University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Warren Buffet’s Leadership
3a. Personality Traits- Big Five Personality Dimensions
Buffett has a relatively high level of self-confidence. In 1956, instead of worrying about not having a regular income, he was concerned about the problem of having too much money in the future. When he first started out as an independent operator, he had zero experience. Yet, the fact that he was able to convince his shareholders and partners to stick to his rules of meeting them once year without the support of others showed his high level of self-assurance. In 1966, Buffett made a significant sum of 6 million dollars to acquire a second-class department store, Hochschild-Kohn. Even though profits in the department stores were meagre initially, he was certain that the profits in the department store would grow over the years. Buffett’s extensive knowledge of every stock and bond in the market has caused him to develop inner confidence which has helped him gained shareholders’ trust. 3.1.2Ambitious
Buffett has been ambitious since young. When he was eleven, he proclaimed that he would be a millionaire by age thirty or else he would jump off the highest building in Omaha. For a boy that age, a million dollars was a big sum and this goes to show that he was really ambitious. Despite his fear in public speaking, he took a Dale Carnegie course on the subject and polished his skills by teaching a night class at the University of Omaha. This is because he knew that he needed public-speaking skills to get ahead. Had he only wanted to be an investor, he would not have needed this particular skill. It is evident that Buffett desired to be someone more significant than just an investor.
Buffett is also competitive in nature. As he strongly dislikes losing, he will only make huge investment in stakes that have a chance of winning. He invested only in stocks, and one example was GEICO, a company owned by Ben Graham. GEICO stocks were under-priced at that time, and he believed that this under-valuation would certainly earn him profits in the future. He only hires very capable people whom he believes are the best for the job so that they can help him helm the company. Even with his family, he enjoys the feeling of winning. There was once when he made a deal with his daughter, Susie Jr., in which she could shop for clothes for a month without any limit provided she lost a certain amount of weight, but she would be required to pay back the money if she regained the weight in a year. Hence, Buffett preferred to make such no-risk deals to ensure that he always wins, illustrating his competitive nature as he will never lose a bet. 3.1.4Likes to influence people.
Being a good story teller, Buffett likes to influence others. He is able to influence his audience such that his audience feel comfortable and important. He achieves this by letting them feel that they have reached the same conclusion as him. For instance, in social settings, he would always start to talk about a subject and eventually attract people to listen to him without much effort. Buffett also had a tendency to impact his friends’ lives, by asking them to partner with him, as well as by putting them on the companies’ board, weaving them into his life through ties of various kinds. Buffett wrote a letter to all his employees at Salomon, hoping to make them understand the significance of upholding the company’s reputation, and rallied them to check on one another to avoid similar events from occurring in the future.
In 1964, Buffett ridiculed the fund managers working in Wall Street for diversifying their portfolios since he felt that it was challenging to find just a few useful stocks to even consider diversification. Buffett was the first to speak out against the repealing of estate tax in 2001. Even though he belonged to the rich, he was speaking up for the average person in US, and felt that tax on investments was unfairly low. In 2011, Buffett mentioned that he would still voice out his views even if others disagree with him. These evidences showed that Buffett is a generally quite outspoken.
Being goal oriented, Buffett welcomed uncertainty and aimed for above-average results over the long run. For example, in 1983, Buffett refused to give in to the shareholders’ request of splitting Berkshire Hathaway’s stock as it went against his vision of achieving long term value of the company. When the Buffalo Evening News enjoyed tremendous profits after it dominated the Sunday newspaper, Buffett channelled the profits to other profitable investment ventures instead of sharing it with the employees in the newspaper company. There was a time when people around him wanted to wait for more stable and certain periods to buy the Washington Post stock, but not Buffett. He was clear that the future would always be full of anticipation and he always had a clear principle of buying assets for less than their value.
As soon as Buffett set his goals, he started to work hard towards them. By his senior year in school, he was already studying the stock tables when the other boys his age were still reading the sports pages. As an investor, he analysed companies, followed growth of sales weekly and committed his analysis to memory. He read through reports from hundreds of companies before purchasing them. Therefore, there is no doubt that he is someone who would work hard to achieve his goals.
Buffett was also planful and careful as an investor. He avoided “Fashion” investing as he believed in making money using superior reasoning instead of following popular trends. Before a particular investor contacted him, he usually knew the background information about the company as he had usually done his homework by analyzing every company that fulfilled his acquisition criteria. Knowing the short life cycle of many technological businesses, Buffett did not buy stock in Microsoft and Intel even though that would have made him the richest man in America. Hence, it can be implied that Buffett cared more about avoiding excess risk than winning. 3.2.4Conforms to rules
Buffett followed Ben Graham’s guidelines to investment closely, buying stocks based on the principle of identifying companies that were statistically cheap compared to the value of their assets. For example, he bought Sanborn stock throughout 1958 and 1959 based on this principle. In addition, like Graham, he refused to invest in technology companies like Xerox as he considered them as speculative. Also, during a board meeting at Coca-Cola, the compensation committee thought that stock options would pay off if earnings increased fifteen to twenty percent. Buffett knew that this was impossible yet he remained silent and did not object to the decision even though he dislikes the idea of using stock options. These evidences showed that Buffett generally conform to the rules and the norm. However, today, Buffett has totally deserted his mentor’s method of valuing stocks and instead seek for value in enduring franchises that is able to exploit growth opportunities. Hence, it can be implied that Buffett does not always conform to rules.
In 1968, Buffett wrote a letter to his partners, stating that he would rather work with people who had similar viewpoints as him and earn lower returns, instead of working with people whom he disliked at potentially higher returns. Despite lowering his expectations, he continued to make profits, which benefited his partnerships greatly, resulting in his partners’ trust in him to deliver more than what he had promised. In his first 5 years as an investor, Buffett’s partnerships enjoyed a cumulative gain of 251% which was approximately 3 times higher than the 74.3% cumulative gain of the DOW industrial average. As it was important for Buffett that his partners saw him as trustworthy, he would invest more than ninety percent of his personal money with the partners’. He was very dependable as he was putting his own stake into the investment. Buffett has always viewed his investments in the positive light and see losses as temporary.
Buffett was reserved and indirect in criticising his employees. In the 1984 letter he wrote, he took the responsibility for the poor performance of all the Berkshire Hathaway’s insurance companies instead of blaming any particular firm or employee to be responsible for the losses. In addition, Buffett was reserved in his public criticism of Sokol even though he was furious with him for tarnishing Berkshire Hathaway’s reputation. Buffett could not bear to ask Ferguson to retire as Ferguson had suffered from an illness before. Buffett allowed him to continue working as long as he could.
3.3.2Concerned about getting along well with others
Buffet hired Harry Bottle to do the dirty work – which he could not bear to do himself – of cutting costs and getting cash from Dempster’s underperforming factories, which cash was used to invest in stocks and bonds. He made the effort to explain his working style to his investors in advance to reduce misunderstandings that would strain the partnerships. In addition, when CEO Bill Childs suggested a policy of closing his stores on Sunday for religious reasons, even though Buffett was concerned about the loss of profits to competitors, he allowed the manager to follow his own judgement. These evidences show that Buffett is concerned about getting along well with others.
Every year, Buffett would invite his shareholders to his house and shared stories with his guests. At Washington Post, Buffett shared his insights on financial issues with the executives regularly and he never made them feel inferior but instead helped them to comprehend the matter. When visitors, including a group of students, came to see him, Buffett continued talking and teaching them despite having a sore throat. Therefore, Buffett is friendly and approachable to his stakeholders, shareholders and the general public. 3.3.4Wants to be liked by others
When Buffett laid off a hundred people, he was heavily criticised in Beatrice. Being thinned-skin where his reputation was concerned, Buffett vowed not to lay people off again. In the 1970s, even though Buffett disliked George Aderton, the manager of a Citizen State Bank of Mount Morris, which was a Buffett holding, he would rather sell the bank than lay off the Aderton. Hence, “Praise by name, criticize by category” was Buffett’s rule. These evidences showed that Buffett desires to be liked by others as he has always been concerned about how people think of him.
3.3.5Enjoys working with others
Buffett had selected Charlie Munger, a lawyer friend, as his confidant and adviser to his activities. He relied on Munger’s advice for various major investment decisions. Buffett hated confrontation and disliked disappointing people. When the York store and the Hochschild-Kohn employees and management resisted his decision, he gave in. Buffett enjoyed working with board members who are owner-oriented, entrepreneurial and interested such as Charlotte Guyman because he felt that they could make contributions. All these examples showed that Buffett enjoys working with others.
3.4.1Calm in stressful situation
Buffett always evoked a sense of calmness from his shareholders and others around him who felt that he could see simple truths that they themselves neglected. There was one time when he met his neighbours who were arguing about a city proposal. He calmly suggested them to forget about it and people realized he was right. Immediately after the September 11 attacks, Buffett continued to host a golf tournament and made arrangements for people to attend to their matters while handling General Re logistics. When he was facing a lawsuit in which he was accused of attempting to monopolize the newspaper industry in Buffalo in 1977, he remained cool-headed in countering the accusations. These evidences revealed his ability to stay calm even under stressful situations. 3.4.2Does not take failure or mistake personally.
Even though Buffett sometimes made mistakes in Berkshire Hathaway, he was able to pinpoint his prior failure and designed a plan for the company. He admitted that Dexter Shoe was the worse acquisition he had ever made and changed its management after that. Also, Buffett initially thought that Dan Grossman could perform but the latter eventually failed him. Even though his judgement failed in the above incidents, Buffett was not discouraged emotionally, and this enabled him to analyse his own mistakes, recognised those of others and rectify them.
Due to Buffett’s non-confrontational nature, he tries to avoid conflicts by not revealing his emotions. When he was young, he did not get angry with his mother, Leila, even though she scolded him frequently, he chose to keep to himself most of the time. In 2000, Berkshire Hathaway made huge losses after purchasing General Re and people started to humiliate and mock at Buffett for a period of time. However, even when his reputation was attacked, Buffett did not attempt to defend himself. His ability to remove his emotions from his analysis and control the urges that led people into trouble investing allowed him to become a successful investor.
3.4.4Performs well under pressure
In 1976, Buffett bought over the Evening News, a newspaper in Buffalo. The Evening News published every day of the week except Sunday due to an agreement with owners of the rival Courier-Express which dominated the Sunday paper. While trying to capture the market for Sunday paper, The Evening News made losses for several years. Under such pressure, Buffett persevered and eventually succeeded. During the period when Salomon was accused of criminal indictment, Buffett was under a lot of pressure to save the company and he succeeded eventually.
Buffett’s ability to be objective in his judgment and optimistic in his outlook was a big part of his success. There was a time when his net worth fell by half but it did not affect him emotionally. In fact, he was more optimistic than disheartened. This was because he viewed himself as being ‘on the hundredth floor most of the time’. This suggested that he considered himself as more fortunate than others even though he faced setbacks sometimes. In 1986, when many investors were contemplating to pull out of Cap Cities, Buffett showed up at the meeting and convinced them that the stock price will rise. Buffett has always viewed his investments in the positive light and see losses as temporary.
3.5Openness to Experience
Buffett has been very curious about finance ever since he was young. He would read all the books which had the word “finance” in their titles in the Omaha Public Library when he was only ten years old. Buffett did not stop there. He continued reading the Wall Street Journal, financial statements and annual reports till now. Buffett was so eager to know the latest news that he wanted to read the news of Wall Street Journal ahead of anyone else. As such, he made a bargain with the Omaha distributor of the paper. From then on, Buffett would get the paper before midnight and be the first to read the next day’s news. In the early 1950s, Buffett met the founder of National Indemnity, Jack Ringwalt in Omaha. However, Buffett was rejected by Ringwalt when he asked him to invest. However, Buffett was not deterred as his strong curiosity and big appetite for insurance business pushed him to read a large
number of books to figure out Ringwalt’s strategy.
In the early 1970s, Berkshire Hathaway mainly focused on insurance business. Thus, when there was an opportunity to buy a small company manufacturing boxed chocolate in California, Buffett rejected it. However, after extensive investigation and suggestions from Charlie Munger, Buffett changed his mind. In 1972, they bought See’s Candies for only $25 million. This acquisition happened because of Buffett’s open-mindedness. In Berkshire Hathaway’s Owner’s Manual, Min Spec 4, it states that managers will not lose anything by standing still if the current performance is already excellent, whereas the norm is to push people to perform their best. They will not raise the standards to push performance. With Buffett’s open-mindedness, the risk of managers holding back results for next year’s bonus has been minimized. Moreover, Buffett has liberal views on estate tax. Unlike other rich businessmen, Buffett was the first to say that tax on investments was relatively low and unfair to other non-investment based income earners. His secretary’s income tax rate was even higher than that of his. Indeed, he did consistently fight against the repeal of the estate tax. He just wrote an op-ed to share his views about taxing the wealthy this August.
3.5.3Strategic – Big Picture Thinker
In 1963, American Express suffered from the salad oil scandal. The company’s stock price kept falling and almost everyone was selling its stocks, except Buffett. He invested nearly ¼ of his assets in this stock. He did not value American Express only based on financial evaluation, but also on the value of their intangible assets, such as American Express’s name, customers’ loyalty and its dominant share in the market. He focused on the whole market performance and future development of the company instead of the crisis. By 1967, Buffett’s stocks in American Express were worth $15 million more than its initial cost of $13 million. In the summer of 1965, Buffett visited Disneyland with Munger.
After meeting with Walt Disney, Buffett found that they had similar enthusiasm and joy in their work. As usual, Buffett analyzed the whole Disney to get a complete and comprehensive evaluation of its stock value. Again, Buffett’s strategic thinking helped him gain in Disney’s investment. When Buffett acquired Berkshire Hathaway, instead of controlling the employees, Buffett wanted them to “act as owners”. Buffett stated all the principles and rules in his Owner’s Manual to provide a right direction to employees. By doing so, managers can find their own way to work towards Berkshire Hathaway’s objective.
This unique framework shows Buffett’s strategic thinking and planning. 3.5.4Seek new experiences through travel, going to new restaurants, learning about new cultures Buffett prefers to stick to people, places and foods he is familiar with. He is well known for his frugal lifestyle. He still lives in his Omaha house purchased in 1958 which has not been redecorated in years. In addition, he likes eating hamburgers and fries very much. Once he went to Beijing, China, he refused to eat any Chinese food.
Throughout the whole journey, Buffett was served hamburgers and French fries specially ordered for him while everyone else was enjoying Chinese cuisine. In 2004, while searching the global economy, Buffett found that Korea was overlooked and undervalued which suited his investment criteria. But he did not understand the Korean accounting methods. Therefore, Buffett learnt the Korean culture of commerce, which was totally new to him. Finally, he managed to shorten the long list of Korean stocks to invest in. 3.5.5Learning about the arts, movies, readings, sports (broad interest) Buffett’s biggest interest is finance, and other than bridge he has few other interests. Once, he and his family went to his son Peter’s live show performed together with a band. However, it was really difficult for Buffett to get into the world of art. His major focus was still the commercial benefits of such artistic events.
Table 1 Scores for Big Five Personality Traits of Warren Buffett With reference to Table 1, for Extraversion, Buffett scored a maximum 5, which means his behaviour in a group setting is highly likely to be dominant and
socially assertive. He has extremely high self-confidence, is very ambitious and competitive and often tries to influence people and be outspoken. This is a good trait to have as a leader and Buffett has used it to his advantage to influence others. Likewise for Conscientiousness, he scored a maximum 5. He is highly dependable, careful, goal-oriented and hardworking and conforms to rules when appropriate. His followers would be able to rely on and trust him as he consistently displays conscientiousness.
He scores high for Agreeableness as well, with a 5. Buffett dislikes conflict, thus he tries to be liked by others and friendly. He also shows his humanistic side by being sensitive and empathetic. Thus, he is generally well liked by the people he works with and those who work for him. A likeable leader invokes trust from followers as well. Buffett has high Emotional Stability too, at 4.8.
To be as successful as him, one has to be calm and collected under stress and still perform well, not lose control, to learn from mistakes and be optimistic. He has helmed Berkshire Hathaway for so long and over the years, his high emotional stability has helped the company overcome many obstacles. For “Openness to experience”, he scored 3.4, which suggests that Buffett’s openness to experience is average. His degree of seeking for new experiences through travel & other aspects in life, and learning from arts, reading and sports scored relatively low or just at average. As a successful world-class leader, he is high in curiosity, open-minded and strategic thinking which help him in the career development.
3b. Influence Tactics
In 1983, Berkshire Hathaway wanted to buy the Nebraska Furniture Mart (NFM), which was the largest furniture store in North America. In order to make the deal, Buffett first invited the owners of NFM to visit his office, thus allowing him to develop a relationship with them. Thereafter, Buffett sent a letter to NFM stating clearly his thoughts on the pros and cons if they sold it to Berkshire Hathaway, as well as his real offer in details to persuade them. By using all these facts, Mrs. B agreed to sell the business to Berkshire Hathaway. Buffett is a Wall Street Journal lover. But Buffett disagreed with the efficient-market hypothesis which Wall Street Journal subscribed to. At a seminar held by Columbia University, Buffett had the opportunity to disprove the hypothesis.
He started his argument with a coin-flipping simulation, and then supported it using a chart of the track record of 9 money managers to prove their success was not due to random luck. Ultimately, audience was convinced by Buffett’s reasoning. In an article he wrote for Hermes, Buffett summarized his views which convinced the random walkers and they revised the argument which allowed for exceptions. During the time when Salomon was in the crisis of criminal indictment, Buffett spent much effort to save the company. By explaining his thinking to the board, the board cut off some of the executives’ benefits for the purpose of cost saving. Buffett managed to change the custom of giving large bonuses to executives in Salomon by reasoning it out with the board.
After acquiring the Associated Cotton Shops (ACS), Buffett wanted Ben Rosner, the founder of ACS, to stay as the manager as he was well-suited to manage the business. However, Rosner wanted to hand it over to the new owner at the year-end and leave after that. To ensure that Rosner would stay, Buffett made a deal with him for $6 million as an exchange. In the summer of 1957, a well-known Omaha urologist, Edwin Davis showed his interest to invest with Buffett. As an exchange of Davis’s capital, Buffett promised that Davis would get all of the profits of up to 4%. The remaining profits would be shared at the ratio of 3:1 between Davis and him. In this way, Buffett actually undertook the risk with Davis together. In the end, Buffett got $100,000 from Davis. 3.3Legitimating
In 2000, Berkshire Hathaway’s shareholders were dissatisfied with the stock price. There were quite a number of shareholders who asked Buffett to invest in technology stocks. Still, Buffett did not change his mind, and finally his legitimating power influenced the shareholders to give in and accept his decision of not investing in technology stocks. Buffett valued shareholders’ trust the most. Hence Buffett would explain his fashion to his partners before they injected capital. His rule is only to report to partners once a year without disclosing any investment information, only profits. However, there was one partner who wanted to know more details of the investment and asked to see Buffett. Buffett rejected to see the partner, but he did not want to leave. A minute later, Buffett asked his
secretary to kick the man out of the partnership. Buffett exhibited strong legitimating power in this incident.
In 1967, in Buffett’s letter to the Berkshire Hathaway’s partners, he stated his strategy as usual and that he had decreased the goal of return from 10% to 5% a year without any explanation. He went on telling his partners that they were free to invest their money in somewhere more profitable if they wanted. This meant the partners making their decisions were solely basing it on their trust in Buffett. However, only a fraction of the shareholders left. Most of them remained faithful towards Buffett. In 1976, Buffett became a shareholder of the Washington Post. He strongly advised Katharine Graham, CEO of the Washington Post, to buy back its stock, something that no other company was doing at that time.
However, Mrs. Graham listened to Buffett’s suggestion wholly based on her trust and faith in him, and eventually those shares turned out to worth 20 times more than its repurchase price. As Buffett and Mrs. Graham became close friends, her reliance on Buffett also became stronger and stronger. Whenever there was something she could not decide on, she would seek Buffett for advice. The Post’s former president Mark Meagher recommended the Post to go private before he quit. His successor Richard Simmons rejected the proposal. However, Buffett thought it was acceptable. Interestingly, the Post executives agreed with Buffett’s idea. Furthermore, they said it was just too hard to dislike or disagree with Buffett. People like Buffett so much, and therefore most of the time this causes others to agree with him.
During the time of the Salomon scandal, Buffett decided to change Salomon’s entire culture. In order to survive and grow, Salomon needed to be open, sincere and honest. To achieve this, Buffett needed all employees to work towards the same goal. Hence, he wrote a letter to them, telling everyone to report each and every counterproductive behaviour and illegal activity. To show his resolution, he gave out his home number and told employees to call him whenever they felt unsure.
Buffett also emphasized on Salomon’s new goal by using “first class” as the standard to inspire employees and also wanted them to think about their loved ones’ feelings if any negative act was published on the front page of newspaper. Salomon’s employees were inspired by their values and emotions and tried their best to save the company. Otto Obermaier was the judge who had the final say on whether to indict Salomon, a company in crisis, criminally. Buffett had talked to him face-to-face and worked very hard to persuade him. Buffett invoked the image of those innocent employees who would lose their jobs if Salomon were to close down. Buffett also promised to continue managing Salomon and a new culture would be created to bring Salomon into a new state. At that moment, Buffett was not sure about the impact of his talk on Obermaier since he kept a poker face. Only after several months, the government finally decided not to indict Salomon. Buffett had really made an impact on Obermaier. 3.6Coalition
In 1960, Buffett approached one of his partners, William Angle to help him gather 10 investors to raise funds. With Angle’s help, Buffett had the chance to speak to a group of doctors to persuade them to invest their money. This group of potential investors were willing to trust Buffett because they trusted Angle. Finally, they persuaded 11 doctors to invest. While Buffett was on the board of Coca-cola, he and Herbert Allen, another board member, agreed that Ivester was not the right CEO for the company. However, neither Allen nor Buffett had the authority to fire Ivester. Therefore, they could only let Ivester be aware of his problem and that they no longer had confidence in him. They wished to persuade him to quit by himself. Several days later, Ivester left the company voluntarily. Again, Buffett and Allen’s influence worked successfully.
In the early 1960s, after being rejected by Jack Ringwalt to manage his money, Buffett approached one of his friends, Charlie Heider, who was also a board member of National Indemnity. Heider provided a piece of highly valuable information to Buffett. He said that for about fifteen minutes every year, Ringwalt would consider getting rid of National Indemnity. Heider agreed to inform Buffett once that moment came. This fifteen-minute opportunity came in 1967. Buffett decided to meet Ringwalt at once. In order to make the deal within fifteen minutes, Buffett agreed to every request Ringwalt had to keep him in a good mood.
By doing so, Buffett did not give Ringwalt any chance to change his mind. Everything was done within the fifteen minutes as Buffett expected. In late 1985, Buffett was interested in Scott & Fetzer (S&F). There were many investors who wanted to acquire S&F as well. In order to make a good impression and show his willingness to buy, Buffett wrote a letter to the CEO of S&F, Ralph Schey, saying that he liked S&F and that he does not do any non-profitable business and that he was contactable any time. Schey was glad with Buffett’s praise, and decided to meet him. Not surprisingly, Buffett bought S&F without difficulty.
*The exchange tactic applied by Buffett is considered under soft influence tactics. By definition, only when there is no choice for people to choose, exchange will be classified as hard influence tactics. The evidence provided shows that there was a choice proposed to the target. They were allowed to make their own decisions whether to accept the offer or not. After taking all the evidence into account, hard influence tactics and soft influence tactics have scores of 4 and 4.4 respectively (Table 2). A higher score indicates a higher tendency for the leader to apply those tactics. In Buffett’s case, he prefers to influence people using soft tactics than hard ones, especially through rational persuasion and personal appeal as there were many more incidents for Buffett’s application of these tactics. 3c. Empowerment
Buffett employed a mix of mechanistic and organic approaches to empower his followers. He successfully integrated both approaches and thus empowered his followers.
3.1.1Clarifies organisation’s mission, vision and values
In 1996, Buffet wrote a booklet to address the 13 business principles that should help his shareholders understand his managerial approach. This booklet was the Owners’ Manual. He hoped that shareholders would view themselves as critical owners of the big Berkshire Hathaway family, and that they did not merely own pieces of paper. Buffett also expressed that the way for Berkshire Hathaway to grow was through acquisitions. The acquisitions should earn cash and consistently produce above-average returns.
They also intended to acquire parts of similar businesses. Buffett made sure that managers who stayed on after acquisitions knew that nothing changes in their usual operations, except their compensation – for the better. Other than the Owners’ Manual, Buffett also drafted the User’s Manual. He stated that all models for managing capital were to be turned into frameworks for managers to act like owners of the company. Managers were expected to focus on per-share intrinsic value but Buffett did not teach or provide steps for them to be like owners of Berkshire Hathaway. Employees would be given autonomy to work and he would not doubt their judgement as long as they stayed within their roles. In the manual, he devised the Circle of Competence (Figure 2) that allowed him to practise discretion in his allocation of capital.
To manage the enterprise well, managers are expected to establish their Circle of Competence, like Blumkins who was the owner of Nebraska Furniture Mart (NFM), to emulate Buffett’s allocation of capital, hence, gaining the trust of shareholders. Back at the diminishing Salomon business, Buffett wrote a letter to employees to emphasise upright legal and moral obligations in their process to save the business. He called this the “front-page test” and that was not to have any legal or moral failures that were to be reported right on the front page of the local newspapers. All these show that Buffett has clear mission, vision and values that he communicates to his managers effectively and that there is an implicit rule that the managers have to subscribe to the framework Buffett has laid out for them. By providing a structure, Buffett shows top-down empowerment.
Source: The Real Warren Buffett
3.1.2Specifies tasks, roles and rewards for employees
Buffett sets up rules to influence his managers to centralise their
behaviours to the interests of the owners of Berkshire Hathaway. One of the rules stated that remuneration packages are ensured to be compatible with the inner responsibility that they took for their behaviour. He stated tasks but the managers were not forced to comply, in hope to promote intrinsic motivation in them, just like his fly-by-wiring model. He influenced them to manage his businesses by the wiring inside their brains such that his rules were just minimum specifications.
Managers were expected to run their businesses as though it was the only asset in their families. By that, he meant that there was no need to check with him before making any decisions. He explicitly told them that there will be no proposal presentations in Omaha and that there was no need to ask headquarters to approve budgets. There will also be no dictums issued on capital expenditures, except those large capital expenditures. Buffett also agreed that managers should be rewarded appropriately and treated fairly. Individual personal achievements were tied to employees’ compensation but their compensation will never be affected by the company’s performance or the environment the subsidiaries operated in.
Even if the company is doing badly, they would still be awarded based on whether they handled what they, as managers, could control, instead of basing it on what they could not. Furthermore, ranks or seniority does not necessarily entail higher employee compensations in Berkshire Hathaway. It is all by merit. The way Buffett specifies tasks, roles and rewards is quite unconventional, but he specifies nonetheless. The specification though, is to act like an owner, to build intrinsic motivation. Rewards would likewise be based on that. Since he still sets the rules and rewards, Buffet engages in top-down empowerment. 3.1.3Delegates responsibility
During the times when Buffett was a major partner in secret, he made Ken Chace the president of Berkshire Hathaway and entrusted the authority to make plans to him. He was given total responsibility and freedom except the allocation of capital in which Buffett would watch it himself. In need of finding someone to manage his creation of the Homestate Companies, which was a batch of small insurers scattered among a number of different states, Buffett snatched Dan Grossman, who was 26, back from his reinsurance rescue mission in New York. It was a difficult business to manage as fraud was rampant.
Grossman explained to Buffett that he was inexperienced and not qualified at all but Buffett assured him that he had confidence in him. He persevered but the business overwhelmed him. Eventually, he admitted he simply could not handle it and he told Buffett that he would move on. It was clear that Buffett recognises talents. Often, he delegated responsibilities to such talented people. Ian Jacobs was one other example. Knowing that Jacobs could interpret and work off directions without aid, Buffett instructed him to do a scuttlebutt approach from the retail dealers to learn how Clayton, a struggling mobile-home business, worked. Buffett entrusted Jacobs to save Clayton. Buffett often delegates responsibility as he has more than 50 subsidiaries under Berkshire Hathaway presently. 3.2Organic Approach
3.2.1Encourages intelligent risk-taking
At R.C. Willey, one of Berkshire Hathaway’s furniture store operators, CEO Bill Childs closed his stores on Sundays due to religious reasons. Buffett was sceptical about expanding this policy to a new store in another region. He thought that it was impossible to compete with rivals who opened on Sundays. Nevertheless, Buffett still gave Childs the green light to go ahead and take the risk. The risk paid off and the store made good profits. At Washington Post, Katharine Graham consulted Buffett for advice on almost everything, even when she needed to make a speech which she found terrifying.
She depended a lot on Buffett to monitor the business. Being apprehensive of what USA Today could do the Post, she requested that Buffett make a trip to Washington to discuss the swap one of the Post’s television station in Washington for a station in Detroit with some cash payment. To make her more self-reliant, Buffett assured her that she could handle it and that she knew exactly how much to pay for the swap. At Salomon, information rationing was extensive. Unauthorised bids were made and orders were even falsely submitted under a customer’s name. There was a lot of cover-up, lying and cheating.
Knowing that Salomon could not survive a criminal indictment, Buffett put Ronald Olson in-charge of the case. To pursue a novel strategy to handle legal matters, Olson was tasked to convince Otto Obermaier, the U.S. Attorney for the Southern District of New York, and that Salomon would be kept in check. The strategy was well-thought-out and eventually, Salomon was free of criminal indictment. Buffett’s philosophy of management is to not interfere with the running of the subsidiary after acquiring it. However, he is usually consulted for big decisions and thus does encourage calculated risk-taking among his managers. 3.2.2Trusts people to perform
A contract of employment is common in almost all companies but in Berkshire Hathaway Buffett does not believe in it. Buffett trusts people to perform and he felt that contracts are poor alternatives to control his managers. Instead, he relied solely on their words and used his Owners’ Manual as a social contract. He based his trust on friendship and that people will be intrinsically motivated to comply with company’s objectives and hence perform well. Often, Buffett takes his hands off the reins. He did not impose the Berkshire Hathaway culture on his managers but allowed them to run their business nearly without strings.
Early in 1976, GEICO, an auto insurance company was suffering from severe losses. CEO of GEICO, Jack Byrne, was left to raise new capital on his own. After being rejected by 8 firms on Wall Street, he turned to Salomon Brothers which was still a budding trading firm. John Gutfreund initially rejected him but he was convinced to pump in capital eventually in what appeared to be a major loss. Within 6 months, the $76 million Salomon invested resulted in quadrupling returns. Byrne found a way to grow GEICO on his own. In a more recent example, Buffett trusted David L. Sokol who was a Chairman of MidAmerican Energy Holdings Co. and chief of unit NetJets Inc., a Midwestern utility owned by Berkshire Hathaway, to scout for investments that yield high returns and save struggling companies. Sokol brought back with him impressive balance sheets and real deals to repay Buffett. In return, Sokol also enjoyed privileges unavailable to other executives. Sokol attributed his success and drive to his fear of failure.
He assessed his employees’ performances on a monthly basis to decide who to keep and to lay-off. By being conscientious and goal-oriented, Sokol gained Buffett’s trust in his performance. He was once a potential successor of Berkshire Hathaway but he had resigned abruptly early in March this year. Again, the nature of Berkshire Hathaway requires Buffett to trust people to perform as it has many subsidiaries. But Buffett has no issues with trusting other people to run companies as he enjoys working with people of ability and drive. 3.2.3Starts by understanding needs of employees (bottom up) After the Courier News liquidated, the Evening News turned into a morning paper known as the Buffalo News.
In a quick span of 6 months, Sunday papers circulation hit an all-time high, far surpassing that of what its rival had achieved before. By the late eighties, the paper was so profitable that it earned more than $40 million a year. Yet, Buffett had no intention of sharing the profits with his employees. Shockingly, he even claimed that there was no way the writers in the newsroom could have influenced profits. The employees may have been awarded a catch-up pay raise but they did not receive any share of the “fruits of their labour”. They were disappointed. Through this example, we can see that Buffett had failed to understand the needs of his employees. Empowerment ApproachScore
Table 3 Scores for Empowerment Approaches
Buffett uses both approaches of empowerment, but he displays more of the mechanistic approach of empowerment than that of organic. With reference to Table 3, he scored 5 for mechanistic approach and only 3.67 for organic. Buffett had specified clear vision, mission, roles and rewards. The Owners’ Manual was necessary for Buffett to articulate his directions to all his employees after 1996 when the organisation became too large and that they did not even meet often. He also delegated responsibilities but it was also clear that he trusted his employees to perform in the examples seen above. He believed that he had understood and addressed the needs of his employees with his reward system and his belief in intrinsic motivation.
In fact, the approaches that he had taken were only in the direction of benefit to everyone but they did not really satisfy their individual needs. This is why he scored low for the organic approach, as he empowered mainly top level managers but did not seem to engage employees at lower levels. Graham and Grossman are examples that thrived under his leadership but a general employee was unsatisfied with the returns that he received for his efforts. Still, Buffett’s employees are empowered as they display self-determination, competence and they believe in what they do. Buffett is a world class leader who empowered his employees in both approaches when a mix of empowerment was still uncommon. 3d. Transformational Leadership
3.1.1Demonstrates high standards of moral and ethical conduct Paul Mozer, who ran Salomon Brothers’ government bond department, tried to cheat the US government, clients and Salomon. This scandal resulted in the largest fine ever imposed on an investment bank at that time. When Buffett found out about Mozer’s actions, he fired him right away. Buffett could not tolerate liars and cheaters. Buffett is usually agreeable but he knows that there are some moral and ethical issues that cannot be compromised. Another instance was when a company under Berkshire Hathaway, The Pampered Chef, had employees in pro-life groups and did not support the fact that some of their profits would be given reproductive rights organisations, under a Berkshire Hathaway charity contributions programme.
Other employees were being harassed by pro-life groups whenever they were working. Buffett decided to close Berkshire Hathaway’s charitable contributions program, because not only were the employees’ jobs threatened, they might have gotten physically hurt if Buffett had not given in. Buffett knew the stakes involved and people getting hurt was not what he was prepared to sacrificed. Buffett spoke out against the repealing of estate tax in 2001, as he felt that more taxes were taken from the average people so that the rich can pay less. In fact, he was the first to speak out that tax on investments were unfairly low; his tax rate on his income was lower than that of his secretary’s as most of his income came from investment! Buffett believed that what the government was doing was morally and ethically wrong, and spoke out publicly against it, even though he is usually reserved. His high sense of morals shows even to the society.
3.1.2Makes personal sacrifices for others’ benefits
Back in 1970, Berkshire Hathaway’s last fabric mill standing was not doing well and he foresaw that textiles business was no longer profitable. Despite the mediocre return of the fabric mill, as long as the mill was self-reliant, Buffett let it continue its operations and tolerated its poor return. This is quite unlike what Buffett would do as he believed in
compounding returns as much as possible. Buffett’s affection and attachment to the employees and the mill made him decide to keep the mill although it did not align with his capital allocation principles. Due to poor performance and unforeseen circumstances, the insurance companies on the whole recorded losses in 1984.
Yet, in his letter to the shareholders’, Buffett did not name the companies or managers responsible. Instead, he took the responsibility of the poor performance on himself and wrote a 7 page long explanation on the losses. This act might have cost Buffett the trust of his shareholders. But he saved his managers blame and scrutiny as the next year, the companies repaid Buffett with cash flows to start him on his capital compounding journey. When Congress passed a major tax reform act, shareholders would be twice taxed for gains from sales of assets instead of only once. Buffett himself would save $185 million if he had liquidated Berkshire Hathaway, but he did not. He calculated that the shareholders would actually lose money from the liquidation. Buffett usually would not pass up an opportunity to gain more money, but this time he did to keep Berkshire Hathaway to maintain a good relationship with the shareholders and his beloved company.
3.1.3Displays high level of determination
To avoid criminal indictment of Salomon, Buffett gave the US government full cooperation by waiving Salomon’s attorney-client privilege during investigation. Buffett’s sincerity and determination to solve the crisis was unmatched and the US government did not indict Salomon. This was a radical, never-before-used way of approaching a crisis yet he implemented it because he believed it was the best way to help the company and shows Buffett’s tenacity and persistence. Around the beginning of the 21st century, technology stocks were rapidly rising in value. However, Buffett refused to buy any technology stocks.
Berkshire Hathaway’s share fell to a low and the media mockingly labelled Buffett as “formerly the world’s greatest investor”. He was proven right when the dotcom bubble burst. Buffett’s determination in sticking to his decision stemmed from his belief in doing what he thought was right, even if the whole world said he was wrong. In this case, it helped the shareholders’ evade huge losses. In 1976, Buffett bought over the Evening News, a newspaper in Buffalo. He set up the Sunday paper, but the rival sued them for anti-trust and the Evening News got an injunction which severely damaged its circulation numbers. In 6 years, the Evening News lost $12 million, but Buffett saw huge potential in the Evening News and did not give up the fight in those 6 years. Finally, the rival newspaper folded and the Evening News profits went up to $40 million a year by the late 1980s. He was very determined to make the newspaper work, even as his most trusted partner, Charlie Munger, was pessimistic about the outcome.
3.2.1Articulation of Vision
When Buffett was building up his partnership in his early years, he would often write letters to his potential partners and explain his expectations to them as well as to align their expectations of the partnerships with his own. He did so to ensure that his goals and vision of the partnerships were made known to his partners before they decide to make any form of capital contributions to the partnerships. During his time at Berkshire Hathaway, Buffet drafted an Owner’s Manual, which set an outline for the relationship he wished to maintain with Berkshire Hathaway’s shareholders, as well as the goals in which he required his managers to follow.
When Buffett owned Salomon, he wrote a letter to all his employees explaining that upholding the reputation of the company is of utmost importance and it should never be compromised to settle a crisis. He wanted the company to adopt his personal values of openness, integrity and honesty after Salomon suffered a bad blow to its reputation due to allegations that it had engaged in fraudulent activities. These 3 examples clearly showed that Buffett made sure his visions and goals were always explained and made known to his partners and employees, ensuring that everyone he was working with had a clear understanding of his vision, and thus were able execute their daily roles and responsibilities with accordance to these vision and goals.
3.2.2Shows how vision can be achieved
During his early years as an investor, Buffett would spend a large amount of time and effort to explain his methods of achieving the vision that he had for the partnerships, as he feared that any misunderstanding would destroy his relationships with his partners. After Buffett officially passed his operational duties at Berkshire Hathaway to Mike Goldberg in 1982, he decided to offer compensation packages that were tied directly to their individual performance. Buffett wanted to make use of the manager’s intrinsic motivation to encourage them to improve their performance and explained that the conditions were designed in such a way to ensure that they were able to perform well.
In 1983, when Buffett was pressured by shareholders to split Berkshire Hathaway’s stock, he refused to give in to their request. He explained that conducting a stock split might not necessarily increase the price of Berkshire Hathaway’s stock, which was what the shareholders were hoping to achieve. Over the years, price of Berkshire Hathaway’s stock grew, despite Buffett’s decision of not conducting stock splits. These various examples showed how Buffett attempted to demonstrate how his vision and goals could be achieved, which enabled his employees and partners to stay focus and motivated while performing their tasks.
In 1986, when many investors were re-evaluating their faith in Cap Cities, Buffett made a surprise visit at the yearly retreat for the managers. He promised them that he would not abandon the company no matter what happened, thus displaying his self-confidence as well as his confidence in the managers and the company. His promise to them and his presence at the managers’ retreat was enough to instill confidence in the managers, and eventually, this was reflected as the price of Cap Cities soared to a record high of $630.
In Berkshire Hathaway, Buffett believes in setting as little rules as possible so that managers are motivated to act like owners and do what they excel in. By trusting his employees, Buffett showed that he has confidence in both his judgment in choosing the right managers, as well as his confidence in the abilities of the managers. In 1982, Buffett appointed Michael Goldberg to run his insurance group. He felt that Goldberg would fit into the job well and was confident that he would do a remarkable job managing the business due to his personality and intelligence. In these examples, Buffett displayed high levels of self-confidence as well as confidence in his followers, thus allowing them to feel motivated and confident when performing their tasks. 3.3Intellectual Stimulation
3.3.1Helps followers become more innovative and creative
When asked on how to determine the “value” of a stock, Buffett gives tips on how he does it. His advice is not to follow analysis and predictions made by other people and instead trust oneself. Instead of looking at short term fluctuations in price, look at the long term business value, but one does not need to be too precise. This way, he lets people choose their own stocks, using their own evaluation. Buffett never advises people on which stocks to buy as he feels that anyone can make a good judgment as long as they do their research.
3.3.2Gets others to look at problems from different angles Buffett criticised his partners at Berkshire Hathaway in a letter for being too occupied with avoiding taxes. As higher taxes would decrease the earnings of the partners, they were averse towards it. However, Buffett saw it as a means to an end, the end being the largest after-tax compound possible. His reason was that if tax was rationally perceived, it should not be avoided. Buffett was able to focus on what really mattered. He hoped that his partners would understand and follow his point of view. His independent thinking sets him apart from others.
Before 2002, stock options were not seen as an expense as most companies were unsure of how to calculate it and accounting regulatory bodies did not have strict guidelines for stock options. Buffett felt that it was common sense and obvious that stock options are a form of compensation and this expense should be deducted from earnings. Coca-Cola and Washington Post Co. announced that their stock options would be expensed, many other companies followed suit. Buffett simplified the problem and made others realise that things do not have to stay the status quo. 3.3.3Challenges others to re-examine critical assumptions
In 1997, the US stock market and Berkshire Hathaway’s stock was doing very well. It would seem like a very good time to be an investor then, Yet Buffett believed that as a capital allocator, his idea of tough times would be now , as it was difficult to see which company was a good buy i.e. underpriced. Buffett’s declaration of tough times to shareholders’ at a shareholder meeting seems quite thought-provoking and it definitely challenged his followers, those people who trust him with their money, to rethink assumptions of the stock market. Buffett does not agree with the widely accepted efficient market hypothesis at all.
He believes and exemplifies his theory that it is possible to keep picking winners in the stock market. Speaking at a seminar at Columbia University, he turned the argument around and even showed 9 examples of people who had consistent success. People were convinced by his disproof. Again, Buffett impressed people with his unique thinking and won them over. 3.4Individualized Consideration
3.4.1Supports and coaches the development of followers
At Washington Post, Buffett often shared his insights on financial issues with the executives. He never made the executives feel incapable if they did not understand, but instead helped them to focus and comprehend the matter. Buffett wanted to make sure that his employees were not merely doing what was required of them, but also continued to learn and improve, and he was there to make sure that his employees had a share of his insights. Buffett was also a personal mentor to Katharine Graham. Instead of simply instructing her on what to do, Buffett coached and guided Graham regularly. Whenever Buffett went to Washington, he would carry with him stacks of annual reports and guide Graham through them thoroughly.
Buffett often gave enlightenment to his managers in the form of simple yet clever one-liners so as to constantly help his managers improve. He was doing this even in small and informal settings, such as daily chats with his managers. Buffett believe very much in developing his followers, but often choose to do so indirectly, as he trusts that his followers have the ability to learn on their own with a bit of direction, rather than spoon-feeding them knowledge. He also made sure that his managers were not merely doing what was required of them, but also continued to learn and improve, and he was there to make sure that his managers had a share of his insights. 3.4.2Delegates assignments as opportunities for growth
In 1977, a Buffett protégé by the name of Dan Grossman was tasked to take charge of an insurance company at the age of 26. Even though he had a lack of experience and felt that he could not live up to Buffett’s expectations, Buffett stood by and believed in him, explaining that he had utmost confidence in his abilities, and given his diligent nature, he would soon learn how to run an insurance business effectively. In 1986, Ralph Schey, one of Buffett’s managers in Berkshire Hathaway, had an idea to restructure a business unit. Buffett was unsure of the viability of the idea, yet he allowed Schey to carry out the plan. Buffett did not criticize him when the plan eventually failed, and it was most likely because he had wanted Schey to learn from this experience right from the start.
This would explain why Buffett allowed Schey to go ahead with the plan despite his scepticism towards it. In 2003, Buffett gave Ian Jacobs a task to learn how Clayton, a mobile-home manufacturer, operated its business. Buffett hope that through this experience, Ian could understand the changes in its business operations and sales practices over the years. These examples showed that in several occasions, Buffett appointed various managers to take on different assignments in hopes of giving them opportunities to develop various useful skills applicable in the business.
3.4.3Recognises and leverages on individual differences in terms of needs and desires to enhance growth and development During Buffett’s time at the Evening News, when the firm finally became the sole newspaper publisher in its region, the employees were disappointed after they realised that Buffett had decided not to reward them as how they would have wanted to be rewarded. He insisted that employees should be contented with the salary they received, nothing more and nothing less. This showed that Buffett hardly believed in developing his follower’s basic needs to high level needs as he felt that lower ranked employees would be satisfied as long as their basic needs were fulfilled.
Table 4 Scores for Transformational Leadership
Buffett scored highly for Idealised Influence and Inspirational Motivation. For Idealised Influence, he displays high standards of moral and ethical conduct and a high level of determination and made personal sacrifices for the benefit of others’. The people he led will be influenced by him to show the same fortitude and integrity to do their best for Berkshire Hathaway.
Likewise for Inspirational Motivation, Buffett shares and communicates his vision to his followers and leads them in achieving it. His belief and confidence in them has resulted in many success stories across the many companies of Berkshire Hathaway, as they too returned that belief. For Intellectual Stimulation and Individualised Consideration, referring to Table 4, Buffett scored an above average 3.67. In the aspect of Intellectual Stimulation, Buffett was able to help his followers see things from different angles and think critically, but was not able to help them think innovatively and creatively. This could be due to the fact that Buffett is not really creative and does not expect his employees to think out of the box. For Individualised Consideration, the view in Empowerment is echoed here as it seems that Buffett delegates and supports the development of higher level employees but failed to consider lower level employees. Still, he has helped many managers to further their abilities and groomed many to be top business leaders. Buffett is a successful transformational leader as he is not only able to motivate his employees but also elevate their morale and level of moral and ethical conduct and develop his followers through his actions. 3e. Analysis of Impact of Leadership Style on Followers and in the Context of the Berkshire Hathaway 3.1Impact on Motivation of the followers
In Berkshire Hathaway, as mentioned in the Owners’ Manual, all employees are encouraged to centralize their behavior to the interests of the shareholders. By tying their compensation to their effort instead of the company’s performance, managers are hence motivated to work even harder. In particular, managers are given liberty to manage their companies but, at the same time, they also have to hold greater responsibility in the decisions they make. An environment that encourages his managers to act like owners and to even give up the temptation to remain at status quo was established in Berkshire Hathaway. Managers are so intrinsically motivated that the performance of other subsidiaries does not affect their own performance.
This is known as going against the institutional imperative of Buffett. In See’s Candies, Chuck Huggins absorbed very little capital when they turned in $857 million pre-tax earnings in 1999 on a purchase price of $25 million in 1972, when other subsidiaries did not utilize the capital well. Buffett seek to keep his employees motivated even in times of crisis. In his minimum specifications, Buffett promised not to abandon businesses even when they are not performing well. Instead, he will choose to allocate more capital to them to save the businesses. Adhering to Buffett’s minimum specifications, his managers are empowered to save these businesses even without being directed by Buffett. With reference to 3 d, under individualized consideration, Buffett supported and coached the developmental needs of his employees. At Washington Post, he entrusted authorities to make Post’s swap all to Graham.
In this attempt to make her more self-reliant, Buffett also made her more motivated by making her believe in her capabilities in making good decisions. Often, he shared insights on financial issues with the executives. He ensured that they understood him and never let them feel incapable or incompetent. Through his articulation of vision, he motivated his employees. In the case of Salomon, he wrote a letter to encourage the company to adopt his personal values of openness, integrity and honesty when fraud was alleged to be rampant. By encouraging his employees in Salomon to report all moral and legal violations to him, he motivated them to uphold upright morals and ethics and not to compromise the reputation of the company at all cost. At the same time, he influenced the culture in Berkshire Hathaway to be that of high in morals. 3.2Impact on Commitment of the followers
Employees and managers of Berkshire Hathaway feel a strong sense of commitment to the company, as well as to Buffett. Buffett’s employees are highly committed due to Buffett’s leadership style and the influence tactics he has employed. With reference to 3 b, Buffett has used more soft-influence tactics as compared to the hard-influence tactics. For instance, during the Salomon scandal , Buffett used inspirational appeal to inspire the employees to save the company. Buffett wanted the employees to commit rather than merely comply with his instructions since he was promoting a change in Salomon’s entire culture. This is because such a change is accompanied with uncertainty and employees’ commitment is necessary to overcome the resistance associated with the change efforts. Therefore, by writing a letter to his employees, Buffett has strategically employed the use of his referent power to result in a higher level of commitment among his employees. As illustrated in 3 c, Buffett’s willingness to empower his employees in Berkshire Hathaway by trusting them to perform leads to employee ownership. Such an empowerment results in employees having a psychological commitment to the mission of the company, in which managers act as “owners”. Instead of using contracts of employments to control his managers, Buffett based his trust on friendship and this not only motivates them but also increase their commitment to Berkshire Hathaway . Besides commitment to the organisation, being a transformational leader, Buffett has also made his employees more committed to him. With reference to 3 d, Buffett’s willingness to make personal sacrifices for others’ benefits has resulted in increased commitment and loyalty of his employees to him. Also, the fact that Buffet believes in coaching the development of his employees further suggests his ability to increase employees’ commitment. Thus, transformational leadership helps to build employees’ commitment. Buffett’s unique way of motivating his followers, which leads to heightened commitment, is a reflection of his leadership style.
3.3In the Context of Berkshire Hathaway
Berkshire Hathaway has become a multinational conglomerate holding company with many subsidiaries engaged in various industries, ranging from insurance and reinsurance to railroads and manufacturing, and finance to services, as well as retailing, energy and utilities. The highly diversified nature of businesses for Berkshire Hathaway has played an important part in helping Buffett to make the best use of his leadership skills. Berkshire Hathaway headquarters do not manage its subsidiaries directly. Whenever Berkshire Hathaway acquires a new company, Buffett would appoint one capable manager to in charge of the whole business. Thus, operating decisions for Berkshire Hathaway subsidiaries are made by the respective CEOs of individual business units. Buffett and Munger only make decisions on investment and capital allocation. This decision-making process is determined by both the nature of the investment industry and Buffett’s successful leadership skills.
The investment industry is highly competitive, uncertain, fast moving, and dynamic. Hence, one needs to make wise decisions in this ever-changing industry so that you can outperform your competitors. According to 3 a in the earlier session, Buffett is very confident and highly competitive in nature. These personalities allow him to make decisions wisely and independently yet effectively. Moreover, Buffett is emotionally stable in the fierce competition. He does not take failure or mistake personally which enables him to learn from mistakes and recognise those of others. He is also optimistic and performs well especially under pressure. These traits are just perfect in such an uncertain and dynamic industry.
With Buffett’s independent thinking and irreplaceable talents, Berkshire Hathaway’s per-stock book value has been enjoying a 20.2% growth rate compounded annually over the past 46 years since he took over. As an excellent role model, managers and employees from Berkshire Hathaway follow a similar style with Buffett, which shapes the corporate culture of Berkshire Hathaway from the roots of the organisation. Due to the fact that Berkshire Hathaway likes to invest in businesses across a wide range of different industries, there are no direct connections among its subsidiaries. Therefore, it is appropriate to measure each business and each CEO based on its individual performance. As Buffett’s empowerment approach suggests in 3 c, he fully trusts his CEOs and wants them to think and manage the business like owners.
Since most of his CEOs were actually the original owners before acquiring by Berkshire Hathaway, they were just tailor-made to Buffett’s management style. As a result, managers and employees work towards the same goal as owners for the interest of the company. Under 3 d transformational leadership, Buffett exhibits a high standard of moral and ethical conduct. The no laying off policy in subsidiaries and no enforcing of their culture make Berkshire Hathaway a stand out from other companies. It is highly recognized in the acquisition field. People who are considering selling their business would come to think of Berkshire Hathaway. Influenced by Buffett’s values, everyone in Berkshire Hathaway support and advocates the same values and lives up to them. Berkshire Hathaway is now perceived as the reflection of Buffett’s values. Overall, Buffett’s unique and irreplaceable leadership skills played a significant part in the development of Berkshire Hathaway corporate culture.
4Conclusion – Other Lessons Learnt from Warren Buffett
Buffett’s success as a leader and an investor can be attributed to the simple
fact that he is extremely focused on what he is doing; he will only stick to what he does and know best. He knows his goal as the CEO of Berkshire Hathaway, which is to maximise shareholder wealth and his investing is done with objectivity. He shows this in a framework he came up with, which is called the Circle of Competence. The Circle of Competence comprises what is important and knowable to him, and it thus limits the risks of him biting off more that he can chew. For instance, he hardly buys technology stocks as he feels that he does not know enough about technology. Because staying within his Circle of Competence has always paid off for Buffett, shareholders and employees alike trust him and his judgment. They know that Buffett is more cautious and focused than other people on his goal and knows his priorities.
After 44 years, Buffett has steered Berkshire Hathaway to grow at an annual compound rate of 20.3%. He does this by utilising the resources of Berkshire Hathaway prudently. As always, to maximise shareholder wealth, the only rule he has of the management of the companies under Berkshire Hathaway is to send the excess cash, which is money left over after business needs are met, back to Berkshire Hathaway. He then uses the cash to invest in other opportunities. Buffett has definitely made mistakes which resulted in losses, though not as serious as to put Berkshire Hathaway out of business, but he admits to them, learns from experience and never repeats them. For a leader to admit his mistakes publicly through shareholder letters is humbling and shows that he has respect for the resources and efforts his employees have put in and will treat them with prudence. 4.1.3Building Community through Philanthropy
Buffett is one of the top philanthropists in the world and has pledged that by the time he passes away, 99% of his wealth will go to philanthropy. He also set up the Giving Pledge and has influenced many other billionaires to pledge to give away at least 50% of their wealth. Buffett has been building a sense of community within Berkshire Hathaway for a long time as well. The Buffett Foundation has been established since 1964 and gives out donations and grants. For example, it has been giving out scholarships to college students with financial needs for 40 years. Another example is after Buffett announced that he would donate a majority of his wealth to the Gates foundation, many letters from needy people poured into Buffett’s office. Instead of ignoring them, Buffett send them over to his sister with $5 million so that those deserving would get the help they needed. Buffett’s commitment to the society is apparent, especially in recent years. A true leader is one who serves the needs of others and Buffet has and is continually doing so.
Berkshire Hathaway adopts an achievement culture that emphasizes heavily on goal pursuance, solid business performance, values and high-performance. With such a performance-oriented culture, Berkshire Hathaway ensures that the company and its employees are guided with clear goals and vision, with a strong focus on independence between different operating functions. The lack of synergy across the different business units ensures that the managers and executives of each individual business behave like owners and thus are responsible for their own actions. In the User’s Manual, it is stated that rewards are tied directly to the achievements of each manager, regardless of the overall performance of the company.
The unique characteristic of Berkshire Hathaway’s culture is the way it handles firms that they acquire. Having a personal strong aversion to lay off employees, Buffett has driven this principal straight into the core of Berkshire Hathaway’s culture. Existing executives and CEOs of the companies that Berkshire Hathaway acquires are never worried of being replaced after the acquisition, unlike usual practices of the industry. Instead of enforcing its culture on these firms, Berkshire Hathaway provides the executives with almost complete autonomy of their businesses, allowing them to impose their own preferred culture, make their own decisions and be responsible for the profitability and growth of their companies.
This is the distinct culture of Berkshire Hathaway, and it is one of the primary reasons for its continuous success over the years. Other than this unique method of treating its subsidiaries, Berkshire Hathaway also emphasizes heavily on ethical and moral values. Buffett believes in the importance of pursuing high moral ethical conducts more than the profitability of the company as he feel that this builds a strong foundation for Berkshire Hathaway’s culture of trust, responsibility and integrity. Over the years, Berkshire Hathaway has developed a strong reputation by displaying high levels of moral and ethical values, and this is another contributing factor to its success.
4.3Management of Change
Buffett’s way of managing change varies with the situation at hand, but it definitely hinges on one thing: his determination. In the Salomon Brothers’ crisis, at first, when Salomon was in the danger of collapsing, employees were happy that Buffett, who was Chairman then, saved it. Yet, after Buffett decided to overhaul the compensation system at Salomon, most employees became angry at Buffett and many quit. Buffett thought that employees should get less and slashed their bonuses and employees thought that they deserved more for staying at Salomon through the crisis.
In this case, Buffett used explicit coercion to bring about the change, but it was essential as Salomon needed to rebuild its reputation and Buffett used this opportunity to change its culture to one of integrity. Those who did not accept it could walk. A complete overhaul usually requires such drastic measures as there will be many people who resist the change. Even with many top executives gone, Salomon, under Buffett, managed to weather the crisis and emerged with high stock prices and record profits. It goes to show that sometimes coercion is needed to implement changes for the better for the company. Buffett’s leadership here has saved the livelihoods of the employees who stayed and the shareholders’ interests.
His determination is the key here as other people may have given in to the employees’ demands. Another time when he was implementing change was after he bought over The Evening News and started a new paper on Sunday. He felt that there was a high chance of success hence he personally supervised the paper. Employees, however, felt uncertain and scared that they may lose their jobs as they faced a court injunction and sales were bad for the new paper. Buffett made sure that he got his message across clearly to them: he was in for the long run and will stay and fight on with them. This gave the employees’ conviction to go through with the daunting challenge. He gave his support to them by commending articles and contributing ideas.
But mainly, he let the employees’ take charge of the new paper, letting them design everything about the paper, getting them involved so that they would accept the change wholeheartedly, at the same time, boosting their morale and fighting spirit. In the end, they triumphed and the paper posted record profits. Buffett has the ability to see the need for change and to implement it successfully. He is able to see what a company needs to save it or make it into a top performing one. He communicates his intentions well so that the employees and shareholders will understand his reasons for the change, and will introduce or enforce the change in a way that befits the situation. What makes him stand out in this aspect is that he is really determined in carrying out changes and adheres to the rule of establishing a culture of integrity as that is what will ensure the company’s reputation and growth in the long run.
For many years, Buffett has been idolized by many for his tremendous success in the financial market as well as his distinctive methods of investment. Often revered as the financial guru of our time, his unique leadership and management style has frequently drawn both praises and criticism from analyst all over the world. When we look at his accomplishments in Berkshire Hathaway, GEICO, the Buffalo News etc., it is undeniable that Buffett has proven himself to not only be the legend of investment, but also a very successful leader. However, despite his seemingly ideal leadership and management style in running a massive investment holding company, there exist a few flaws in his leadership framework and approach.
One of the problems that a leader will naturally encounter in a highly diversified and large company is the lack of interaction between the leader and lower ranked employees, those who belong to the other spectrum of the hierarchy. Over the years, ever since Berkshire Hathaway became an investment holding company, it has acquired countless firms, and employed thousands of employees. Often, Buffett would empower the managers or CEOs of these acquired firms, and not take part in the companies’ daily operations. His lack of involvement in the operations of the firms resulted in the interactions between him and the employees at the bottom of the organizational structure to be almost non-existent.
He drafted the owner’s manual to align shareholder’s visions and goals with that of managers, as well as a compensation scheme, in which he talked about the intrinsic motivation of his managers and the kind of rewards they can expect for performing well. However, he did not mention anything about employees who fall under the charge of these managers. Not only did he not interact frequently with these employees, there was also an instance when he rejected the employees request for bonuses when his news company, the Evening News, performed beyond expectations. When asked for a share of the profits, Buffett remained adamant and argued that the lower-ranked employees were merely there to fulfill their tasks, and nothing that they could have done would have affected the profits, and thus did not deserve a share of it.
His lack of empathy and interaction with the lower-ranked employees might be a result of his zealous attitude towards being goal-oriented in compounding shareholder’s wealth. A recommendation for Buffett would be to take these employees welfare and contributions into consideration whenever he makes decisions on reward packages and the sharing of profits. Another recommendation is for him to engage the employees more. In this way, he will not only be able to inspire them to work harder, but he will also be able to understand their needs and desires more.
5Over-all Conclusion of Report
It is quite easy to overlook the fact that Buffett is a world class leader as he is primarily seen as an investor. However, it cannot be that Berkshire Hathaway has thrived for so long just because Buffett is the best at identifying capital compounding opportunities. With 52 subsidiaries presently , Buffett would need leadership and management skills to keep them operating smoothly and continue to be profitable in the long run. He has excellent people management skills as seen from the way he influences and empowers them.
He has a likeable personality and people trust him as they see him as conscientious, confident and calm. He excels in certain aspects of Transformational and Servant Leadership, being able to cater to not only their immediate self-interest but motivate them intrinsically. He goes beyond the boundaries of business and extends his reach to the society, doing charity with the fortune he has amassed. We now have a better understanding of Buffet as a leader and have learnt much from what we have researched on him.