What the Berkshire playbook can teach CFOs

One of the world’s most-watched shareholder letters debuted a new author last week.

When Warren Buffett stepped down as CEO of Berkshire Hathaway at the end of last year, he handed the keys (and the pen) to Greg Abel. The PwC alumnus and employee of Berkshire since 2000 published his first annual shareholder letter on February 28.

In the letter, he outlined a commitment to upholding Buffett’s legacy and the business philosophy of prioritizing shareholders’ interests. The 18-page letter also went granular on everything from capital discipline to specific companies and industries.

“I give him a gold medal for laying out the technical aspects of the company,” Macrae Sykes, portfolio manager at the Gabelli Financial Services Opportunities exchange-traded fund, told Barron’s. “The letter is very comprehensive, his knowledge is incredible which is not a surprise, but still impressive to see.”

And for CFOs, Abel laid out a syllabus of financial leadership. Here are three key principles for CFOs to consider.

Minimize bureaucracy. Berkshire gives its managers “the independence to focus relentlessly on their business,” Abel wrote. But in return for that autonomy, it expects “accountability and integrity in performance.”

Buffett was known for his hands-off management of companies. At the company’s 2014 annual meeting, Charlie Munger, the then-vice chair of Berkshire Hathaway, said, “by the standards of the rest of the world, we overtrust. So far it has worked very well for us.”

And Abel is planning on continuing that “decentralized leadership” by attracting the best autonomous managers who can deliver results independently.

A strong balance sheet is a strategic asset. Berkshire holds over $370 billion in cash and Treasuries, with minimal debt. Abel said this gives the company freedom to “respond swiftly when opportunities arise.”

“It allows us to act decisively, invest when others are tentative or fearful, and stand firm when financial storms roll through,” he wrote.

Only invest in what you understand. In the letter, Abel lays out Berkshire’s capital allocation principles, and it might be something CFOs want to print out and tape over their desktop.

The first is to “invest in businesses that we thoroughly understand, with durable advantages and long-term economic prospects.” The second is to work with “high integrity leaders who understand their customers and act like owners,” and the third is to “avoid businesses that undermine the fabric of society or could jeopardize Berkshire’s reputation.”

Berkshire’s reputation is paramount to Abel; he devoted an entire section in the letter to integrity and on how it’s a quality to be earned and maintained.

As Buffett said in 1991 congressional testimony, “Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”