Monday, August 27, 2012

Is Warren Buffett Putting Politics Ahead of His Fiduciary Duty?

Over the weekend Newsbusters reported that actor R. Lee Ermey believes he was fired as a GEICO spokesman for publicly disparaging the Obama administration. Ermey doesn't seem to have offered any evidence beyond stating that "If you’re a conservative in this town, you better watch out," which certainly rings true but doesn't prove anything.

The identity of GEICO's owner would seem to lend support to the allegation. GEICO is owned by Berkshire Hathaway, which is run by the increasingly outspoken liberal billionaire Warren Buffett.

Buffett's long track record as an investor is exceptional, if perhaps not commensurate with the level of acclaim he receives. On a risk-adjusted basis, there are a number of hedge fund managers with records that compare favorably with Buffett's.

But if one looks beyond the adulatory press showered on Buffett, his record in recent years is one of unexceptional investment returns and increasing participation in partisan politics. While by all accounts he leaves day-to-day management of Berkshire-owned companies to their respective executives, it isn't especially difficult to imagine him making a call asking - like Matt Damon - whether, in addition to a cartoon gecko, metrosexual cavemen, the stack of money with eyeballs, and the Rod Serling impersonator, GEICO didn't already have a surplus of spokespeople.

But shedding Ermey for espousing conservative views may be bad business for an auto insurer.

The consumer auto insurance business is highly fragmented; here are the top insurers, ranked by market share:

State Farm (18.7%)
Allstate (10.2%)
GEICO (8.5%)
Progressive (7.7%)
Farmers Group (6%)
Liberty Mutual (4.5%)
USAA (4.4%)
Nationwide (4.2%)
Travelers (2.1%)
American Family Insurance (1.9%)

After State Farm, the market shares really drop off. I can only assume this is because State Farm benefits from a jingle - like a good neighbor, State Farm is there - written by Barry Manilow (and covered by Weezer).

While most companies seek to avoid association with partisan politics, there may be advantages when selling a highly commoditized product in a fragmented market.

Most people have no strong attachment to their auto insurer and choose one based on price. But when you have only 8.5% market share like GEICO, association with a political viewpoint may be profitable. Let's make two assumptions: that engaged political partisans are evenly distributed across the auto insurance market, and that such partisans of the left and right each comprise, say, 10% of the market.

If that's the case, then embracing Ermey's remarks risks driving away the 0.85% of the market comprised of your left-leaning customers, but gives you greater appeal to the 9.15% of the market comprised of right-leaning partisans that currently use one of your competitors.

In a perfectly efficient market, the net benefit comes down to how well the de-commoditization of your offering through political affiliation mutes customers' price sensitivity. In the real world with all its attendant frictions, it probably causes a small cohort of liberal existing customers to leave in a huff, and a larger cohort of conservative potential customers to visit your website, get a quote, decide it's in the ballpark, and click "purchase."

This effect, with the opposite political valence, may already be operating with respect to Progressive. While Flo is the public face of Progressive, the politically engaged are more apt to know that Progressive's Chairman, Peter Lewis, is a major liberal donor to such groups as America Coming Together and

Viewing Ermey's firing in this light, one might fairly wonder if Warren Buffett isn't putting his political views ahead of his fiduciary obligation to shareholders.

1 comment:

  1. Viewing Ermey's firing in this light, one might fairly wonder if Warren Buffett isn't putting his political views ahead of his fiduciary obligation to shareholders.

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