By Mary Buffett and David Clark
Besides being a genius at investing, Warren Buffett is also a genius of a manager, with over 88 CEOs of different companies reporting directly or indirectly to him. In modern business, no man has managed a more highly talented group of managers in so many diverse businesses and delivered such spectacular results.
In many ways, Buffett’s managerial record surpasses even his amazing investment record with Berkshire Hathaway. The company’s operational annual net income grew from $18 a share in 1979 to $4,093 a share in 2007, a compounding annual growth rate of 21.39%, compared to the 19.78% in Berkshire’s investment portfolio for the same period. It can be argued that as a manager, Buffett outperformed himself as an investor.
A.L. Ueltschi, the founder and chairman of FlightSafety International, the world’s leading aviation training company, commenting on his boss Buffett, told author Robert P Miles: “Leadership is really what a good manager is about. The letters of the word represent the qualities that a good manager should have:
* L is for loyalty and
* E is for enthusiasm.
* A stands for attitude and
* D is for discipline.
* E stands for example – you have to set a good example – and
* R is for respect.
* S represents shareholders and
* H is for honesty.
* I and
* P stand for integrity and pride.
“The thing I like best about Warren Buffet is that he possesses all of these.”
The Five Steps
Buffett’s management philosophy can be broken down into five segments or steps, each working with one another to create the perfect combination of management skills:
* Pick the right business. Buffett has figured out that not all businesses are created equal. The first step to success is to own, manage or work for the right business with the right economics working in its favor. That’s how to get ahead of the game right from the start, whether you’re an owner, a manager or an employee.
* Delegate authority. The second step is his unique view on delegating authority, which has allowed him to grow Berkshire Hathaway from a small, failing textile company into a giant multinational conglomerate.
* Find a manager with the right qualities. The third step is to know the qualities that are needed to manage an excellent business – here he’s looking for integrity, intelligence and a passion for the business, which also happen to be the qualities that we need to cultivate in ourselves to be successful managers.
* Motivate your work force. Once the excellent business is found and the right manager is in place, Buffett has the job of motivating his managers to be all that they can be, so the business, the manager and the employees can be as productive as possible. If there’s a single skill that a manager should be great at, it’s motivating others to achieve. Buffett developed a specific set of motivational skills that have inspired his managers to hit one business home run after another.
* Managerial axioms for different problems. Finally, there are a number of specific Buffett managerial axioms for dealing with everything from managing leverage to handling dishonest employees.
Pick the Right Business
Buffett has discovered that certain kinds of companies have inherent business economics so great that even a bad manager will look good working for them. These are companies that he wants to own, and they’re the kinds of companies we want to work for. These super companies come in three basic business models:
* Companies that sell a unique product. This is the world of Coca-Cola, Pepsi, Wrigley, Hershey, Coors, Guinness, Kraft, Merck & Company, Johnson & Johnson, Procter & Gamble and Philip Morris. Buffett thinks of these companies as owning a piece of the consumer’s mind, and when the company owns a piece of the consumer’s mind, it never has to change its products, which is a good thing.
* Companies that sell a unique service. This is the world of Moody’s, H&R Block, Amex, ServiceMaster and Wells Fargo. Like lawyers and doctors, these companies sell services than people need and are willing to pay for – but unlike lawyers and doctors, these companies are institution-specific as opposed to people-specific. When you think of getting your taxes done, you think of H&R Block, you don’t think of Jack, the guy at H&R Block who does your taxes.
* Companies that are the low-cost buyer and seller. This is the world of Wal-Mart, Costco, Nebraska Furniture Mart, Borsheim’s Fine Jewelry and the Burlington Northern Santa Fe railroad. Here big margins are traded for volume, with the increase in volume more than making up for the decrease in profit margins. The key here is to be the low-cost buyer, which allows you to get your margins higher than your competitors’ and still be the low-cost seller of a product or service.
Delegate Authority
Buffett owns more than 88 diverse businesses, and he has turned over the management of these companies to 88 highly competent CEO managers. Berkshire companies such as Johns Manville, Benjamin Moore, Fruit of the Loom, Clayton Homes and Jordan’s Furniture are all run by CEOs who have complete control over their businesses. When Berkshire bought Forest River, Buffett told its founder and CEO Peter Liegl not to expect to hear from him more than once a year. “We delegate almost to the point of abdication,” Buffett has said.
Buffett has developed three rules to help him delegate successfully:
* From the smallest of firms to the largest corporations, workers and managers have developed highly specialized skill sets that allow them to accomplish their tasks. As a manager, Buffett has learned that he cannot perform those highly specialized skills even remotely as well as they can. He feels that his employees are the experts and should be allowed to do what they’re good at doing without his interference. He also feels that if he has any job as a manager, it’s to inspire his employees to greatness at their jobs.
* Buffett has discovered that competent managers like to be left alone to run “their” businesses as they see fit.
* Buffett realizes that in order for complete delegation of authority to work, it’s necessary not only that managers be hard-working, passionate and intelligent about their businesses; they must also have a great deal of integrity. If they aren’t honest, they just might end up using their hard-working, passionate and intelligent ways to rob us blind.
Find the Right Manager
Buffett tries to avoid managerial changes. He has said, “Management changes, like marital changes, are painful, time-consuming and chancy.” When he advertises for new companies to buy, through investment bankers or his annual letter to Berkshire’s shareholders, he insists that the businesses come with competent management already in place.
He requires the key managers of each of the companies he owns to write him a letter telling him who in the company would succeed them if they were to die tomorrow. These letters are updated each year. This way, if something does happen to one of his managers, time won’t be wasted in trying to find a replacement. Buffett gets a manager who’s already familiar with the business and was hand-chosen by the person who best understood the company, its people, products and customers.
If he has to look outside a company for a manager, he usually turns to someone he has already worked with who has a proven track record. Or he’ll ask his business associates for a recommendation.
Buffett theorizes that all people have either an inner or an outer scorecard: we’re true to ourselves or we conform to what we think the world wishes us to be. A true leader follows the beat of his or her own drummer, while a bureaucrat bends to the perceived wishes of others.
Having an inner locus of control isn’t always easy. When you win, it was you who won, but when you lose, it was you who lost. There’s no other scapegoat to blame, which can be crushing. The great lesson is: people with an internal locus of control take responsibility for their failures and in the process learn from their mistakes. Those are the leaders Buffett seeks out.
Motivate Your Work Force
Buffet is masterful in inspiring and influencing his managers. Here are some of the lessons that can be drawn from him:
* Make a good first impression. When Beryl Raff was approached to be CEO of Berkshire’s Helzberg Diamond Shops, she flew to Omaha to meet Buffett. She was shocked when Buffett picked her up at the airport himself. He was witty and charming, putting her at her ease, and after spending a couple of hours at his office answering questions she was taken to lunch at the country club. Her first impression? This is a guy I would love to work for. If you want to get your way, start your encounters with people in a friendly way.
* The power of praise. Buffett recognizes that we all have a need to feel important. It’s almost biological. The early American psychologist and philosopher William James once said, “The deepest principle of human nature is the need to be appreciated.” That’s not lost on Buffett, who’s the consummate cheerleader and his employees’ biggest fan. He never misses a chance to praise his managers in private or at Berkshire’s annual meetings and in its annual reports. For Buffett, praise is the gift that keeps on giving.
* The power of reputation. Buffett learned the importance of giving employees a fine reputation to live up to from Dale Carnegie, who told the story of a manager who found that a long-time trusted older employee had become bored and lackadaisical about his work. Rather than threatening to fire the worker, the manager told him how worried he was about him because for years so many customers had complimented his craftsmanship but now it was declining. The manager said he was wondering if there was anything he could do to help the employee. How did the employee respond? Realizing he had a fine reputation to live up to, he stopped doing shoddy work, increased the level of his production and returned to being the worker that others looked up to.
* The dangers of criticism. Buffett has discovered that uninvited criticism is something we all hate to hear. Yet many of us make the mistake of bestowing uninvited criticism on others, especially at the workplace. Instead of criticizing his managers when they make mistakes, Buffett tries to understand what went wrong and why there was an error in judgment. He’ll praise people personally, but if he must criticize, he criticizes the category – if he’s unhappy with a banker, he’ll criticize the banking profession as a whole, so that banker can save face.
Axioms
Here are some aphorisms in his own words that help Buffett manage effectively:
* “The roads of business are riddled with potholes; a plan for dodging them all is a plan for disaster.”
* “Leverage is very tempting, and always leads to trouble.”
* “You can get into more trouble with a good idea than a bad idea.”
* “There’s plenty of money to be made in the center of the court. There’s no need to play around the edges.”
* “If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they’re naked.”
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