Berkshire Hathaway: The Self-Aware Organization via 2006 - 2010 Letters
“A man’s gotta have a code.” - Omar Little, played by Michael K Williams in The Wire
The following is an investing article for OMD Journal. Keep in mind I may own or have owned the company discussed. None of this is investment advice, do your own due diligence.
Find the archive of companies and people explored here
This is Part Eight of my exploration of Warren Buffett’s shareholder letters. While most letters and questions focus on his financial analysis and investment advice, I wanted to pull out elements that showed his analysis of people—something he doesn’t get enough credit for.
Here are articles on preceding letters:
Pre-Berkshire Hathaway: Buffett Partnership Letters 1957 - 1969
Berkshire Hathaway: Acquiring People it Deserves via 1971 - 1980 Letters
Berkshire Hathaway: Financially Sub-Optimal Yet Optimally Human via 1981-1986 Letters
Berkshire Hathaway: Families of the Sainted Seven via 1987-1991 Letters
Berkshire Hathaway: Ordinary Things by Exceptional People via 1992-1996 Letters
Berkshire Hathaway: Think for Yourself & The Compass to Decentralization via 1997 - 2001
Berkshire Hathaway: Owner Capitalism via 2002 to 2005 Letters
Berkshire survived the 2008 Great Financial Crisis. It sounds silly to say that but during the heat of the crisis, fear was everywhere and survival was a question for many financial institutions. Many that survived came out without wounds to even lick because they lost a full limb. Berkshire was the ant prepared to deploy ~$15b of capital as the grasshoppers around them froze in the crisis of winter.
The once textile operation continued to evolve over the 2006 to 2010 period. A 40-something-year-old veteran of the business world, Berkshire executed with discipline from a position of self-awareness.
Though Buffett often recommended investors to find companies even an idiot could run, he didn’t. I would say a few reasons are because 1) he prefers to buy out companies and investing in the stock market is a secondary choice 2) he doesn’t want to work with idiots and 3) that’s Berkshire’s advantage.
All that wouldn’t be possible without the organization being a self-aware entity. It isn’t enough for individuals to be self-aware. Companies love talking about the desire to hire self-aware people. But that’s useless when the organization itself isn’t self-aware.
Whether it’s hiring the right people, attracting the right shareholders or earning the right customers, an organization needs to be self-aware to achieve all of that. It’s a necessity for such results. That is, for the results to persist over a sustained period of time.
Self-Aware Organizations
The "best person” for a job is subjective. There aren’t school brands, names of companies worked for, social pedigree, or the like that can act as an objective metric for competence, which isn’t to say they aren’t. It might even make sense on some occasions. But it’s improperly used by most organizations. It’s because most have forgotten that it all depends on what the organization needs.
Organizations are no different from people in their need to “fit in” and follow what everyone else does. That’s why so many follow the same hiring practices, have similar benefits, etc. Most are driven by what “others” are doing and not from a bottom-up process that answers the question “What kind of company are we trying to create?” It’s a lack of specificity that results in this herd mentality for organizations.
Running companies is hard work and I don’t blame them for wanting to do what everyone else does. The social inertia is immense and with so much responsibility on the line, why wouldn’t they do what everyone else does? Fucking up could lead to many lives impacted and no leader wants to be responsible for that. Now, those who aren’t willing to embrace that accountability shouldn’t take on leadership positions. But alas, that comes back to the extrinsically driven scorecard to signify the importance of titles for greater income, better exit opportunities, etc.
The best person for a company depends on what the company’s own scorecard is. That’s to say, whether you are joining a company or hiring someone, their pedigree could be valuable to organizations that have it in their scorecard and not valuable for others. Some organizations should want people who want to climb the ranks while others shouldn’t. It’s not enough to put the onus of self-awareness on the prospective employee but for the organization and its leaders to have done that work ahead of time. Without that, they are being negligent employers.
If the company wants people who will bust their ass and make the work their life, they should incentivize that properly and have a culture that rewards that. If the company doesn’t plan to grow fast and promote anyone else into executive roles then they shouldn’t hire those who only want that. People run businesses and Berkshire was one that understood its people were their competitive advantage. But to attract those people, it needed to be self-aware of what it was trying to be.
Buffett outlined what he believed were the three competitive advantages of Berkshire, the organization:
"First, we possess a cadre of truly skilled managers who have an unusual commitment to their own operations and to Berkshire."
"Our second advantage relates to the allocation of the money our businesses earn. After meeting the needs of those businesses, we have very substantial sums left over."
"Our final advantage is the hard-to-duplicate culture that permeates Berkshire. And in businesses, culture counts."
It was these foundational advantages that led to acquiring good businesses in railways, utilities, candy, etc. But good businesses thrive with great managers. Buffett didn’t want to work with any greedy idiots who didn’t tap dance into work like he did. If people didn’t want to do that, they didn’t have to sell to him or work for him.