berkshire Hathaway Inc

Berkshire Hathaway traces its roots back to a textile manufacturing company established by Oliver Chance in 1839. Who is Oliver Chance? As from what I learned from Meriam, this man was the founder of several New England textile manufacturing companies in the early 19th century. 

The company originated as Valley Falls Company, which was then renamed Berkshire Fine Spinning Associates. In 1955, Berkshire Fine Spinning merged with Hathaway Manufacturing Company. Warren Buffett began buying stocks on 1962 and eventually took control of this textile manufacturing firm. After the expansion into an insurance industry and other investments on 1967, it resulted to Berkshire Hathaway Inc.

Since we mentioned something about a textile manufacturing, the two pretty ladies of our Research team believed that they should share what is meant by this? According to Karla and Meriam, textile manufacturing is a major industry. It is based in the conversion of three types of fiber into yarn, then fabric, then textiles. These are then fabricated into clothes or other artifacts. There are many variable processes available at the spinning and fabric-forming stages coupled with the complexities of the finishing and coloration processes to the production of wide ranges of products.

What is the background of Berkshire Hathaway Inc.; its history and development?

I’m so much interested to see how this company started to a not big one then started to get its name known. What are their milestones? Let’s find out on Karla’s detailed timeline below.

Berkshire Hathaway Inc

In addition, Berkshire acquired the following:

  • September 2011 - Lubrizol Corporation (Lubrizol)
  • June 2011 - Wesco Financial Corporation
  • July 2012 - Berkshire’s The Lubrizol Corporation acquired Lipotec SA

What is the nature of Berkshire Hathaway Inc. business?

You might be thinking that this company is more of textile manufacturing. And you are not alone since I thought that too. Surprisingly, Karla and Meriam cleared my mind and brought to my knowledge what Berkshire Hathaway Inc’s nature of business is. Here it is.

Berkshire Hathaway Inc

Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha Nebraska, United States. The company is known for its control by investor Warren Buffett who is the company’s chairman and CEO.

It owns subsidiaries engaged in a number of diverse business activities. The core of it is in Insurance conducted on both a primary basis and a reinsurance basis. The company wholly owns GEICO, Dairy Queen, Fruit of the Loom, Helzberg Diamonds and NetJets, owns half of Heinz and has significant minority holdings in American Express, M & T Bank, Procter and Gamble and IBM.

Subsidiaries, as defined, are a common feature of business life, and all multinational corporations organize their operations in this way. Examples include holding companies such as Berkshire Hathaway Time Warner, or Citigroup; as well as more focused companies such as IBM, or Xerox Corporation. These, and others, organize their businesses into national and functional subsidiaries, oftentimes with multiple levels of subsidiaries.

Who is running company and their background?

Brilliant people are of course one of the most important aspects of every company’s success. With that, here’s Meriam and Karla’s detailed report as to who runs the company as well as their background.

CEOMr. Warren Edward Buffet is the chairman of the board, chief executive officer, and the controlling person of the corporation. He has been corporation’s director since 1965 and has been its chairman and chief executive officer since 1970. He is an American business magnate, investor, and philanthropist and is widely considered the most successful investor of the 20th century. He was ranked as the world’s wealthiest person in 2008 and as the third wealthiest person in 2011. Mr. Buffett is called the “Wizard of Omaha”, “Oracle of Omaha”, or the “Sage of Omaha” and is noted for his adherence to the value investing philosophy. On April 11, 2012, he was diagnosed with prostate cancer for which he completed the treatment in September 2012. Can’t help but to say “Wow’ with his achievements.

CFONext in line is Mr. Charles Thomas Munger, the vice chairman of the board of Berkshire Hathaway Inc., since 1978. He is an American business magnate lawyer, investor, and philanthropist. Between 1984 and 2011, he was chairman of the board of directors and chief executive officer of Wesco Financial Corporation. Buffett describes Munger as “his partner” who served as president of Wesco Financial Corporation between 2005 and 2011. He is also chairman of the board of directors of Daily Journal Corporation and a director of Costco Wholesale Corporation. Mr. Munger studies mathematics at the University of Michigan and serves in the US Army Air Corps as a meteorologist trained at Caltech. He entered Harvard Law School where he was a member of the Harvard Legal Aid Bureau.

I wondered what was meant by a business magnate so I sought some help over the Internet. I found out that when you were given this title, you are referred to as a very wealthy businessperson, especially one who made his/her fortune in a single industry. For example, one may be called an oil tycoon or a steel tycoon.

Who is directing the company? How are the committees structured?

Berkshire Hathaway Inc. has four committees namely: audit, compensation, nominating and corporate governance. These four committees won’t function well without the head or the chairman. Who are they? Let’s meet each of through Meriam’s report.

Mr. Thomas S. Murphy is a director and chairman of audit committee. He is an American broadcast executive, and was chairman and chief executive officer of Capital Cities / ABC, Inc. until 1996. He serves as Honorary vice chairman and trustee of New York University. He served as a trustee of Save The Children Federation, Incorporated. He also served as a director of Walt Disney Co. from 1996 to March 3, 2004. Mr. Murphy graduated from Cornell University with B.S. in 1945, and Harvard University with an M.B.A. in 1949. He served in the U.S. Navy, and worked at Kenyon & Eckhardt and Lever Brothers.

Then here is Walter Scott Jr. who serves as the director and chairman of governance, compensation and nominating committee. He served as the CEO of Level 3 Communications Inc. He has been an independent director of Berkshire Hathaway Inc. since 1988. He served as CEO of MidAmerican Energy Holdings Company (“MEHC”) from January 8, 1992 to April 19, 1993. From 1979 to March 1998, he served as the president and CEO of Peter Kiewit Sons’ Inc. Mr. Scott has been the chairman of Omaha, Nebraska-Telecommunications and Internet Services. He has been a director of MidAmerican Energy Holdings Company since June 1991. He also served as a director of WorldCom from December 1996 to July 1997.

Corporate governance committee is a committee comprised of some of the members of a board of directors. Under the 2002 Sarbanes-Oxley legislation, companies are required to have all of the members of the corporate governance committee be independent from the company. At a basic level, that means they can’t be board members who are employed by the company. Companies have a grace period until 2004 to make certain that all of their members are independent. A company that is controlled by another company is not subject to the full independence requirement. The corporate governance committee must have a charter that specifies the purpose, responsibilities, and evaluation procedures of the committee. This committee also may be incorporated with or under the nominating committee.

Thanks to Karla for that relevant information.

How do they make money?

You may as where do they get their revenue? What are their sources?  As what Meriam mentioned to me, the company derived a relatively small amount of revenues and earnings from international markets.

Basically, its investment income is consists of interest and dividends earned on cash and investments of company’s insurance businesses. Insurance premiums for prospective property or casualty and health insurance and reinsurance are earned over the loss exposure or coverage period, in proportion to the level of protection provided. Revenues from sales are recognized upon passage of title to the customer. Service revenues are recognized as the services are performed.

Investment income is the income coming from interest payments, dividends, capital gains collected upon the sale of a security or other assets, and any other profit that is made through an investment vehicle of any kind.

How do they fit in the industry they operate in?

Competition is inevitable so staying on top or on track on your business is a great challenge every businessman should be prepared of. How does Berkshire Hathaway Inc manage to deal in the industry? Karla would let us know through her research below.

Each of the company’s operating businesses face intense competitive pressures within markets in which it operates. Competitors on insurance and reinsurance industry may be from domestic or foreign as well as licensed or unlicensed. The company competes on the basis of reliability, financial strength and stability, ratings, underwriting consistency, service, business ethics, price, performance, capacity, policy terms and coverage conditions. To name its top 3 competitors, these are HM Capital Partners LLC, KKR & Co. LP, and The Blackstone Group LP.

On the side note, reinsurance is insurance purchased by insurers from other insurers to limit the total loss an insurer would experience in case of a disaster. It is purchased by an insurance company (the “ceding company” or “cedant” or “cedent” under the arrangement) from one or more other insurance companies (the “reinsurer”) as a means of risk management sometimes in practice including tax mitigation and other reasons.

Who are their suppliers and customers?

Berkshire’s insurance businesses provide insurance and reinsurance of property and casualty risks world-wide and also reinsure life, accident and health risks world-wide. Reinsurance activities are marketed directly to clients without involving a broker or intermediary. Insurers may market, sell and service insurance policies in the states where they are licensed, which were referred to as admitted insurers.

The company has other services such as: Life or Health Reinsurance, Railroad Business, Utilities and Energy Manufacturing, Service and Retailing Businesses, Finance and Financial Products.

Though reinsurance activities don’t require a broker or intermediary, let’s still define this. According to Meriam and Karla, insurance broker can be anyone who has completed the required training for obtaining a license in the state where he will be selling products. Brokers are licensed by the state and are required to complete continuing courses throughout their career to keep up to date with changes in laws and practices.

What is their workforce like?

In a centralized organizational structure, decision-making authority is concentrated at the top, and only a few people are responsible for making decisions and creating the organization’s policies. In a decentralized organization, authority is delegated to all levels of management and throughout the organization. An organization’s degree of centralization or decentralization depends on the extent of decision-making power that is distributed throughout all levels. Where do Berkshire falls? Meriam will let us acquainted to that.

BRK’s operating businesses are managed on an unusually decentralized basis. Basically there is no centralized or integrated business function (such as sales, marketing, purchasing, legal or human resources). Recruiting and retaining qualified personnel is important to all of company’s operations.Berkshire and its consolidated subsidiaries employ approximately 288,500 persons world-wide, of which 24 are located at the corporate headquarter.

How do they treat their employee? What is the pay and working condition like?

Heads up guys for this section. This is pretty interesting since I learned from Karla and Meriam that Berkshire Hathaway Inc’sprogram regarding compensation of its executive officers is different from most public company programs. Only directors who are neither an employee of the company or a subsidiary nor a spouse of an employee receive compensation for serving on the board.

Director fees are nominal and are limited to immediate compensation. Most of the company’s subsidiaries individually sponsor defined benefit pension plans covering certain employee. Code of business conduct and ethics applies to all Berkshire Hathaway directors, officers and employees, as well as to directors, officers and employees of each subsidiary of Berkshire Hathaway.

Directors fees received for performing services as a director of a corporation are self-employment income if you are not an employee of the company and must be reported on your tax return. It does not matter whether the directors fees are for going to director’s meetings or for serving on committees established by the directors.

 CITATION

Who started the company and why?

http://en.wikipedia.org/wiki/Oliver_Chace

http://en.wikipedia.org/wiki/Berkshire-Hathaway

http://www.fundinguniverse.com/company-histories/berkshire-hathaway-inc-history/

http://en.wikipedia.org/wiki/Warren_Buffett

What is the background of the company; its history and development?

https://www.google.com/finance?q=NYSE%3ABRK.B&ei=WKFwUaD0N8uvkgXFNg

http://www.fundinguniverse.com/company-histories/berkshire-hathaway-inc-history/

http://www.fundinguniverse.com/company-histories/berkshire-hathaway-inc-history/

What is the nature of the business?

https://www.google.com/finance?q=NYSE%3ABRK.B&ei=WKFwUaD0N8uvkgXFNg

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

http://en.wikipedia.org/wiki/Berkshire-Hathaway

http://www.fundinguniverse.com/company-histories/berkshire-hathaway-inc-history/

Who is running the company and their background?

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

http://www.reuters.com/finance/stocks/officerProfile?symbol=BRKa&officerId=19966

http://en.wikipedia.org/wiki/Warren_Buffett

http://www.reuters.com/finance/stocks/officerProfile?symbol=BRKa&officerId=19972

http://en.wikipedia.org/wiki/Charlie_Munger

Who is directing the company; how are the committees structured?

http://investing.businessweek.com/research/stocks/people/committees.asp?ticker=BRK/A

http://investing.businessweek.com/research/stocks/people/person.asp?personId=5534255&ticker=DIS&previousCapId=255251&previousTitle=BERKSHIRE%20HATHAWAY%20INC-CL%20A

http://en.wikipedia.org/wiki/Thomas_Murphy_%28broadcasting%29

http://investing.businessweek.com/research/stocks/people/committees.asp?ticker=BRK/A

http://investing.businessweek.com/research/stocks/people/person.asp?personId=225051&ticker=LVLT&previousCapId=255251&previousTitle=BERKSHIRE%20HATHAWAY%20INC-CL%20A

http://investing.businessweek.com/research/stocks/people/committees.asp?ticker=BRK/A

http://investing.businessweek.com/research/stocks/people/committees.asp?ticker=BRK/A

How do they make money?

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

How do they fit in the industry they operate in?

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

http://www.hoovers.com/company-information/cs/company-profile.Berkshire_Hathaway_Inc.3462a6b9ee9e407c.html

Who are their suppliers and customers?

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=BRKa

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

What is their workforce like?

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

http://www.sec.gov/Archives/edgar/data/1067983/000119312513030238/d474751d424b2.htm

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

How do they treat their employee; what is the pay and working condition like?

http://www.sec.gov/Archives/edgar/data/1067983/000119312513109017/d467360ddef14a.htm

http://www.sec.gov/Archives/edgar/data/1067983/000119312513109017/d467360ddef14a.htm

http://www.sec.gov/Archives/edgar/data/1067983/000119312513109017/d467360ddef14a.htm

http://www.berkshirehathaway.com/govern/ethics.pdf

http://www.sec.gov/Archives/edgar/data/1067983/000119312513087679/d484968d10k.htm

 

Researched by: Meriam
Written by: Meriam and Karla
Edited by: Maydee

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