Warren Buffett Made a Big Bet On an ‘In-Your-Face’ CEO
Warren Buffett weaves through Omaha’s convention center with a scrum of TV reporters. Berkshire Hathaway Inc., the conglomerate he’s run for five decades, is holding its annual shareholder meeting, and the place is crammed with displays for some of the businesses it owns: Geico, BNSF, Fruit of the Loom, See’s Candies.
“Good morning, Mr. Buffett,” hollers a cowboy jumping through a lasso on a stage for a Western-wear subsidiary. Several onlookers bite into ice cream from Dairy Queen, another Berkshire company, never mind that it’s 7 a.m.
The 85-year-old billionaire isn’t having any. Instead, he makes his way to some hulking pieces of metal displayed on pedestals at a booth for Precision Castparts Corp., his latest baby. He bought the Portland, Oregon-based company for $37 billion in January, one of his biggest deals ever. Precision makes the guts of aircraft engines and other complex parts primarily for the aerospace industry. It doesn’t have the name recognition of a consumer brand, but it’s a lucrative niche that had become even more so under Chief Executive Officer Mark Donegan.
“What did we buy?” Buffett asks, walking up to a broad-shouldered man in a pinstripe suit.
It’s a made-for-TV introduction for Buffett’s newest CEO. And Donegan, with a close-cropped gray beard, is playing his part. For years, Buffett has relied on managers like him to run Berkshire’s far-flung operations. Buffett gives the executives lots of autonomy and often brags about their accomplishments, calling the group “all-stars.”
Donegan, 60, a former Villanova University football player who devoted most of his career to Precision, shares many qualities with other Berkshire managers: He’s a low-profile CEO with a great track record, relentless about staying ahead of the competition. During the 13 years he led Precision as a publicly traded company, its stock climbed 20-fold, annual revenue quadrupled to $10 billion and he bought dozens of businesses, consolidating a position as a key supplier to Boeing Co., Airbus Group SE and General Electric Co. It helped him attain a cult status among investors. Barron’s named him one of the world’s best CEOs in 2014 alongside JPMorgan Chase & Co.’s Jamie Dimon, Amazon.com Inc.’s Jeff Bezos and Buffett himself.
Behind the numbers, though, something more brutal is going on. For years, Donegan has traveled the globe, sometimes bullying staff during quarterly reviews at Precision plants. Bloomberg News spoke with 15 current and former employees—some at the most senior levels of the organization—as well as half a dozen people with knowledge of how the company is run. Those who know the CEO best describe a manager who’s highly effective but at times strains basic decency.
These people, most of whom asked that their names not be used for fear of retaliation, say they have witnessed Donegan using profanity and violent language. One heard him threaten to stab someone in the eyes with a pencil. Another says the CEO threatened to rip an employee’s arms off so he could hit the person with the bloody stumps. On more than one occasion, the people say, he has called male employees “c--ts.”
It’s a bruising approach to management that’s at odds with Buffett’s folksy image of a billionaire who downs cans of Cherry Coke. What’s more, these people say, Donegan has a taste for luxury that’s out of sync with his new boss’s well-publicized frugality. Precision got the latest Gulfstream, even as Donegan pinched pennies from factories. While Buffett has lived in the same house since the 1950s, Donegan has spent some of his wealth on vacation homes and sports cars.
Current and former employees say they put up with the sometimes difficult working environment because Precision pays generously. Some of these people say they respect Donegan and ultimately found him fair. The CEO could be helpful in coaching managers through problems at factories and drove himself as hard as he pushed people, according to one person. Outside of reviews, others say, he could be kind, offering to give colleagues a lift on the jet or listening to complaints from workers.
Precision declined to answer questions about Donegan’s behavior or about how he has spent his money. In a statement, the company said, “There are numerous things that are factually wrong with these anecdotes,” without elaborating. Buffett didn’t respond to repeated requests for comment. Berkshire is scheduled to report earnings Friday. It will be the first full quarter including Precision’s results.
None of the harsher aspects of Donegan’s personality are on display in Omaha in April. As the TV cameras roll, Buffett explains why he wanted to buy the company. Donegan, he says, spends about 1,000 hours a year on his jet so he can keep tabs on his business.
“You could talk to hundreds of institutional investors, and you wouldn’t hear one word that’s knocking them,” Buffett says. “They have a pristine reputation. And this is the guy that’s done it.”
Donegan plays humble: “Basically, we’re committed to our factories,” he tells the reporters. “We want to be there to see it, touch it, feel it.”
A reporter asks what it’s like to work for Berkshire’s famous CEO.
“It’s nice to have somebody who has enough confidence in you,” Donegan responds, “that you can do your job.”
A few minutes later Buffett moves on to another display. The crowd follows him, and Donegan is left standing alone.
Berkshire’s newest all-star spent most of his career working in an obscure corner of manufacturing. After studying accounting at Villanova, Donegan got a job at GE just as Jack Welch started reshaping the company with aggressive cost-cutting and dealmaking. In 1985, Precision recruited one of Donegan’s bosses, Bill McCormick, to join as president. Donegan soon followed him.
The business had been run for decades by its founder, an engineer and Harvard MBA named Ed Cooley, who spun it off from an Oregon company that supplied chain saw parts in the 1950s to focus on investment casting. The process starts by making a wax pattern that’s dipped in ceramic slurry. When it hardens, the wax is melted out and the metal is cast in the shell. By the 1960s, Precision was supplying parts for GE aircraft engines from a low-slung factory southeast of downtown Portland.
“When I got to Precision, it was very, very old-fashioned,” McCormick says. It was run like “a family-owned business. The owner, who is a wonderful, wonderful person, was very paternalistic and didn’t hold people accountable.”
McCormick, named CEO in 1991, had a simple antidote: a companywide system of metrics. Every factory started keeping the same set of detailed daily records.
“I wanted to be more competitive, more differentiated,” McCormick says. To do so, he thought Precision should be the lowest-cost producer. Managers had to wring expenses out of their operations every quarter. McCormick made regular rounds to each factory. The culture was “in-your-face, full-body contact,” he says. “People would walk out of the reviews with their armpits sweating... It was ‘why, why, why, how, how, how?’ Accept no excuses.”
The company also expanded aggressively. It started producing parts for industrial gas turbines and bought a forging company called Wyman-Gordon that had a long history supplying the aerospace industry. Donegan kept climbing the ranks, eventually becoming president of that business. He did a good job, McCormick says, so he was named operating chief in 2001. A year later, when McCormick retired, Donegan became CEO.
When Donegan took the reins, he kept McCormick’s management system and embarked on an acquisition spree. He bought companies that made fasteners for aircraft and others that provided metal for its parts. In 2012, he agreed to buy a titanium supplier for $2.9 billion.
“They basically took the lower tiers of the supply chain—forgings and castings and basic raw materials—and they have consolidated that whole space,” says Kevin Michaels, an aerospace industry consultant with AeroDynamic Advisory.
One motivation for these deals was the management system. The company had gotten so effective at pushing its factories that margins often expanded after it bought a business. “They’re maniacs about operational improvement,” says Michaels. “That comes right from Mark Donegan.”
All that pressure meant managers would go to great lengths to hit budget targets. Employees described offices filled with decades-old furniture that looked more shabby than vintage. Working on weekends and holidays wasn’t uncommon. At one U.S. factory, the receiving dock was shut at the end of some quarters to avoid booking extra inventory, according a former employee. Buildings would be scoured for scrap metal to raise a few thousand dollars, and unused equipment was auctioned on eBay.
McCormick declined to describe Donegan’s management style, but he says he was impressed by how deeply his successor cut costs. “I was relatively relentless,” McCormick says. “But he was a lot more relentless.”
Wall Street liked the results. In June 2014, shares hit an all-time high of $275.09. Donegan—and lots of other employees—cashed in. From 2003 to 2014, he made about $150 million from stock sales, regulatory filings show.
Former employees say he’d drive a company-issued Cadillac Escalade to work but was buying much fancier wheels for his time away from the office. His collection has included a Ferrari and an Aston Martin, according to two people who saw the cars or heard him talk about them.
Donegan gave back, too. In 2012, he and his wife pledged $2.5 million to fund scholarships to La Salle Catholic College Preparatory, a high school outside Portland. Mostly, though, former executives say, he kept a low profile. He owned a mansion overlooking the Willamette River. But on weekends, he’d often fly in the company jet to vacation homes on Lake Coeur d’Alene, Idaho, and in Los Cabos, Mexico.
Business was so good that, by 2013, Donegan was ready for an upgrade: Hamilton Aviation, a Precision subsidiary that operates its fleet of aircraft, registered a Gulfstream G650 that year with the Federal Aviation Administration.
When Buffett bought a used corporate jet for Berkshire in 1989, he called it “The Indefensible,” because of its cost to shareholders. He said the $6.7 million price tag was justified because he liked the plane.
“My own attitude toward the jet can be summarized by the prayer attributed, apocryphally I’m sure, to St. Augustine as he contemplated leaving a life of secular pleasures to become a priest,” Buffett wrote in 1990. “Battling the conflict between intellect and glands, he pled: ‘Help me, Oh Lord, to become chaste—but not yet.’”
Donegan was one of the first executives to get the new Gulfstream, which has a list price of about $65 million and can carry 19 passengers. It was a nice way to visit Precision’s ever-expanding empire. The company had ballooned to more than 150 factories, and there were lots of reviews.
Each quarter, plant managers braced themselves for the routine. For a morning review, Donegan typically showed up by 9 a.m. and headed to a small conference room. Often, only four or five people would attend: a finance person and general manager for the plant, the president of the business segment and sometimes a sales person and a member of the operations team.
Every factory was required to produce the same set of 26 charts that highlighted things like productivity, earnings, market share and fixed costs per employee. Donegan usually didn’t receive copies of the presentation beforehand. But his knowledge of the business was deep enough that he could quickly spot what had gone wrong or any missed opportunity. He often found something.
He especially hated when a plant fell short on a metric and the presenter tried to say he wasn’t responsible. Donegan could be funny, these people say. But, mostly, he was intimidating, showing little restraint with his words. His yelling could be so loud that sometimes staff would avoid that portion of the office during reviews, they say.
Back on his jet, he’d unwind, according to executives who traveled with him. Employees weren’t supposed to talk to him about business on the plane, they say, and he’d sometimes kick back and watch TV. One show he enjoyed: "Entourage."
Precision’s methods had become a source of fascination, at least to people who tracked the stock. During a 2009 investor conference, an analyst asked Donegan how he sustained better margins than his competitors.
“We’re a different breed,” he answered. “We’re kind of a blue-collar, in-your-face, slug-it-out, down-in-the-trenches type of company. And I take great pride in that.”
Todd Ittershagen managed several Precision plants over two decades before he says he was fired in 2011 for failing to meet what he describes as overly ambitious budget targets. He remembers being on the receiving end of Donegan’s fury.
“It really drives you,” Ittershagen says. “You don’t want to have him do that to you.”
The tone Donegan set trickled down to some other managers, according to current and former employees. Martin Quigley, who was a vice president of sales in Cleveland, described the culture in a wrongful-termination lawsuit filed in New Hampshire this year against the company and several executives. Donegan wasn’t named as a defendant or mentioned in the complaint, but Quigley alleged that managers condoned verbal and physical abuse and considered Precision a “full contact company.” Precision has denied the abuse allegations and says it doesn’t comment on pending litigation.
The company has posted a list of guidelines at a Portland-area plant for at least a few months, detailing the kind of behavior expected of managers during meetings, according to two employees. Supervisors were asked not to “publicly humiliate or verbally attack” co-workers or make comments that could be “perceived as harassing, threatening or violent in nature.” The employees say the rules were in response to allegations of such behavior.
Despite the hard-charging culture, there are few employment lawsuits against Precision. Current and former employees say the pay bred loyalty. Hourly and salaried employees tended to make more than they could elsewhere, these people say, and the company had a stock plan that allowed workers to benefit from Precision’s soaring share price. Including bonuses and options, there were years when a general manager could make $1 million in places like Cleveland or Portland, Ittershagen says.
Those incentives diminished in recent years as the shares fell. After the acquisition binge, Precision’s revenue and operating-income growth began to flag. The company missed earnings estimates for two straight quarters in 2014. Donegan told analysts that customers were “destocking,” or drawing down Precision parts in inventory. The company also had expanded to supply the energy industry, and as oil prices plunged, that business slumped. Shares slid 27 percent from their peak in 2014 through June 2015.
Buffett saw an opportunity. One of his deputy investment managers, Todd Combs, had begun building a stake in Precision in 2012, gradually amassing a 3 percent holding. On July 1, 2015, Donegan stopped in Omaha for one of his visits with Precision’s largest shareholders, according to a proxy filing. Buffett sat in on the last half of the meeting. The following day, Combs called Donegan to say that Buffett was interested in buying Precision. The CEOs met in Sun Valley, Idaho, and three more times in Omaha. By early August last year, they had agreed on terms.
Though the offer of $235 a share was less than what Precision had traded at the previous year, it still represented a windfall for executives. Donegan was set to receive $51.8 million for his options. By working for Buffett, he’d also be able to run the company for the long haul, free from Wall Street’s quarterly expectations. Buffett, in return, got a business that generated lots of cash and a CEO with smart ideas for how to reinvest it.
The day the deal was announced, Buffett told the Wall Street Journal that meeting Donegan was like seeing “the girl across the room.” He had found his kind of CEO. “The guy is fantastic,” Buffett said. “He’s as in love with his company as I am with Berkshire.”
For decades, Buffett has pulled off an impressive feat: He’s made getting rich look fun when, at times, it’s been ruthless. Nowhere is the image more complete than during the love fest that Berkshire holds each year in Omaha for its shareholders. He fills a convention hall full of the products that Berkshire sells—from rubber duckies to mobile homes—and then yucks it up on stage with his sidekick, Charles Munger, in front of thousands of adoring fans. Amid the celebration, it’s easy to lose sight of the grind at some of its operations.
Donegan may be an extreme case, but Buffett has long been attracted to CEOs who wring expenses out of their businesses. David Sokol, who built the company’s energy unit before resigning in 2011, once wrote that he carried around a notebook ranking his aides in the order he would fire them if forced to do so. More recently, Buffett has partnered with 3G Capital, a buyout firm known for boosting margins by slashing costs. Over the past three years, its managers have fired thousands of workers and shut factories as they used Berkshire’s cash to buy H.J. Heinz and merge it with Kraft.
“At the end of the day, it’s about money,” says Jeff Matthews, who wrote three books about Berkshire. “The tension has been there. It just never had a $37 billion price tag on it.”
Steadily, this embrace of the tougher side of capitalism is becoming part of Berkshire’s identity, a development that has caused angst among some Buffett fans. At last year’s annual meeting, he faced questions about 3G from investors who wanted to know how its methods were compatible with the kind of feel-good business principles he’d been preaching for years.
Buffett’s defense—delivered then and expanded on this year—has been a sweeping argument for efficiency. Productivity gains have been “the all-important factor in America’s economic growth over the past 240 years,” he wrote in his most recent annual letter to shareholders. While 3G chooses to take over businesses where it could aggressively cut costs, he said, Berkshire looks for companies like Precision “that have long been run by cost-conscious and efficient managers.’’
Left out of this analysis is the toll managers like Donegan sometimes take on people. Whether Buffett talks about it or not, that will be part of his legacy, too, along with his investment success, his modest house, his love of Cherry Coke and his conflicted embrace of a corporate jet.