The General Electric Company and Berkshire Hathaway are both companies who are involved in many unrelated businesses, and have similar corporate strategies but have had markedly different financial results over the past twenty years.

QUESTION

The General Electric Company and Berkshire Hathaway are both companies who are involved in many unrelated businesses, and have similar corporate strategies but have had markedly different financial results over the past twenty years.

G.E.’s total revenues grew from $90.8 billion in 1997 to $122.1 billion in 2017 (34% over the 20 years); Berkshire Hathaway’s revenues grew from $10.4 billion in 1997 to $242 billion in 2017 (a growth of 222.7% over 20 years).

Over the same period twenty-year period, G.E.’s net profits grew from $8.2 billion in 1997 to $8.0 billion in 2017 (before massive write-offs due to restructuring and other related costs, which resulted in a net loss of $6.2 billion). At the same time, Berkshire Hathaway’s profits grew from $1.9 billion in 1997 to $44.9 billion in 2017, or by 226%.

G.E.’s stock price at the end of 1997 was $24.76 and, at the end of 2017, was $17.45. A loss of 30% over the twenty years. G.E. shares now trade between $7.00 and $8.00 a share. G.E. shares traded at an all-time high of $155 per share (split-adjusted) in 2000.

Berkshire Hathaway’s stock price (class B shares) at the end of 1997 was $22.74 and $198.22 at the end of 2017. A gain of 89% over the 20 years.

Thomas Edison founded G.E. in 1892, and Berkshire Hathaway was founded and is still run by Warren Buffett in 1965, but began as a cotton mill in 1888.

G.E. and Berkshire Hathaway have (or have had) both consumer goods and industrial businesses.

G.E. has 313,000 employees world-wide, and Berkshire Hathaway has 360.000.

Both companies have had an unrelated diversification strategy for some time, and both have made numerous acquisitions in unrelated businesses as well as some related businesses, and have interests in various segments of the financial services industry (banking, insurances, and financing). Both companies also have investments and interests in international operations.

The overriding question to be answered by this analysis paper is why Berkshire Hathaway has performed so much better than General Electric during the past twenty years when both companies have had similar strategies.

To find some answers to this question, this paper should look at the following issues:

1. Leadership: What role did leadership play in the long-term financial performance of the two companies? What has been the G.E. leadership style? What has been Berkshire Hathaway’s leadership style? How would you describe the differences in the leadership style of the two companies during the twenty years? Do these differences affect long-term financial performance? Explain how and why.

2. Culture: Are their differences in the culture of each of the organizations that might explain performance differences? What is G.E. culture? What is the Berkshire Hathaway culture? What are each company’s values? Do these differences explain performance differences? Explain how and why.

3. Compensation: What are differences in compensation and compensation plans for the CEO’s and other executives of the two companies, and how might that contribute to differences in performance? Explain how and why

ANSWER

A Comparative Analysis of General Electric and Berkshire Hathaway: Leadership, Culture, and Compensation

Introduction

This analysis paper aims to explore the factors that have contributed to the divergent financial performance of General Electric (G.E.) and Berkshire Hathaway over the past twenty years, despite their similar corporate strategies. Specifically, we will examine the role of leadership, culture, and compensation in shaping the long-term financial outcomes of both companies.

Leadership

Leadership plays a crucial role in determining the direction and success of an organization. General Electric and Berkshire Hathaway have exhibited contrasting leadership styles throughout the analyzed period. G.E. experienced multiple leadership changes, with a focus on short-term financial results and aggressive expansion into diverse industries. This approach led to significant challenges, including massive write-offs and restructuring costs.

In contrast, Berkshire Hathaway has been consistently led by Warren Buffett, known for his long-term investment perspective and a prudent approach to acquisitions. Buffett’s leadership style is characterized by patience, discipline, and a focus on intrinsic value (Samuel, 2023). This approach has allowed Berkshire Hathaway to make informed investment decisions, leading to sustained profitability and growth.

The differences in leadership styles between the two companies have undoubtedly impacted their long-term financial performance. G.E.’s frequent leadership changes and short-term focus may have hindered strategic decision-making and prevented the development of a cohesive vision. Conversely, Buffett’s steady leadership and emphasis on long-term value creation have contributed to Berkshire Hathaway’s success.

 Culture

Organizational culture plays a significant role in shaping employee behavior, decision-making, and overall performance. General Electric and Berkshire Hathaway exhibit distinctive cultures that may account for their divergent financial outcomes.

G.E.’s culture has historically been characterized by a focus on performance metrics and financial targets (Kruk et al., 2018). This results-oriented culture may have contributed to short-term thinking and a lack of emphasis on sustainable growth strategies. Furthermore, G.E.’s culture has been criticized for its hierarchical structure and bureaucracy, which may have hindered innovation and adaptability.

In contrast, Berkshire Hathaway’s culture emphasizes integrity, long-term thinking, and decentralized decision-making. Buffett has fostered a culture that encourages autonomy, personal accountability, and a commitment to shareholder value. This culture may have facilitated a more agile and entrepreneurial approach, enabling Berkshire Hathaway to identify promising investment opportunities and adapt to changing market dynamics.

The disparities in organizational culture between G.E. and Berkshire Hathaway likely influenced their respective financial performances. G.E.’s performance-oriented culture may have prioritized short-term gains over sustainable growth, while Berkshire Hathaway’s focus on integrity and long-term thinking fostered a more stable and successful business model.

Compensation

Executive compensation plays a pivotal role in driving organizational performance and aligning the interests of leaders with shareholders. Differences in compensation plans for CEOs and executives between G.E. and Berkshire Hathaway can shed light on their financial outcomes.

G.E. had a complex compensation structure, often favoring short-term performance metrics such as earnings per share (EPS) and revenue growth. This approach incentivized executives to focus on short-term results, potentially overlooking the long-term sustainability of the business (Groysberg, 2023). The compensation plans at G.E. may have encouraged risky decision-making and hindered strategic planning.

In contrast, Berkshire Hathaway has been known for its more conservative and straightforward approach to executive compensation. Warren Buffett famously pays himself a modest salary and aligns his interests with shareholders through significant personal shareholdings in the company. This approach incentivizes long-term thinking and discourages excessive risk-taking.

The disparities in compensation plans likely contributed to the differing financial performances of G.E. and Berkshire Hathaway. G.E.’s focus on short-term metrics may have driven executives towards risky strategies, while Berkshire Hathaway’s more aligned and long-term compensation structure may have fostered stability and prudent decision-making.

Conclusion

In conclusion, the contrasting financial performances of General Electric and Berkshire Hathaway over the past twenty years can be attributed to various factors. Leadership styles, organizational cultures, and compensation plans have all played significant roles in shaping the outcomes of these companies. G.E.’s frequent leadership changes, results-oriented culture, and complex compensation structure may have hindered long-term financial success. In contrast, Berkshire Hathaway’s stable leadership, long-term focus, and conservative compensation approach have likely contributed to its superior performance. Understanding these factors provides valuable insights into the impact of leadership, culture, and compensation on the financial outcomes of large, diversified companies.

References

Groysberg, B. (2023, May 4). Compensation Packages That Actually Drive Performance. Harvard Business Review. https://hbr.org/2021/01/compensation-packages-that-actually-drive-performance 

Kruk, M. E., Gage, A. D., Arsenault, C., Jordan, K., Leslie, H. H., Roder-DeWan, S., Adeyi, O., Barker, P. M., Daelmans, B., Doubova, S. V., English, M., Garcia-Elorrio, E., Guanais, F. C., Gureje, O., Hirschhorn, L. R., Jiang, L., Kelley, E. F., Lemango, E. T., Liljestrand, J., . . . Pate, M. (2018). High-quality health systems in the Sustainable Development Goals era: time for a revolution. The Lancet Global Health, 6(11), e1196–e1252. https://doi.org/10.1016/s2214-109x(18)30386-3 

Samuel, N. (2023). Warren Buffett and the Art of Long-Term Investing: A Strategy Overview. Picture Perfect Portfolios. https://pictureperfectportfolios.com/warren-buffett-and-the-art-of-long-term-investing-a-strategy-overview/