Warren Buffet’s (World’s most successful investor) management style and CIOs

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“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

Warren Buffet (1930 – ) World’s most successful investor

Today’s article is the third in a series of articles (First was written on Steve Job’s – Apple CIO followed by Michael Dell (CEO Dell) analysing current and past leaders to ascertain how Chief Information Officer’s (CIOs) can learn better management by applying the management practices of leadership, practiced by these leaders.

PS: CIO is a generic term and other analogous titles are Head of IT, IT Director, Director of IT etc.

The Management Style

Warren Buffet is one of the world’s richest men and a very successful investor.  For today’s blog post I have selected a truly unique individual. He works from his office that lacks a computer and surprisingly his desk is bereft of research on stocks and shares.

Before we go any further, one particular event caught my attention that captures a facet of Warren Buffet’s management style. So, I have decided to share it with everyone. According to BusinessWeek, ‘We arrive late to Paris, touching down in a freakish, near-gale-force windstorm that both thrills and alarms our pilot. In four cars, we race as fast as rush-hour Paris traffic allows from Le Bourget to Dassault Aviation Group’s magnificent 19th century chateau–familiarly known as Le Rond Point–on the Champs Elysees. EJA is the largest commercial customer of Dassault Aviation, Europe’s leading manufacturer of business jets. Serge Dassault, the company’s chairman, is hosting tonight’s gala reception and dinner in Buffett’s honor. By the time we arrive, the reception is in full swing. But Buffett takes a few steps into the foyer and hustles up a flight of stairs. It will be a good 35 minutes until he descends and joins the party.

Downstairs, the guest of honor’s whereabouts is Topic A among Dassault’s distinguished guests. It might puzzle them to learn that Buffett is on a transatlantic call to one of his employees. The matter he is discussing with Ajit Jain this evening is not urgent. But it is Buffett’s custom to speak with Jain every evening. If that means keeping 200 of France’s richest people waiting, then c’est la vie.’

What can CIOs learn from Warren Buffet’s management style? Let’s investigate while allowing you to decide.  (In no particular order and a few other sources utilised):

1. Business assessment: When looking to invest, Warren Buffet looks to satisfy ‘five’ essential criteria, equally CIOs can apply similar criteria when looking to invest their expertise towards business assessment. Buffet – ‘Never invest in a business you cannot understand.’

	Warren Buffet investment criteria	CIO ‘business’ assessment criteria
1	Is the company simple and understandable?	Is the business model, simple and understandable?
2	Does it have a consistent operating history?	Has IT consistently assisted the growth or well being of the company?
3	Does it have favourable, and predictable, long- term prospects?	Is IT viewed favourably within the company and can IT predict how it can help the company’s long-term prospects?
4	Is the management competent and honest?	Is the IT management team competent and aligned to the business vision?
5	Is the underlying business undervalued?	Is IT undervalued? How can IT deliver ‘more’ value from existing resources?

2. Ownership: In the 2010 Berkshire Hathaway (BRKA) annual report, Buffett wrote of his holding company: “We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. Most managers use the independence we grant them magnificently, by maintaining an owner-oriented attitude.” Buffett wants Berkshire Hathway’s managers to think like owners. Their rewards are tied exclusively to the achievements of their own businesses, not those of Berkshire Hathaway – a principle to which Buffett holds very strongly. “We delegate to the point of abdication,” Buffett says in Berkshire’s Owner’s Manual. CIOs need to instil their teams with similar beliefs. Every individual within the CIOs team needs to think as if they were the ‘owner’s’ of the business, especially the CIOs main management team.

3. Risk assessment and crisis management: Buffet – ‘If there is any significant bad news, let me know early’. The team need to have confidence in the CIO, in order that ‘bad news’ events/issues/problems can be resolved prior to them mothballing to the ‘point of no return.’ ‘An investor needs to do very few things right as long as he or she avoids big mistakes.’

4. Succession: Buffet – ‘send me a letter updating your recommendations as to who should take over tomorrow if you became incapacitated tonight. Anything you send me will be confidential’. CIOs need to have succession planning in order that the business has continuity in the unfortunate event of a CIO not being able to provide management.

5. Business reputation: Buffet – ‘Look at the business you run as if it were the only asset of your family, one that must be operated for the next 50 years and can never be sold’. He adds that ‘We can afford to lose money – even a lot of money. We cannot afford to lose reputation – even a shred of reputation.’ CIOs need to understand that IT systems can enhance and taint a company’s reputation. The recent BP oil spill crisis reflects that as it had a devastating effect on BP’s reputation, wiped millions off its share price, cost billions to settle claims and control the oil spill. Additionally, the irrecoverable loss of both human and marine life, coupled with the environmental damage leaves the oil giant in shambles.

6. Quality management: ”What I must understand is why someone will continue to get out of bed in the morning once they have all the money they could want,” Buffett says. ”Do they love the business, or do they love the money?” CIOs need to have a team that enjoys working within IT and associated line of business.

7. Competitive advantage: Warren Buffett was once asked what is the most important thing he looks for when evaluating a company to invest in. Without hesitation, he replied, “Sustainable competitive advantage.” CIOs need to ask themselves how they can help the business through leveraging IT to create competitive advantage? I covered this a few months ago, in my post, Leveraging IT for Competitive Advantage – Myth or Reality? Companies with a sustainable economic advantage need honest, capable and hardworking leaders to retain their lead. Berkshire-Hathaway’s managers have one instruction: Widen the moat. That keeps the castle valuable.

8. Use numbers to season the points you serve — they’re not the main dish: (Points 8,9,10,11 courtesy of the Harvard Business Review blog) Buffett doesn’t just report on the underwriting gains of their insurance businesses and let the numbers stand for themselves; he explains the terminology, what the numbers mean, and how he and Charlie Munger, his business partner, view them. Case in point: “Our $58.5 billion of insurance “float” — money that doesn’t belong to us but that we hold and invest for our own benefit — cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008. Charlie and I find this enjoyable.”

9. Use analogies and metaphors. A great example is Buffett’s description of how many of us felt after the economic collapse in 2008: “By year end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.” And he goes on to describe the government’s response: “In poker terms, the Treasury and the Fed have gone ‘all in.’ Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel.” These metaphors do more to explain his points than paragraphs of technical jargon ever could.

10. Be honest and transparent. Buffett follows-up a recap of 2008 successes with the following revelation: “During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. I will tell you more about these later. Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.” Instead of deflating his credibility, this kind of refreshing candidness makes the audience more trusting of whatever else he might say: after all, he’s clearly not hiding anything. ‘It is more important to say “no” to an opportunity, than to say “yes”.’

11. Use facts to put things in realistic context. After explaining how bad the economic situation was in 2008, Buffett gave a fact-based context for how to view these realities. “Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1/2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges. Without fail, however, we’ve overcome them. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time.”

12. Follow your instinct: Buffet – ‘Do not follow the crowd. Ignore the market, the crowd, and its fashions.’‘It is not necessary to do extraordinary things to get extraordinary results.’

13. Research: Buffet – ‘Do not rely on outside analysis. Do your own research – and do it thoroughly.’ ‘Do not often act on a hunch. Always have sound, well-argued, well-researched reasons for your investments.’

14. Trustworthiness and integrity: Developing characteristics such as trustworthiness and integrity, Buffett believes, is a matter of forming the right habits. “The chains of habit are too light to be noticed until they are too heavy to be broken,” he says. People who stray from these values often show up on Wall Street; they may initially even shine; but eventually they self-destruct. “That is sad, because it does not need to happen,” says Buffett. “You need integrity, intelligence and energy to succeed. Integrity is totally a matter of choice — and it is habit-forming.”

15. Buy at the right price: Purchases must be made at the right price if they are to pay off.

No less an authority, John F. Welch, CEO of General Electric Co., considers Buffett a superb judge of managerial talent. Buffett and Welch have gotten to know each other over the years as golf partners and as rivals in auto insurance and other businesses. ”Take 20 people you know quite well but Warren has just met casually,” Welch says. ”If you ask Warren his opinion about them, he’ll have each one nailed. He’s a masterful evaluator of people, and that’s the biggest job there is in running a company.”

Asked why he has not retired despite his phenomenal wealth, Buffett said the reason is that he has more fun doing what he does than anything else. “The fundamental thing is that the process should be fun,” he said. “I had just as much fun when I had $10,000 to invest as I do now. It’s crazy to do things for your resume. It’s like saving up sex for your old age. You should do what you enjoy as you go along, and work with people you admire. I look forward every day to the next day. I’m wired for this game.”

For the long haul, Warren Buffett’s way must be best. As an associate says, ‘somehow Warren has been able to keep a diverse cast of characters working harder for him than they did for themselves. I see it every day – and I still don’t know how he does it’. Having read all the above, though, you will have a good idea of the maestro’s magic methods. Use them.

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