Collection: Charlie Munger - #213 'The Downfall of Big Bureaucracies'



[Transcript]

BECKY QUICK 00:00

Shareholder named Rob writes in, he says, "how do you value Mr. Gensler and the SEC’s role in protecting the integrity of the American financial system?"


CHARLIE MUNGER 00:08

Well, it’s hard to fix.


What happens, of course, is that people rationalize their own way of making a living. There’s some moral compromise in most activities that people are in where they make a living, and particularly so in things like finance, wealth management, and so forth.


And of course, the people making the decisions care more about their own families than they care about the people whose money they’re managing, because that’s just the way human beings are constructed.


And that means that when you hire somebody else to manage your money, to take care of your old age, it’s very hard to get the job done right. It’s very difficult.


Nowadays, every director in a big company gets $300,000 a year. We arranged all this wonderful "independence." A man who needs $300,000 extra year as a director is not independent. The one thing you can guarantee is he’ll try to stay a director. I don’t think that’s an ideal system. And I don’t think there’s anything easy to do about it. I just think it’s hard to get things managed as well as they should be.


I was – In the early days of my life, I was a little bit on the fringes of the motion picture industry. And I would say practically everyone sort of took advantage of the shareholders. And that was just the culture. And that is just deeply into human nature that people are going to behave that way. And of course, it makes it hard to run a proper civilization.


If you look at Berkshire and Daily Journal – look at the Daily Journal Corporation; Charlie Munger age 98, Gerry Salzman age 83. Enormous delegations of powers to Gerry Salzman.


As I say, the Berkshire Hathaway system of managing a subsidiary is just short of abdication. And look at how well it’s worked. Of all the newspapers in the United States, most of them are going out of business. The Wall Street Journal will survive. The New York Times will survive. The digital newspaper of Thomson Reuters will survive. But most of the newspapers are gonna go out of business.


And yet, in that climate, this little Daily Journal Corporation is one business is dying, and we have all this liquid wealth and marketable securities, and we got another business that we’re trying to make into a respectable big business. It’s quite an achievement. If there were 500 newspaper companies there are maybe two or three that have a result like that.


And look at how old the people are that have done it. Neither Gerry nor I ever took one penny out of the Daily Journal all the years we worked here. No director’s fee, no president’s fees, no expenses, no nothing. And Gerry’s been a miracle. Wearing five or six different hats at once and so far doing everything. And very little cost.


And Berkshire has like 30 people in headquarters who aren’t internal auditors. Look at how well Berkshire has done. It’s hard to run a bureaucracy that doesn’t get terrible slowness and terrible waste and terrible pondering.


And I don't know how to – it’s a very serious problem.


Just imagine, think of the big bureaucracies that have died: US Steel, Eastman Kodak, Federated Department Stores, Sears Roebuck. And yet some things have come through and survived. In some cases, the whole business had to die and they had to take the capital out and own a new business to survive.


That’s what Berkshire did. Look at the three companies that Berkshire had. They all went out of business. And yet, we wrung enough money out of them before they died. Berkshire now has more audited net worth on its balance sheet than any other corporation in the United States. Now, that’s weird.


And we don’t have this bureaucracy that other places have. There isn’t anybody at headquarters to be bureaucratic. Just a little handful of people running an Empire. And I don’t think there’s any chance that the rest of the world is going to be like Berkshire. I think we were kind of a fluke that lasted for a while.


And the Daily Journal is a mini Berkshire. What are the chances that a little newspaper in Los Angeles would be as prosperous as it is after all this struggle which is making all the other newspapers go broke?


(Source: https://youtu.be/8RxLj9OVqLo)

 

[YAPSS Takeaway]

How does Berkshire Hathaway manage its subsidiary?

"Berkshire Hathaway system of managing a subsidiary is just short of abdication." ~Charlie Munger