3 Things Buffett Wants to Know From His Company Managers

This past December, Warren Buffett issued his latest biennial memo to the operating company managers of Berkshire Hathaway, affectionately referred to as his All-Stars. In the memo, the CEO and chairman of Berkshire Hathaway requested three things from these individuals.

Protect the Reputation of Berkshire Hathaway

As you can imagine, Buffett is very concerned with the reputation that Berkshire Hathaway puts forth. After all, this company is the man’s life work, so having a strong reputation is an incredibly important asset and Buffett will not see it sullied.

“The top priority – trumping everything else, including profits – is that all of us continue to guard Berkshire’s reputation… As I’ve said in these memos for more than 25 years: ‘We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.’”

Particularly, Buffett specifically warned about pointing to the herd when justifying a specific course of action:

“Sometimes your associates will say ‘Everybody else is doing it.’ This rationale is almost always a bad one if it is the main justification for a business action. It is totally unacceptable when it evaluating a moral decision.”

When growing up, did your parents really care when you said “So-and-so did it too!” in regards to your bad behavior?

On the other hand, Warren Buffett provided a different standard in order to measure one’s behavior: “We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”

Back in 2011, Warren Buffett was shocked to learn that one of his top guys and a potential successor, David Sokol, broke the insider trading rules of the company in a controversy regarding share dealing that certainly did not pass the Warren Buffett “newspaper test.” In the wake of this scandal, Sokol resigned from his post at Berkshire Hathaway.

Report Bad Apples and Bad News Fast

At the end of the day, Berkshire Hathaway came to the conclusion that Sokol misled the company in regards to his actions – and this is a grave error for an executive that was supposed to be a watchman and an example to others. The subsidiary managers at Berkshire Hathaway are entrusted with a mission to protect and embody the culture of the company. The top managers’ job is to point out bad behavior as quickly as possible:

“… let me know promptly if there’s any significant bad news. I can handle bad news but I don’t like to deal with it after it has festered for a while.… Somebody is doing something today at Berkshire that you and I would be unhappy about if we knew it. That’s inevitable: We now employ more than 330,000 people and the chances of that number getting through the day without any bad behavior occurring is nil. But we can have a huge effect in minimizing such activities by jumping on anything immediately when there is the slightest odor of impropriety. Your attitude on such matters, expressed by behavior as well as words, will be the most important factor in how the culture of your business develops. Culture, more than rule books, determines how an organization behaves.”

Find the Next All-Star Roster

Lastly, Warren Buffett wants his managers to tell him the names of the main candidates that could succeed them. Buffett already has a succession plan in place for himself, although it has not been disclosed publicly. He similarly promises the managers confidentiality in regard to their choices (“These letters will be seen by no one but me unless I’m no longer CEO, in which case my successor will need the information”).

The requirement itself seems to be an exercise in risk management instead of for long-term planning, and it even exempts Berkshire subsidiaries that are not run by a single person (“Of course, there are a few operations that are run by two or more of you – such as the Blumkins, the Merschmans, the pair at Applied Underwriters, etc. – and in these cases, just forget about this item.”)

A Great Way to Start the New Year

Berkshire Hathaway and Warren Buffett have proven that profits – and as it turns out huge profits – do not need to be earned at the expense of ethics in business. But as with any significant endeavor, one is not capable of accomplishing this alone. The people heading up the subsidiaries of Berkshire Hathaway are given exceptional freedom in the way that they run their businesses, but the devotion necessary to protect Berkshire’s corporate reputation must be absolute and uniform. This is not a new lesson – and the memo was practically word for word to a document in 2012 – but certainly worth reviewing at least every other year – for the managers at Berkshire Hathaway and anyone else interested.

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