WHEN BERKSHIRE STUMBLES—or is perceived to stumble—it attracts outsize attention. This occurs for two reasons that pose a challenge for any large trust-based corporation.
First, the general public is skeptical of corporations, especially large ones. Skepticism persists even for decentralized companies like Berkshire, better seen as a collection of smaller businesses, rather than a single mammoth one.
Second, policy experts extol control and hierarchy over trust so that when a trust-based organization such as Berkshire falters, critics pounce.
These forces pose challenges to large companies with lean structures. They may invest little in traditional public relations campaigns common in corporate America. Modest staffing may be enough for the occasional challenges that arise.
In such decentralized structures, moreover, units facing more frequent exposure may opt to provide more full-time public relations staff. Within Berkshire, a few examples will illustrate this structure, featuring major businesses involved in insurance, finance, and energy.
In 2013, an unfounded exposé attacked Berkshire’s practice of generating substantial investable funds from insurance float. This refers to funds derived from policy premiums, which are paid upfront, unlike claims, which need to be paid only much later, if at all. Buffett frequently brags about Berkshire’s use of this leverage.
A reporter turned the strategy around on Berkshire. He portrayed Berkshire’s approach as giving insurance personnel perverse incentives to do everything possible to avoid or delay paying legitimate claims so they could hold float longer. The reporter even asserted that staff had acted in bad faith as a result.
The focus of the exposé, by Mark Greenblatt of Scripps, was National Indemnity Company’s (NICO) specialty business in retroactively reinsuring long-tail asbestos and environmental risks, giving a dozen illustrations from the thousands of policies it wrote. The illustrations involved legal disputes among policyholders, corporate defendants, the original insurer, and Berkshire’s companies.
The piece spotlighted lawsuits charging bad faith in payment delays or denials, including lawsuits by policyholders against the ceding insurers under the original insurance policies or against NICO alleging wrongful interference with those policies (“tortious interference with contract”).1 The story quoted malicious charges from claimants and their lawyers and insurance industry executives, blaming Berkshire’s float philosophy for the problems.
Greenblatt had reached out to Berkshire and NICO personnel for comment, but the recipients did not grant interviews and time constraints made them unable to respond to every written question he posed. Within days of publication, Berkshire emailed Greenblatt to explain various inaccuracies in the story but, shortly thereafter, Scripps emailed Berkshire to say it stood by it.2 Two weeks later, Berkshire publicized a rebuttal, asserting “bias and lack of professionalism” in the report.
For example, the piece wrongly suggested Berkshire controlled the defense of an asbestos case when the corporate defendant did; incorrectly insinuated that Berkshire unreasonably resisted settling cases by focusing on 100 percent of the amount a plaintiff sought rather than Berkshire’s fractional share among multiple defendants; and credited critical comments of an insurance claims executive without appreciating potential bias from his involvement in disputes with Berkshire.3
Despite Berkshire’s refutation, such allegations reach the public and can resonate. Corporate reputations are shaped. And the Scripps story continued to have legs. In January 2014, a lawyer from K&L Gates collated the cases in a presentation to the American Bar Foundation.4 It is not obvious that Berkshire would have done better if it had a more traditional public relations department to respond to the allegations. After all, other insurers such as AIG have also been accused of slow-pay and no-pay practices and, despite such traditional functions, fared no better.5
More to the point, Berkshire acts as if it is small, its decentralized structure makes it feel that way, and that structure maintains its trust-based culture. But to outsiders, whether political opponents or the public at large, it is a Goliath. Managers must evaluate how to address the trade-off between meeting infrequent but outsize attacks and overstaffing to fend them off.
Finance
Berkshire and several of its subsidiaries make good political targets. Take a 2015 campaign against Clayton Homes, maker and financier of manufactured homes.6 Writing a piece sponsored by a political activist, the Center for Public Integrity in the Seattle Times, Daniel Wagner and Mike Baker alleged that Clayton’s home sales team channeled buyers into dubious home mortgages. They claimed customers were offered few or no alternative financing options, terms were seductive (including low down-payment requirements), defaults and foreclosures were high, and collection practices were aggressive.7
Clayton promptly issued a response disagreeing with every negative assertion in the piece.8 It stressed its policies of customer protection while acknowledging that, in a minority of cases such as those the writers portrayed, customers facing periodic life challenges have difficulty repaying loans and have faced foreclosure. The authors responded with a point-by-point rebuttal.9At the Berkshire annual meeting five weeks later, Buffett also repudiated the piece and, again, one of the writers responded with continued skepticism.10
The real reasons behind the piece later emerged to be more political than first appeared. At the time of the report, Congress had begun debating regulations applicable to manufactured housing loans. After the financial crisis of 2008, the Dodd-Frank Act added disclosure and timing requirements to such loans bearing high interest rates, which Congress had been considering repealing as onerous and costly.
Clayton and other industry leaders supported repeal, while some homeowner and consumer groups were opposed. On one side, the manufactured housing trade association stressed the importance of unregulated access for lower income people to this kind of housing, while consumer advocates urged regulation to protect the impecunious from costly housing loans.11
Although the original report did not mention these points, the writers added the theme in a story in mid-May—linking their original assertions to Clayton’s incentives in the political debate and making it clear that they were on the other side of that debate. Thus, it finally appeared that the authors wrote a piece of political advocacy, not investigative journalism, and targeted Clayton from ulterior motives, not as neutral reporters of facts. Notably, it also came out that one of the writers, Wagner, had an undisclosed conflict of interest: his sister was a lawyer representing plaintiffs in lawsuits against Clayton Homes.12
As with the exposé concerning NICO, this story suggests the challenges smaller segments of massive institutions face: the risks of overstaffing a public relations department to meet every challenge versus commanding those resources as needed. At Berkshire, the balance is struck with a combination of parental backstops to address periodic media or political crises and subsidiary media resources that can be deployed as needed. At other subsidiaries, facing recurring political battles, a larger public relations staff is warranted, such as with Berkshire Hathaway Energy, discussed next.
Energy
Berkshire Hathaway Energy maintains a coterie of public relations and lobbying professionals. This is worthwhile as the company’s business often places it at the center of important national policy debates. These debates span from consumer energy prices to climate change and fossil fuels versus renewables.
One such debate, concerning solar power, occurred in Nevada and affected Berkshire’s local public utility, NV Energy. At issue was how much credit residential solar users get for electricity they generate for transmission back to the power grid. State law provided for aggregate credits up to 3 percent of the utility’s historical peak load for such “net metering” credit.13
As long as statewide solar generation was less than that, all solar users earned full credit; if the limit were exceeded, new solar users would not get the credit. Solar advocates sought to boost the cap, arguing it would soon be reached and stressing the need for economic incentives to sustain solarization. NV Energy resisted, forecasting reaching the cap much later and noting the need to avoid having those without solar panels paying more for energy than those with solar panels.
Both sides lobbied vigorously and engaged in a public relations campaign. And both sides were accused of overdoing it. At a public hearing on the issue, for example, lawmakers accused the solar industry of sending “aggressive” emails criticizing specific people, prompting a leading solar advocate to apologize publicly for his staff’s work.14
The accusations against NV Energy went beyond that company to target Berkshire itself and especially Buffett, turning the local story into a David and Goliath match shaded by assertions of overzealous capitalism. One headline read that “Warren Buffett is sending mixed messages on green energy,” contrasting Buffett’s boasts of Berkshire investments in renewables with NV’s position in the Nevada debate—and quoting one source as declaring “It always comes down to money, even if it looks kind of hypocritical.”15
Editors may have liked the storyline pitting consumer-loving, tree-hugging do-gooders against the monopolistic profiteers at Berkshire. In fact, however, the duller reality was the complex and contestable public policy of transitioning from fossil fuels to renewables. Berkshire has a dog in that fight, and NV Energy is one of the many Berkshire Hathaway Energy subsidiaries actively engaged in the process.
It would be absurd to believe, however, that energy scientists and business executives alone complete the dialogue and process everything that the energy company requires be said. For that, the company needs public relations specialists and lobbying professionals on staff. Berkshire Hathaway Energy does, and this story shows that it can pay for itself.
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Not all subsidiaries need full-time public relations staff, but a few do. A decentralized structure enables each subsidiary to meet its own needs. Within a larger organization that might attract outsize attention, providing as-needed parental support and subsidiary deployment may suffice and avoid overstaffing or bureaucracy. For those more regularly exposed to media scrutiny or political debate, a full-time permanent public relations team may be warranted, in which case, the parent company can remain uninvolved.