Warren Buffett’s annual letter to shareholders of Berkshire Hathaway, released Saturday, is always pored over for investing smarts, hints at who might succeed him, and folksy wisdom about life and business.
This year’s 50th-anniversary edition didn’t disappoint. It offered readers a breezy and informative waltz through the history of conglomerates, and aphorisms such as “never underestimate the man who overestimates himself.” It even included advice to get the giant root beer float for dessert at Piccolo’s, if you happen to be in Omaha for the annual meeting that marks Buffett’s 50th year at the helm. (“Only sissies get the small one,” he wrote.)
But the Sage of Omaha’s letter also had something in it for those eager to understand his perspective on management and leadership. Buffett wrote about good governance, what makes a great CEO and what he’ll look for in his successor. (He did not name one, though Vice Chairman Charlie Munger gave some strong hints and Buffett did write that Berkshire’s board now has the "right person to succeed me.")
Here are some nuggets of leadership wisdom that appeared in this year’s letter to shareholders.
Invest in the business, not in growing corporate staff. Berkshire’s total number of employees, Buffett noted in the letter, is 340,499 — a figure up 3 percent from last year. “The increase, I am proud to say, included no gain at headquarters (where 25 people work). No sense going crazy.”
Make sure board members can really relate to shareholders. Buffett talked about what sets his board of directors apart. They’re paid only token fees rather than big sums for their work as directors, for instance. And unlike most other companies, they face real risks: Berkshire Hathaway does not carry liability insurance to protect board members. “At Berkshire, directors walk in your shoes,” Buffett wrote.
There are benefits to splitting the CEO and chairman role. While others debate whether it’s a good idea for the same person to be both chairman and CEO, Buffett leans against it — at least for Berkshire's future. He has suggested that his son, Howard, succeed him as a non-executive chairman. “My only reason for this wish is to make change easier if the wrong CEO should ever be employed and there occurs a need for the chairman to move forcefully. I can assure you that this problem has a very low probability of arising at Berkshire … In my service on the boards of nineteen public companies, however, I’ve seen how hard it is to replace a mediocre CEO if that person is also chairman.”
“Character is crucial.” Though Buffett may not have made any big revelations, he did outline the skills the company's next CEO should have to succeed. Managing Berkshire, he wrote, "is primarily a job of capital allocation, coupled with the selection and retention of outstanding managers." As a result, the person leading Berkshire should be “a rational, calm and decisive individual” as well as someone who “knows his limits.” There is no place an ego-driven CEO motivated by excess pay — “a Berkshire CEO must be ‘all in’ for the company, not for himself” — and “character is crucial,” Buffett noted, since “a CEO’s behavior has a huge impact on managers down the line.”
Avoid the “ABCs of business decay.” Buffett described how the ability to fight off arrogance, bureaucracy and complacency are a necessary skill for CEOs. “When these corporate cancers metastasize, even the strongest of companies can falter,” he wrote. He used past examples of General Motors, IBM, Sears Roebuck and U.S. Steel to make his point.
Remember the golden rule. Buffett and Munger have put their trust in their managers, which has allowed them to produce more "than would be achieved by streams of directives, endless reviews and layers of bureaucracy.” He added, “Charlie and I try to interact with our managers in a manner consistent with what we would wish for, if the positions were reversed.”
Experience is the best teacher — and sometimes the only one. Buffett said in his letter that two of his investment managers, Todd Combs and Ted Weschler, will now each manage one of the company’s businesses. He noted that this will make them better investors through the best teacher of all: hands-on experience. By way of explanation, Buffett referenced a cartoon of Adam and Eve in the book Where Are the Customers’ Yachts? The cartoon's caption, he wrote, states that “there are certain things that cannot be adequately explained to a virgin either by words or pictures.”
Admit your mistakes and stay humble. All though he doesn't say this outright, Buffett’s letter is filled with examples of him calling out his own errors and saying his managers are actually better than he is. “I’m not embarrassed to admit that Heinz is run far better under Alex Behring, Chairman, and Bernardo Hees, CEO, than would be the case if I were in charge,” he wrote. And of his delayed sale of Tesco shares, he admitted that he “made a big mistake with this investment by dawdling.” Buffett is repeatedly willing to put himself down and give credit to others when it’s due.
Shower the people who work for you with praise. This was a letter to investors, of course, so it’s not surprising to find Buffett giving compliments to his managers. But the degree to which he did so is unlike that of other CEOs in their letters to investors. Such letters typically highlight the faceless success of a company division or praise an ambiguous “we” rather than the individuals in charge. Buffett, however, lauded not only senior leaders like Reinsurance Group manager and potential successor Ajit Jain (“Ajit’s underwriting skills are unmatched. His mind, moreover, is an idea factory”), but also a 30-year-old former secretary who organized the company’s annual meeting (“Carrie is unflappable, ingenious and expert at bringing out the best in the hundreds who work with her”). He never explicitly said how important it is to give others recognition, but he showed by example that this is key to his leadership style.