The governance structure of Berkshire Hathaway is remarkably different from that of other corporations, and most of its features do not conform to the “best practices” recommended by experts. Why is this an important exception, and what can it teach us about best practices in governance? Topics, Issues and Controversies in Corporate Governance The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important.

1. stanford closer look series 1
Berkshire Hathaway: The Role of Trust
in Governance
management and Governance Structure
Despite being one of the largest corporations in the
world, Berkshire Hathaway receives relatively little
public attention for its management and gover-
nance structure.1
For the most part, the company
is primarily thought of as the investment vehicle
of Warren Buffett and his partner Charlie Mung-
er. Few realize the size and diversity of its asset
base—which includes insurance (GEICO, General
Re, Berkshire Hathaway), regulated gas and elec-
tric utilities (MidAmerican), railroads (Burling-
ton Northern), manufactured housing (Clayton
Homes), wholesale distribution (McLane), and
many specialty finance, manufacturing, service,
and retail companies—and the manner in which
the company is governed.
Berkshire Hathaway is built on a model that in-
volves extreme centralization of capital allocation
decisions within corporate headquarters and ex-
treme decentralization of operating decisions with-
in individual business units. This is underscored by
the distribution of the company’s employee base:
the corporate office employs 21 individuals, where-
as the business units employ over 250,000. It is the
lowest ratio of corporate overhead to investor capi-
tal among all major corporations (see Exhibit 1).
The primary responsibility of headquarters is
to allocate capital that the business units generate.
For example, if See’s Candies generates pre-tax op-
erating cash flow of $70 million during the year,
it transfers that amount (less any amount required
for capital expenditures) to Omaha for realloca-
tion. Decisions on how to reinvest free cash flow
are made entirely by Buffett—in some cases in con-
sultation with Munger—and are not vetted by any
committees or analysts.
By David F. Larcker and Brian Tayan
May 28, 2010
By contrast, operating decisions are made en-
tirely by the managers who oversee each unit.
Whereas Buffett has complete discretion about how
to reinvest capital at the corporate level, managers
have complete discretion about all operating and
capital allocation decisions within their businesses.
They are not required to meet with Buffett, submit
budgets for approval, or develop long-term operat-
ing plans. Instead, they make all decisions them-
selves, without supervision or corporate control.
Munger describes the Berkshire Hathaway system
as “delegation just short of abdication.”2
The success of this model is predicated on two
conditions: purchasing businesses that are unlike-
ly to need significant attention and working with
managers who are unlikely to need oversight. The
businesses that Berkshire purchases are character-
ized by stable economics, high levels of free cash
flow, and low requirements for incremental capital.3
They have distinct and durable competitive advan-
tages—either in terms of production, distribution,
or economic franchise. They are also built on a cul-
ture of honesty and integrity. As Munger explains,
“We try to buy companies so permeated by a good
ethos that they don’t need a lot of direction and
checking from headquarters.”4
They are led by ca-
pable and honest management, often the same in-
dividuals who founded and still run the company.
In most cases, Buffett insists that the seller retain
a minority interest, so that they remain de facto
owners working in partnership with Berkshire Ha-
thway.
Upon the close of an acquisition, managers are
given simple instructions. They should treat the
business as though they are its sole owner. They
should give no consideration to the accounting
Topics, Issues, and Controversies in Corporate Governance and Leadership
S T A N F O R D C L O S E R L O O K S E R I E S

2. stanford closer look series 2
Berkshire Hathaway: The Role of Trust in Governance
implications of their decisions but focus entirely on
enhancing competitive position and maximizing
free cash flow. They should do nothing to tarnish
the reputation of their company or Berkshire. Buf-
fett believes that this hands-off approach is critical
for a successful long-term working relationship:
“Our job is not so much to select great manag-
ers, because they have this proven record that they
come with. Our job is to retain them…. We are de-
pendent on them. … We can’t run their businesses.
So our job is to make sure that they have the same
enthusiasm, excitement, and passion for their job
after the stock certificate changes hands as they had
before.”5
Managers are paid modest salaries but stand to
receive very significant cash bonuses if performance
goals are achieved. Buffett tailors the compensation
plan to each business, based on its economics and
competitive positioning. Managers are compen-
sated for elements of the business that are directly
under their control (such as growth and profit-
ability of insurance contracts). Particular emphasis
is placed on the ability to return free cash flow to
headquarters. The company does not grant equity-
based awards because their value cannot be as close-
ly correlated to performance as can cash bonuses.6
Still, cash bonuses can reach extreme levels—tens
of millions for superior performance.
By contrast, Buffett and Munger receive modest
compensation. Their salaries are set at $100,000.
They receive no bonuses, options, or restricted
grants. Instead, their economic incentive is driven
by direct holdings of company stock which they
purchased with their own money in the 1960s. As
of year-end 2009, the value of those holdings were
$40 billion and $1.3 billion, respectively. Similarly,
board members receive negligible fees for their ser-
vices and are encouraged to purchase substantial
sums of company stock with their own money. Eq-
uity ownership is intended to align their interests
with those of shareholders (see Exhibit 2).
Corporate Controls and Oversight
The internal controls and oversight mechanisms
at Berkshire Hathaway are nominal in compari-
son to those employed by other corporations. No
due diligence is performed before an acquisition is
completed. In general, Buffett asks that the seller of
a business to suggest a price. If he thinks it is rea-
sonable, he will accept and the deal is closed. Fur-
thermore, purchase decisions are not reviewed in
advance by the board. Munger explains, “Can you
imagine Warren Buffett saying to somebody, ‘Well,
I’m sorry, I have to go back and check with my
directors’? I mean, of course he has to go back to
check with his directors, but he knows what they’re
going to say, and everybody knows that what he
says is going to govern.”7
Buffett is also primarily responsible for enter-
prise risk management. Risk oversight is not dele-
gated to a committee or risk management function.
According to Buffett, “I regard myself as the chief
risk officer at Berkshire.”8
The company’s primary
tool to mitigate enterprise risk is the delegation of
responsibility to managers with proven skill and in-
tegrity. Munger explains, “A lot of people think if
you just had more process and more compliance,
you could create a better result in the world. Well,
Berkshire has had practically no process. We had
hardly any internal audit until they forced it on us.
We just try to operate in a seamless web of deserved
trust and be careful whom we trust.”9
Why This Matters
1. The Berkshire Hathaway model is predicated on
responsibility and trust. How do the company’s
acquisition criteria, operating principles, and in-
centives work together to reinforce those values?
2. The theory of corporate governance is based on
an assumption that self-interested managers will
take actions that benefit themselves at the cost
of shareholders (the “agency problem”), and yet
Berkshire Hathaway is built on the opposite as-
sumption. How should companies take agency
risk into account when designing their gover-
nance systems?
3. The operating principles of Berkshire Hathaway
are in stark contrast to the “best practices” rec-
ommended by governance experts. What does
this say about the reliability of those best prac-
tices? 
1
For more on this topic, see also: David F. Larcker and Brian Tayan,

3. stanford closer look series 3
Berkshire Hathaway: The Role of Trust in Governance
“The Management of Berkshire Hathaway,” GSB Case No. CG-16,
Jan. 01, 2009. Available at: https://gsbapps.stanford.edu/cases/.
2
The DuBridge Distinguished Lecture Series, “A Conversation with
Charlie Munger,” California Institute of Technology, Mar. 11, 2008.
3
MidAmerican Energy and Burlington Northern are two notable ex-
ceptions to this last criterion. For a discussion of how they fit into
the Berkshire model, see the Berkshire Hathaway Annual Report,
2009, Letter to Shareholders. Available at: http://www.berkshire-
hathaway.com/reports.html.
4
Wesco Financial, 2008 Annual Meeting, cited in: Outstanding Inves-
tor Digest, Vol. XXI, No. 4&5, Aug. 31, 2008. Edited lightly for
clarity.
5
Berkshire Hathaway, 2008 Annual Meeting, cited in: Outstanding
Investor Digest, Vol. XXI, No. 4&5, Aug. 31, 2008.
6
In terms of value realized rather than expected value on the grant
date.
7
Keynote speech by Charles T. Munger, Stanford University Direc-
tor’s College, held at Stanford Law School, Jun. 26, 2006.
8
Hathaway, 2008 Annual Meeting, cited in: Outstanding Investor Di-
gest, loc. cit.
9
Wesco Financial, 2007 Annual Meeting, cited in: Outstanding Inves-
tor Digest, Vol. XXI, No. 1&2, Feb. 29, 2008. Edited lightly for
clarity.
David Larcker is the Morgan Stanley Director of the Center
for Leadership Development and Research at the Stanford
Graduate School of Business and senior faculty member
at the Rock Center for Corporate Governance at Stanford
University. Brian Tayan is a researcher with Stanford’s Cen-
ter for Leadership Development and Research. They are
coauthors of the books A Real Look at Real World Cor-
porate Governance and Corporate Governance Matters.
The authors would like to thank Michelle E. Gutman for
research assistance in the preparation of these materials.
The Stanford Closer Look Series is a collection of short case
studies that explore topics, issues, and controversies in cor-
porate governance and leadership. The Closer Look Series
is published by the Center for Leadership Development
and Research at the Stanford Graduate School of Business
and the Rock Center for Corporate Governance at Stan-
ford University. For more information, visit:
http://www.gsb.stanford.edu/cldr.
Copyright © 2012 by the Board of Trustees of the Leland
Stanford Junior University. All rights reserved.

4. stanford closer look series 4
Berkshire Hathaway: The Role of Trust in Governance
Exhibit 1 — Berkshire Hathaway Operating Companies (2009)
Company Employees Company Employees
Berkshire Hathaway Homestate Cos. 591 General Re Corporation 2,513
Berkshire Hathaway Reinsurance Group 523 Kansas Bankers Surety Company 18
Boat America Corporation 379 Medical Protective Corporation 414
Central States Indemnity Co. 408 National Indemnity Primary Group 393
GEICO 23,549 United States Liability Insurance Group 546
Insurance total 29,334
insurance businesses
Company Employees Company Employees
Acme Building Brands 1,947 Kingston (1)
109
Adalet (1)
191 Kirby (1)
549
Altaquip (1)
329 Larson-Juhl 1,594
Applied Underwriters, Inc. 471 The Marmon Group 15,410
Ben Bridge Jeweler 744 McLane Company 15,441
Benjamin Moore 2,380 MidAmerican Energy Company (2)
3,567
Borsheim’s Jewelry 168 MidAmerican Energy Holdings Co. (2)
25
Burlington Northern Santa Fe 35,000 MiTek, Inc. 1,723
The Buffalo News 730 Nebraska Furniture Mart 2,627
Business Wire 498 NetJets 7,226
CalEnergy (2)
360 Northern Natural Gas (2)
878
Campbell Hausfeld (1)
448 Northern and Yorkshire Electric (2)
2,455
Carefree of Colorado (1)
172 Northland 64
Clayton Homes, Inc. 12,133 PacifiCorp (2)
3,158
Cleveland Wood Products (1)
80 Pacific Power (2)
1,164
CORT Business Services 2,248 The Pampered Chef 791
CTB International 1,165 Precision Steel Warehouse 168
Dairy Queen 2,342 Richline Group 2,003
Douglas / Quikut (1)
56 Rocky Mountain Power (2)
2,125
Fechheimer Brothers 677 Russell Corporation 1,744
FlightSafety International 4,140 Other Scott Fetzer Companies (1)
137
Forest River, Inc. 5,355 See’s Candies 3,000
France (1)
80 Shaw Industries 25,492
Fruit of the Loom 26,952 Stahl (1)
99
Garan 4,485 Star Furniture 740
H. H. Brown Shoe Group 1,162 TTI, Inc. 2,603
Halex (1)
96 United Consumer Finance Company (1)
197
Helzberg Diamond Shops 2,147 Vanity Fair Brands, Inc. 2,529
HomeServices of America (2)
2,415 Wayne Water Systems (1)
177
Iscar 9,583 Wesco Financial Corp. 13
Johns Manville 6,411 Western Enterprises (1)
254
Jordan’s Furniture 812 R.C. Willey Home Furnishings 2,250
Justin Brands 793 World Book (1)
191
Kern River Gas Transmission Co. (2)
162 XTRA 523
Non-insurance total 227,758
Corporate office 21
Total Berkshire Hathaway 257,113
non-insurance businesses
(1)
A Scott Fetzer Company
(2)
A MidAmerican Energy Holdings Company

5. stanford closer look series 5
Berkshire Hathaway: The Role of Trust in Governance
Exhibit 2 — Berkshire Hathaway: Compensation and Equity Ownership (2009)
summary Compensation
Note: “All other compensation” includes the value of director fees received by Buffett for serving on the board of The
Washington Post Company in which Berkshire Hathaway has a significant ownership position.
Named Executive Officers Year
Annual
Salary
Annual
Bonus
All Other
Compensation
Total
Compensation
Warren E. Buffett, Chairman and CEO 2009 $ 100,000 - $ 75,000 $ 175,000
Charles T. Munger, Vice Chairman 2009 100,000 - - 100,000
Marc D. Hamburg, CFO 2009 862,500 - 12,250 874,750
Non-Executive Directors 2009 Non-Executive Directors 2009
Howard G. Buffett $ 3,000 Charlotte Guyman $ 7,000
Stephen B. Burke - Donald R. Keough 6,700
Susan L. Decker 3,000 Thomas S. Murphy 7,000
William H. Gates, III 2,700 Ronald L. Olson 3,000
David S. Gottesman 3,000 Walter Scott, Jr. 3,000
equity ownership
Director Class A Class B Total Value
Economic
Interest
Warren E. Buffett 350,000 75,013,134 39,667,367,000 24.3 %
Howard G. Buffett 1,406 841,050 194,970,000 0.1 %
Stephen B. Burke 5 - 496,000 -
Susan L. Decker - 6,250 413,000 -
William H. Gates, III 4,350 77,313,900 5,534,194,000 3.4 %
David S. Gottesman 19,044 2,604,439 2,060,867,000 1.3 %
Charlotte Guyman 100 600 9,959,000 -
Donald R. Keough 70 - 9,943,000 -
Charles T. Munger 13,057 - 1,295,124,000 0.8 %
Thomas S. Murphy 1,310 11,600 130,705,000 0.1 %
Ronald L. Olson 284 15,000 29,160,000 -
Walter Scott, Jr. 100 - 9,919,000 -
Notes: Based on year-end closing prices: BRK.A: $99,190; BRK.B: $66. Shares beneficially owned by William H. Gates, III
includes 77,313,900 Class B shares owned by the Bill & Melinda Gates Foundation Trust.
Source: Berkshire Hathaway, form DEF 14A, filed with the Securities and Exchange Commission, Mar. 11, 2010.