At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish. And their wishes do differ: There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A â€œhire well, manage littleâ€ code suits both them and me.
Cultures self-propagate. Winston Churchill once said, â€œYou shape your houses and then they shape you.â€ That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior. (As one wag put it, â€œYou know youâ€™re no longer CEO when you get in the back seat of your car and it doesnâ€™t move.â€) At Berkshireâ€™s â€œWorld Headquartersâ€ our annual rent is $270,212. Moreover, the home-office investment in furniture, art, Coke dispenser, lunch room, high-tech equipment â€“ you name it â€“ totals $301,363. As long as Charlie and I treat your money as if it were our own, Berkshireâ€™s managers are likely to be careful with it as well.
At bottom, a sound insurance operation requires four disciplines… (4) The willingness to walk away if the appropriate premium canâ€™t be obtained. Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. â€œThe other guy is doing it so we must as wellâ€ spells trouble in any business, but none more so than insurance.
I don’t agree with everything he says. And what works at one company, obviously won’t work everywhere. Copying doesn’t work. Learning from others and understanding what makes it work and then determining how to incorporate some of the ideas into your organization can be valuable. I don’t believe in “Our trust is in people rather than process.” I do believe in â€œhire well, manage little.” Exactly what those phrases mean is not necessarily straight forward. I believe you need to focus on creating a Deming based management system and that will require educating and coaching managers about how to manage such a system. But that the management decisions about day to day operations should be left to those who are working on the processes in question (which will often be workers, that are not managers, sometimes will be supervisors and managers and sometimes will be senior executives).
Related: Too often, executive compensation in the U.S. is ridiculously out of line with performance. – Management Advice from Warren Buffet – Great Advice from Warren Buffett to University of Texas – Austin business school students – 2004 Warren Buffet Report
Far too often senior executives treat corporate treasuries as their noble right instead of behaving honorably. I would say over 90% of senior executives at S&P 500 companies are ludicrously overâ€paid.â€ Their arguments for that not being the case amount to the same arguments made by those that caused the credit crisis â€“ everyone else is behaving in this unethical and unsustainable way you canâ€™t expect me to behave less badly than them.
Warren Buffett understands the proper focus is long term success, not quarterly, or monthly, reports.
All of this [how important railroads are to our countryâ€™s future. Rail moves 42% of
Americaâ€™s inter-city freight, measured by ton-miles] adds up to a huge responsibility. We are a major and essential part of the American economyâ€™s circulatory system, obliged to constantly maintain and improve our 23,000 miles of track along with its ancillary bridges, tunnels, engines and cars. In carrying out this job, we must anticipate societyâ€™s needs, not merely react to them. Fulfilling our societal obligation, we will regularly spend far more than our depreciation, with this excess amounting to $2 billion in 2011. Iâ€™m confident we will earn appropriate returns on our huge incremental investments. Wise regulation and wise investment are two sides of the same coin.
At MidAmerican, we participate in a similar â€œsocial compact.â€ We are expected to put up ever increasing sums to satisfy the future needs of our customers. If we meanwhile operate reliably and efficiently, we know that we will obtain a fair return on these investments.
This echoes Dr. Deming’s understanding of the purpose, and obligations, of companies.