Warren Buffett is considered the most successful investor of our time, and his company Berkshire Hathaway is currently ranked as the 4th largest company in the world. While of course Buffett is plenty wise, and has a great approach to investing, Berkshire Hathaway would not be where it is today if Buffett wasn’t so committed to guarding the companies pristine reputation.
“Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless,” Buffett first said in 1991, but has repeated many times since.
Buffett understands that reputation and integrity actually have an economic value. A lot of CEO’s do not see this, but it isn’t lost on Buffett— he will pay premium for a company with integrity.
One of the best examples of this was Berkshire’s acquisition of Wesco Financial Corporation in 1972. Wesco had the opportunity to merge with another company, who Buffett deemed not good enough. Wesco’s CEO listened to Buffett and pulled out of the merger, which dropped its stocks significantly— from $18 to $11. Rather than purchasing those undervalued stocks, Buffett offered them a fair price of $17. They eventually agreed on $15.
This came as a bit of a surprise to a lot of value investors, since typically these are exactly the kind of stocks that they look for. But, Buffett explained (over the course of a year, to the Securities and Exchange Commission) that they paid that higher price to show integrity. Buffett said that by paying a fair price, they immediately won the CEO’s respect— something you can’t put a dollar amount on.
Many years after that event, in 1995, a home furnishings company RC Willey was purchased by Berkshire Hathaway. The company had received a lot of offers, many over $200 million, but agreed to Berkshire paying $175 million. Since Berkshire has such a good reputation under it’s belt, R.C. Willey practically paid $25 million to be acquired by it.
“So valuable is Berkshire’s culture that sellers undeniably treat it as a valuable part of what they receive on the sale,” author Lawrence Cunningham claims, “This enables Berkshire to acquire companies at lower prices than rival bidders.”