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Ralph Schey

👤 Profile Overivew

Ralph Schey was the CEO of the Scott Fetzer Co. from its acquisition by Berkshire Hathaway in 1986 until his retirement. Buffett repeatedly praised Schey as one of the finest managers in corporate America, specifically for his ability to run a diverse group of businesses with extreme capital efficiency and minimal oversight from Omaha.

🔑 Role at Berkshire Hathaway

Schey was the primary case study for Buffett’s philosophy on decentralized management and rational compensation.

The "Capital Release" Machine

Under Schey’s leadership, Scott Fetzer became a massive source of "investable funds" for Berkshire.

  • Capital Discipline: Schey was charged a high interest rate on the capital his businesses used. Consequently, he was highly motivated to "release" capital to Buffett if he couldn't earn a superior return on it himself.
  • The $1 Billion Result: By 1994, Scott Fetzer had paid over $1 billion in dividends to Berkshire—cumulative earnings that greatly exceeded the $315 million purchase price—all while requiring zero incremental capital from the parent company.

Compensation Logic

Schey's compensation was designed to align perfectly with Berkshire's goals:

  • Unit-Based: He was paid based only on the performance of Scott Fetzer, not on Berkshire’s stock price.
  • Symmetrical Oversight: He was rewarded for earnings growth but penalized (via capital charges) for the assets required to generate those earnings.

💡 Key Accomplishments

  • Unlevered ROE: In 1994, Scott Fetzer achieved an unlevered Return on Equity that Buffett claimed would rank it #1 on the Fortune 500 when excluding non-operating accounting anomalies.
  • Operational Excellence: He maintained the dominance of "Hope Diamond" brands like Kirby (vacuum cleaners) and World Book (encyclopedias) through the 80s and early 90s.
  • Compensation Standard: In 1996, Buffett cited Schey as the absolute gold standard for unit-based compensation logic, warning against generic "strategic plan" incentives.

🗣️ Buffett on Schey

"Ralph Schey... is a spectacular manager. Since we purchased the business in 1986, Scott Fetzer has paid Berkshire over $1 billion in dividends... Ralph and his small staff in Westlake, Ohio, have achieved these results without any advice or help from us." (1994 Letter)

📅 1994 Meeting — Public Introduction

At the 1994 Meeting, Ralph Schey was introduced to shareholders alongside Berkshire's other managers. Buffett elaborated on the compensation model, noting it was worked out in a five-minute conversation in 1986 and had never been changed: "We wouldn't dream of having some compensation expert or consultant come in and screw it up." Schey was held up as the proof-of-concept: a contract simple enough to fit on one page, symmetrical enough to create genuine alignment, and resilient enough to never need renegotiation.

📚 Historical Mentions & Citations (6)

Click a reference document below to expand and read the exact paragraph(s) containing this concept in the archive.

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1985 LetterExcerpt Available
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An equal attraction at Scott Fetzer is Ralph Schey, its CEO for nine years. When Ralph took charge, the company had 31 businesses, the result of an acquisition spree in the 1960s. He disposed of many that did not fit or had limited profit potential, but his focus on rationalizing the original potpourri was not so intense that he passed by World Book when it became available for purchase in 1978. Ralph’s operating and capital-allocation record is superb, and we are delighted to be associated with him.
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1994 LetterExcerpt Available
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You might expect that Scott Fetzer’s success could only be explained by a cyclical peak in earnings, a monopolistic position, or leverage. But no such circumstances apply. Rather, the company’s success comes from the managerial expertise of CEO Ralph Schey, of whom I’ll tell you more later. The difference between Scott Fetzer’s intrinsic value and its carrying value on Berkshire’s books is now huge. As I mentioned earlier—but am delighted to mention again—credit for this agreeable mismatch goes to Ralph Schey, a focused, smart and high-grade manager.
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🎙️
1994 MeetingExcerpt Available
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I think I can see him — John. Don Wurster from National Indemnity. Rod Eldred from the Homestate Companies. Brad Kinstler from Cypress, our worker’s comp company. Ajit Jain, the big ticket writer in the East. And Mike Goldberg, who runs our real estate finance group and also generally oversees the insurance group. Mike. Gary Heldman from Fechheimers. Chuck Huggins from See’s, the candy man. Stan Lipsey from the Buffalo News. Chuck’s been with us, incidentally, twenty-odd years. Stan’s been working with me for well over 25 years. Frank Rooney and Jim Issler from H.H. Brown. Dave Hillstrom from Precision Steel. Ralph Schey from Scott Fetzer. Peter Lunder, who is with our newest acquisition, Dexter Shoe. And Harold Alfond, his partner, couldn’t be with us because his wife is ill. And finally, the manager that’s been with Charlie and me the longest, Harry Bottle from K&W. Harry, you here? There’s Harry. Harry saved our bacon back in 19 — what? WARREN BUFFETT: Yeah, it’s doing well, right. Well, I would say you got to give credit Stan Lipsey — I’m not sure whether Stan’s here right now, but — who’s been running the News. World Book, in terms of unit sales — as we put in the report — have fallen off significantly the last few years. It’s actually surprising, in a sense, how well the profits have held up because they’ve done a good job, a very good job, in that respect. And as we put in the report, we don’t know the answer, precisely. We are, Ralph Schey is — has taken some actions — is taking some actions — that he thinks will improve the operations. Ralph’s record as a manager is absolutely at the top of the list. I mean, it — I wrote about it in the 1992 report. In 1993, Ralph did even better. I mean, it was a — fabulous. I think, probably, may have been 110 or so million pre-tax on 90-some million of average equity capital, or something of the sort. So it’s a fabulous record.
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1996 LetterReference Only
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Mentioned in this document.

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📜
2000 LetterExcerpt Available
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In 1985, we purchased Scott Fetzer, acquiring not only a fine business but the services of Ralph Schey, a truly outstanding CEO, as well. Ralph was then 61. Most companies, focused on the calendar rather than ability, would have benefited from Ralph’s talents for only a few years.
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🎙️
2001 MeetingExcerpt Available
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WARREN BUFFETT: And — (laughter) — Andy [Heyward], if you’re here, you could stand up, I think the crowd would like to say thanks. (Applause) We have one other guest, too. After doing an incredible job for all Berkshire shareholders and particularly for Charlie and me, Ralph Schey retired this year. But Ralph and Luci, I believe, are here. And [if] Ralph and Luci would stand up, the shareholders and I would like to say thanks. (Applause) Scott Fetzer was one of the best acquisitions we ever made, but the reason it was among the very best was Ralph. And a great many of the other companies that we own now, our ownership was made possible because of the profit that Ralph delivered over the years. So, thanks very much, Ralph. Now we will come to order. I will go through this fast. I’m Warren Buffett, chairman of the board of directors of the company, and I welcome you to this 2001 annual meeting of shareholders. I will first introduce the Berkshire Hathaway directors that are present in addition to myself. First of all, of course, is Charlie, on my left.
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