Warren Buffett: Culture, Not Rules, Determines Organizational Behavior

Over the past weekend, Berkshire Hathaway released its 2010 annual report, which included Warren Buffett’s letter to the company’s shareholders.  These letters have achieved an almost cult-like following because they’re written in a highly readable and direct style, and actually sound like something Buffett himself might write.  The corporate-speak that’s used in most such letters is conspicuously absent.  For instance, when describing the company’s interest in pursuing major acquisitions, Buffett writes:  “[w]e’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”  And, when encouraging shareholders to attend the  company’s annual meeting, he describes it as  “Woodstock for Capitalism.”

Beyond the unpretentious style, Buffett’s shareholder letters are remarkable because they provide a clear sense  of Berkshire’s corporate culture.  Buffett acknowledges that this culture would be hard to duplicate, and describes it as one in which directors and managers treat the business as if it, and the company’s assets, were their own.  This culture, he writes, “will repel and expel managers of a different bent.”

Buffett  also explains how he implements his “hire well and manage little” philosophy:  he simply sends a memo to his managers every two years, and invites them to call him when they wish.  Buffett says that he speaks with some managers daily, but hasn’t spoken with others for over a year.

Buffett’s most recent biennial managers’ memo  (included in the annual report), provides further insights into Berkshire’s organizational culture:

As I’ve said in these memos for more than 25 years: “We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.”  We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.

Sometimes your associates will say “Everybody else is doing it.”   This rationale is almost always a bad one if it is the main justification for a business action. It is totally unacceptable when evaluating a moral decision. Whenever somebody offers that phrase as a rationale, in effect they are saying that they can’t come up with a good reason. If anyone gives this explanation, tell them to try using it with a reporter or a judge and see how far it gets them.

If you see anything whose propriety or legality causes you to hesitate, be sure to give me a call.  However, it’s very likely that if a given course of action evokes such hesitation, it’s too close to the line and should be abandoned. There’s plenty of money to be made in the center of the court. If it’s questionable whether some action is close to the line, just assume it is outside and forget it.

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Somebody is doing something today at Berkshire that you and I would be unhappy about if we knew of it. That’s inevitable: We now employ more than 250,000 people and the chances of that number getting through the day without any bad behavior occurring is nil. But we can have a huge effect in minimizing such activities by jumping on anything immediately when there is the slightest odor of impropriety. Your attitude on such matters, expressed by behavior as well as words, will be the most important factor in how the culture of your business develops. Culture, more than rule books, determines how an organization behaves.

It’s hard to improve on that as a statement of organizational values.  The 80-year-old Buffett writes that he believes Berkshire’s distinctive culture is so deeply embedded that it will endure long after he’s gone.  I hope he’s correct.

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