Friday Feature: Buffet on Management and Boards of Directors

I ran across this yesterday in a publication I get called Becker’s Hospital Review. I recall seeing much of the content before and really liking it. It is from famed investor and Chair of Berkshire Hathaway, Warren Buffet. It is content from his letters to Berkshire Hathaway shareholders from years back, 1977 to be exact. Readers will notice the year after each quote.

Now, I am not necessarily a Buffet fan or follower. I keep a bit of touch on him as he makes news, but I’ve never found him to be all that interesting of a personality. He’s uber-rich and self-made so he deserves props for sure. His fund, Berkshire Hathaway has made 19.8% compound returns for nearly sixty years and I like his general philosophy on picking companies to buy and invest in (know the product, use the product and be satisfied with the product consistently (or service) and it is likely, a good company to invest in). I guess that’s the primary reason he bought Dairy Queen.

For this Friday before Labor Day, this bit of wisdom from Warren Buffet seems appropriate. I like it (the content) because I have been directly involved/working as a CEO and/or Board member for 30 plus years. Most people in management or governance would be well served reading this post.

Wishing all readers an enjoyable and safe, Labor Day weekend and Monday! From Warren Buffet,

1. “I’d like you to know that almost all of the directors I have met over the years have been decent, likable and intelligent. They dressed well, made good neighbors and were fine citizens. I’ve enjoyed their company. … Nevertheless, many of these good souls are people whom I would never have chosen to handle money or business matters. It simply was not their game. They, in turn, would never have asked me for help in removing a tooth, decorating their home or improving their golf swing. Moreover, if I were ever scheduled to appear on Dancing With the Stars, I would immediately seek refuge in the Witness Protection Program. We are all duds at one thing or another. For most of us, the list is long. The important point to recognize is that if you are Bobby Fischer, you must play only chess for money.” [2019]

2. “Berkshire’s CEOs come in many forms. Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required.” [2010]

3. “When you have able managers of high character running businesses about which they are passionate, you can have a dozen or more reporting to you and still have time for an afternoon nap. Conversely, if you have even one person reporting to you who is deceitful, inept or uninterested, you will find yourself with more than you can handle.” [1986]

4. “Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.” [2005]

5. “We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly — or not at all — because of a stifling bureaucracy.” [2008]

6. “CEOs who recognize their lack of capital-allocation skills (which not all do) will often try to compensate by turning to their staffs, management consultants, or investment bankers. Charlie [Munger, vice chairman of Berkshire Hathaway] and I have frequently observed the consequences of such ‘help.’ On balance, we feel it is more likely to accentuate the capital-allocation problem than to solve it.” [1987]

7. “Cultures self-propagate. Winston Churchill once said, ‘You shape your houses and then they shape you.’ That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior. At Berkshire’s ‘World Headquarters’ our annual rent is $270,212. Moreover, the home-office investment in furniture, art, Coke dispenser, lunchroom, high-tech equipment – you name it – totals $301,363. As long as Charlie and I treat your money as if it were our own, Berkshire’s managers are likely to be careful with it as well.” [2010]

8. “CEOs seldom tell their shareholders that they have assembled a bunch of turkeys to run things. Their reluctance to do so makes for some strange annual reports. Oftentimes, in his shareholders’ letter, a CEO will go on for pages detailing corporate performance that is woefully inadequate. He will nonetheless end with a warm paragraph describing his managerial comrades as ‘our most precious asset.’ Such comments sometimes make you wonder what the other assets can possibly be.” [1987]

9. “In addition to being independent, directors should have business savvy, a shareholder orientation and a genuine interest in the company. The rarest of these qualities is business savvy – and if it is lacking, the other two are of little help. Many people who are smart, articulate and admired have no real understanding of business. That’s no sin; they may shine elsewhere. But they don’t belong on corporate boards.” [2003]