What Would Warren Do

For years, Warren Buffett has been known as the world’s greatest investor, and for good reason. Since the early 1950s, he’s generated an incredible average return of 31 percent per year, compared with the S&P 500 return of 11 percent per year over the same period.

    This summer, Buffett picked up a new title—world’s greatest philanthropist—after he announced that he was giving away 85 percent of his stake in Berkshire Hathaway, about $37 billion, to charity. It’s the biggest charitable gift ever.

    But believe it or not, there is another, less heralded area in which Buffett has world-class skills. And, it is at the heart of what has made his Omaha, Nebraska-based holding company, Berkshire Hathaway, so successful that he’s been able to generate the fortune that fuels his philanthropy.

    For my money, Warren Buffett is also the world’s greatest manager.

    I was reminded of how good Buffett is earlier this month when Berkshire Hathaway reported a 62 percent rise in net income in the second quarter to $2.35 billion ($1,522 per share), compared with $1.45 billion ($941 per share) in the same quarter last year. Revenue jumped to $24.19 billion from $18.13 billion last year, a 33 percent increase.

    These are huge increases for any company, but especially big for Berskshire Hathaway, which is an eclectic mix of more than 45 subsidiaries such as Dairy Queen, Geico Auto Insurance, Helzberg Diamonds and Fruit of the Loom. Berkshire also has major investments in such companies as Coca-Cola Co., Anheuser-Busch, Wells Fargo & Co., American Express and the Washington Post Co.

    The genius of Buffett in managing this is simple. He puts good people in place and stays out of their way.

    More to the point, Buffett only buys companies for Berkshire that are a good fit. The focus is on businesses (usually family-run) with a strong culture and values, and that usually means a strong CEO. Buffett believes that managers of Berkshire companies ought to be left to run their businesses without interference from him and without any overriding unifying corporate strategies or goals.

    “We delegate to the point of abdication,” Buffett says. As The Wall Street Journal put it: “A prerequisite to a Berkshire purchase of any company is trusting that company’s managers to make decisions.”

    This is a counterintuitive strategy and not particularly popular in this day and age when Jack Welch and others preach the gospel of aggressive management, the forced ranking of workers (the famous “rank and yank” strategy) and other top-down management techniques.

    Buffett’s philosophy is very different. He recognizes that good people need room to operate without someone looking over their shoulder or micromanaging them from above. Once he decides to buy or invest in their business, he lets them operate it the best way they see fit.

    He described this process in his letter to Berkshire Hathaway shareholders in the company’s 2005 annual report:

    “Our managers focus on moat-widening (improving their long-term competitive position)—and are brilliant at it,” Buffett wrote. “Quite simply, they are passionate about their businesses. Usually, they were running those long before we came along; our only function since has been to stay out of the way.”

    This is not to say that Warren Buffett is right and Jack Welch is wrong, but rather, that there are very different ways to manage people and maximize the return to shareholders.

    As much as I admire Welch and what he did at GE, I’d much rather work for Buffett. He’s the boss every skilled manager would love to have—supportive, there when you need him, but more often, the boss who recognizes that you know what you are doing and stays out of the way so you can do it.

    It may be impossible to match Warren Buffett as an investor or philanthropist, but really, it’s easier to equal his stature as a manager. Just find great people, give them a lot of room to operate, show some trust and get out of the way. You may not be able to match Buffett’s track record, but I guarantee you this: You’ll be heading the right way. wƒm

Workforce Management, August 14, 2006, p. 58 — Subscribe Now!