Warren Buffett views himself as a capital allocator above anything else. His primary responsibility is to allocate capital to businesses with good economics and keep their existing management to lead the company.
When Buffett acquires a controlling interest in a business, he makes clear to the owner the following:
* He will not interfere with the running of the company.
* He will be responsible for hiring and setting the compensation of the top executive.
* Capital allocated to the business will have a price tag (a hurdle rate) attached.
This process is to motivate owners to send excess capital that does not return more than its cost to Berkshire headquarters rather than investing it at low returns.[citation needed] This cash is then free to be invested in opportunities that offer higher returns.
Buffett's hands-off approach has held strong appeal and created room for his managers to perform as owners and ultimate decision makers of their businesses. This acquisition strategy enabled Buffett to buy companies at fair prices because the sellers wanted room to operate independently after selling.
Besides his skills in managing Berkshire's cash flow, Buffett is skilled in managing the company's balance sheet. Since taking over Berkshire Hathaway, Buffett has weighed every decision against its impact on the balance sheet. As of 2005, he has succeeded in building Berkshire into one of the nine companies that are still rated by S&P as AAA, the highest credit rating achievable and thus, with the lowest cost of debt. Buffett takes comfort in his belief that, for the near future, his company will not be one of those shaken by economic or natural catastrophes. He has repeated over the years that his catastrophe insurance operation is the only one he knows of that can keep the checks clearing during a financial turmoil.
(source: http://en.wikipedia.org/wiki/Warren_Buffett)
