Introduction
Modern corporations often suffer from poor leadership and excessive over-management that stifle initiative. You may find yourself trapped in bureaucratic structures where constant interference prevents meaningful achievement.
Warren Buffett offers a superior alternative through his operational and managerial record at Berkshire Hathaway. Instead of micromanaging, you can learn to lead through trust, delegation, and the selection of exceptional enterprises.
Mary Buffett and David Clark detail a proven framework to transform your approach to business leadership. You will discover how to identify strong companies, empower capable individuals, and drive performance.
This book answers several critical questions about corporate management:
- How do you select businesses with durable competitive advantages?
- Why should you delegate authority almost to the point of abdication?
- What traits define the ideal manager for your organization?
- How do you motivate a workforce without resorting to interference?
- Which pitfalls must you avoid during your career?
1. Pick the right business to work for
Choosing the right business gives you an immense advantage. Great fundamental economics drive career success effortlessly. A company with superior underlying strength makes even an ordinary manager look good.
Companies with a durable competitive advantage generate internal cash, require little capital for plant retooling or research, and offer the greatest career opportunities.
Super companies own a piece of the consumer's mind and sell products or services that never need to change. This allows them to charge higher prices and maintain better profit margins and inventory turnover without relying on debt or selling new shares. Consider that the Irish have thought of pints of Guinness on cool rainy evenings for 284 years.
Coca-Cola never has to spend billions redesigning products or retooling plants, whereas General Motors must spend billions annually on styling changes and plant retooling.
Evaluating economic strength
Superior businesses come in three specific models: selling unique products, selling unique services, or acting as the low-cost buyer and seller. Product sellers like Wrigley or Pepsi establish strong brand stories through advertising. Service providers like H&R Block or Moody's are institutional-specific rather than people-specific and avoid production warehousing costs. Low-cost operators like Wal-Mart trade big margins for high volume.
In Omaha, residents go to the Nebraska Furniture Mart for the best selection and best price when needing a stove.
Business models and tests
A potential employer's economic strength can be quickly assessed using specific metrics. Consistency and an upward trend in earnings indicate a durable advantage. A heavy debt load signals poor competitive strength. High gross profit margins reflect pricing power well above production costs.
You should apply these economic tests before committing your career:
- Check the company's yearly per-share earnings figures over a ten-year period for consistency and an upward trend.
- Ensure the company carries no or low levels of long-term debt relative to its industry, keeping debt under five times net earnings.
- Calculate the Gross Profit Margin by subtracting Cost of Goods Sold from Revenue, then dividing Gross Profit by Revenue.
Coca-Cola shows a consistent gross profit margin of 60 percent or better, while United Airlines sits at 14 percent and General Motors at 21 percent. Moody's reaches 73 percent and Burlington Northern Railroad hits 61 percent. Wrigley Gum maintains 51 percent while U.S. Steel sits at 17 percent and Goodyear Tire records 20 percent. Microsoft reaches 79 percent, Apple holds 33 percent, and a standard example gross profit margin calculation rests at 40 percent.
2. Delegate
Effective business expansion requires delegating entire jobs to competent managers almost to the point of abdication.
As Berkshire grew from a small regional textile manufacturer into a giant multinational conglomerate, delegating authority far beyond boundaries comfortable for most CEOs became essential. This approach keeps companies competently run and managers happy. Micromanaging multiple tasks leads to neglect.
Competent managers possess specialized skill sets and want to run businesses as their own out of pride. They must also possess absolute integrity so they do not exploit their autonomy. Warren owns 88 diverse businesses through this method.
When Berkshire bought Forest River, Warren told its founder and CEO, Peter Liegl, not to expect to hear from him more than once a year.
Rules for delegating authority
You can apply extreme delegation to handle a growing enterprise. Maintain high standards for the people you place in charge:
- Recognize that employees are the experts in their specialized skill sets and act as a cheerleader rather than a slave driver.
- Allow managers to continue thinking of their businesses as their own to foster pride and hard work.
- Ensure that managers have a great deal of integrity and are as honest as the day is long.
3. Find the right manager for the job
Hiring the right manager for the job is the critical step immediately following business acquisition and the adoption of delegation. The characteristics that define the right manager for the job are also specific managerial qualities that individuals should cultivate in themselves.
Managerial changes should be avoided unless necessary, preferring promotion from within or utilizing proven turnaround artists.
Buying poorly run companies requires painful and expensive management replacements. Key managers must maintain updated succession letters naming their internal successors to prevent wasted time.
Warren bought Dempster Mills Manufacturing at 25 percent of its book value. After multiple failed managers, Charlie Munger suggested Harry Bottle, a turnaround artist who successfully repriced unique parts and cut spare inventory to restore profitability. Warren gave a $50,000 signing bonus to move to Nebraska, and 20 years passed before Warren called Harry Bottle a second time for a manufacturing problem.
Succession and turnaround strategies
You can protect your company by following strict recruitment and retention rules:
- Ask if a management change is absolutely necessary before risking financial ruin.
- Require key managers to write an annual, updated succession letter naming their successor.
- Promote from within when possible, or look for external talent with a proven track record.
4. Motivate your workforce
When delegation reaches the point of abdication, motivating managers to achieve exceptional performance becomes the primary executive function.
Once the right businesses and managers are in place, your main task is to inspire them to reach their full potential using proven motivational skills and techniques. Dale Carnegie's teachings played a transformative role in helping Warren Buffett become a master manager. Buffett adapted Carnegie's psychological and motivational methods into a winning management style.
Inner and outer scorecards
Great leaders possess an internal locus of control, taking personal responsibility for failures and steering away from herd mentality. People with an internal locus of control believe they shape their fate and view problems as challenges to conquer. Those with an external locus of control act as victims, blaming external circumstances.
Warren's father Howard started a successful business during the Great Depression and got himself elected to Congress when he disagreed with the government, teaching Warren an internal locus of control.
True managerial excellence is driven by an obsession for the business and a love for the work rather than just the pursuit of money. The optimal manager is consumed by the enterprise, thinking about it in the morning and dreaming about it at night. Candidates driven solely by money will leave immediately upon acquisition.
Mrs. B ran the Nebraska Furniture Mart until age 104, taking only one vacation in sixty years and spending it miserable because she was away from her store. Tony Nicely began working for GEICO in 1961.
Managers should be compensated based on value added within their industry rather than the inherent economic advantages of the business. Exceptional business economics can make a lousy manager look good, while mediocre business economics can obscure the achievements of a great manager. Pay must reflect genuine performance relative to industry peers.
You can apply these performance principles in daily leadership:
- Take a job that you love so work is not drudgery.
- Hire people who love what they do rather than those who are only driven by money.
- Evaluate a manager's performance by comparing their results against others in the exact same industry.
Dale Carnegie motivational methods
Motivation is optimized by starting encounters with friendliness, praising individuals by name, and criticizing only by category. Uninvited personal criticism triggers defensiveness and resentment. Giving employees a fine reputation to live up to inspires high performance, whereas guilt and direct criticism provoke failure.
David Sokol spent $360 million on a failed zinc project at MidAmerican Energy. Expecting to be fired, Warren instead told him that everybody makes mistakes and instructed him not to dwell on it, leading Sokol to subsequently lead the company profitably for 9 years.
To win an argument and gain trust, you should avoid direct conflict and instead agree with the other person's valid points. Correcting someone openly causes them to lose face and breed resentment. By agreeing with them first and respecting their opinions, you relax the other person and make them willing to listen to your position.
When selling GEICO stock, young Warren would agree with potential clients who stated a preference for Philip Morris before transitioning the discussion to GEICO's virtues.
Successful managers secure cooperation and acquire businesses by speaking to the other person's wants and needs instead of focusing on their own. People act based on what they want. When buying private companies, Warren appeals to the owner's pride, need for employee security, and desire to keep running the show rather than just offering the highest price.
Rose Blumkin sold 90 percent of the Nebraska Furniture Mart to Warren for $40 million instead of taking an $80 million offer from a German conglomerate, because Warren let her and her sons continue running the business.
Inducing people to come up with the right idea through questions is far more effective than giving direct orders. Direct orders provoke resistance because no people like to be bossed around. Asking questions makes suggestions palatable and leads employees or children to set higher standards for themselves and act with conviction.
A sales manager called his team together, listed their expectations of him on a blackboard, and then asked what he could expect from them, leading the team to set and exceed high standards.
You can implement these Carnegie methods directly in your operations:
- Begin encounters in a friendly, welcoming way to make people feel at ease.
- Praise the person by name for both small accomplishments and big achievements.
- Avoid personal criticism; if criticism is unavoidable, praise the person first and criticize the category or use the praise-criticism model.
- Forbear all direct contradictions to the sentiments of others and all positive assertion of your own.
- Avoid words importing fixed opinions like certainly or undoubtedly.
- Use expressions like I conceive, I apprehend, I imagine, or so it appears to me at present.
- Observe in answering that in certain cases an opinion would be right, but in the present case there appears some difference.
- Convert direct orders into suggestions framed as questions.
- Instead of saying I want that job done by Monday, ask: It would be great if we could get that job done by Monday; do you think you can come up with a way to do that?
- Instead of saying Slow down, you are driving too fast, ask: You know the roads are rather slick; do you think that if we slowed down that that would make it safer?
5. Managerial pitfalls and learning opportunities
Managerial pitfalls and challenges must be navigated carefully using hard-earned lessons from experience to avoid trouble. Important axioms cover critical operational dangers such as excessive borrowing, legal violations by employees, misplaced ideas, mistakes, sycophants, and missed opportunities.
Dangers of leverage and bad ideas
Heavy reliance on debt and leverage is a gamble against economic downturns that can threaten a company's survival. While leverage magnifies profits during good times, it wipes out net worth and forces bankruptcy during recessions when earnings drop below debt-service requirements.
During the Great Recession of 2009, Berkshire Hathaway maintained minimal debt and a $20 billion cash cushion, providing safety and capital to buy discounted stocks.
Managers can get into significantly more trouble with a good idea taken to extremes than with a bad idea. Bad ideas are killed immediately, but good ideas become institutions and are scaled recklessly until unexpected systemic risks trigger catastrophic failure.
AIG made huge profits insuring corporate bonds, leading them to insure pools of subprime mortgages without calculating the tail risk, which nearly collapsed the global economy and required an $85 billion U.S. Treasury loan.
Employees who break the law must be reported immediately to the authorities to prevent betting the entire store for quick gains. Failing to report illegal acts makes management accessories after the fact, and aggressive money-making must always stay within legal boundaries.
When two Salomon Brothers traders submitted false U.S. Treasury bids, Warren stepped in as chairman, cleaned house, gave investigators open access, and survived after a $290 million fine on a $700 million preferred stock investment.
CEOs must avoid surrounding themselves with sycophants and yes men who only justify foolish actions. Leaders love to be liked and often surround themselves with advisors whose job is to agree with them, leading directly to corporate disaster.
Warren relies on Charlie Munger as his designated no man who says no ten times as often as he says yes.
Protecting your own earning power
Your own earning power and personal talents are your greatest assets and best hedge against inflation.
Treating yourself like a business with infinite earning potential means continuously improving health, education, and skills. Unique professionals with limited competition can raise prices freely.
Warren paid $34,000 for his first house and drove a cheap car for a long time while accumulating a surplus to invest.
- Weigh Warren's important axioms regarding managerial dangers carefully to keep out of trouble and get out of it.
10 Key Ideas
- Companies with durable competitive advantages generate internal cash, require little capital for plant retooling or research, and offer the greatest career opportunities.
- You should apply specific economic tests, such as checking ten-year per-share earnings consistency and keeping long-term debt under five times net earnings, before committing your career.
- Effective business expansion requires delegating entire jobs to competent managers almost to the point of abdication.
- Managerial changes should be avoided unless necessary, preferring promotion from within or utilizing proven turnaround artists.
- True managerial excellence is driven by an obsession for the business and a love for the work rather than just the pursuit of money.
- Dale Carnegie's motivational methods are optimized by starting encounters with friendliness, praising individuals by name, and criticizing only by category.
- Inducing people to come up with the right idea through questions is far more effective than giving direct orders.
- Heavy reliance on debt and leverage is a gamble against economic downturns that can threaten a company's survival.
- Leaders must avoid surrounding themselves with sycophants and yes men who only justify foolish actions and lead directly to corporate disaster.
- Your own earning power and personal talents are your greatest assets and best hedge against inflation, meaning you should treat yourself like a business with infinite potential.