One of the fascinating things about covering
Warren Buffett (Trades, Portfolio) is that there is always more to learn about the billionaire. There’s always an article I’ve overlooked in the past, or part of an interview that didn’t seem relevant then, but has become important now.
I recently stumbled upon an old article by Fortune Magazine writer Carol Loomis. The article was published back in 1988 and was entitled “The Inside Story of Warren Buffett”.
Unlike many other articles that focused on Buffett’s investment skills, Loomis’ 1988 report looked at Buffett’s business management skills. “The wizard of Omaha may be America’s best investor, but another talent is practically a secret: he’s an ace at running businesses,” reads the subheading.
The article painted an interesting picture of Buffett as an unscrupulous manager who did not tolerate high costs and set strict goals for his employees. For example on the topic of Berkshire Hathaways (BRK.A, Financial) (BRK.B, Financial) compensation policy, noted Loomis:
“Buffett sets the salary of the top man in an operating company, but does not play a role beyond that in the remuneration. All top people are paid through incentive plans, which Buffett carefully designs to achieve all the appropriate goals – higher profit margins in a company, for example. ”Or a reduction in the capital employed or improved underwriting results for the insurance company and more” float ” for Buffett’s investments. The incentives have no upper limits. And so Mike Goldberg made $ 2.6 million from the insurance business in 1986 and $ 3.1 million last year. On the other hand, in 1983 and 1984 when the insurance business was bad, he made his base salary which is about $ 100,000. “
Later in the article, she said Buffett could be “pretty tough,” noting that he once remembered “landing” in one of Berkshire’s operations departments when she was installing new “labor-saving” computing equipment. The number of employees increased by around 25%. The author of the article further stated:
“For all his relaxed leadership style, Buffett knows numbers like this and regrets them. Every company has the right number of staff, regardless of whether the business is good or bad, and they are completely impatient with unnecessary costs ”and managers who allow them. He says, “When I read about a company that is running a cost-cutting program, I know that it is not a company that really knows what costs are about. Spurts don’t work in this area. The really good manager doesn’t wake up in the morning and say, ‘Today I’m going to save costs’, any more than he wakes up and decides to practice breathing.
Over the years Buffett has cultivated a folk image of himself. He has always said that he likes to leave companies alone when he buys them and let managers do what they do best. This article seemed to suggest that while Buffett took this approach for the most part, when costs got out of hand, he didn’t hold back.
It also suggested that he put carefully structured incentive plans in place for Berkshire executives to get the most out of them and their businesses. It seemed that Berkshire managers were pleased with this approach. Loomis noted in her article that managers rarely complained about his style.
When they did, it was because they thought he was “too rational and demanding about numbers”. While some managers may have thought these factors were a disadvantage of working with Buffett, they helped Berkshire grow into the giant it is today.
By pushing the divisions to increase cash flow, keeping unnecessary costs down without cutting cash production costs, and providing the right incentives, Berkshire has become a fortress.
Disclosure: The author owns shares of Berkshire Hathaway.
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