Warren Buffett and Managing Through Trust
On March 30, Warren Buffett’s Berkshire Hathaway announced David Sokol’s resignation. Buffett’s reputation quickly took a bit of a hit from the likes of Joe Nocera.
Nocera suggests it wasn’t the first time Buffett had tap-danced his way out of a tight spot; he cites the Salomon Brothers’ bond scandal in the 1990s, and the General Re dustup in the mid-2000s.
What’s Nocera’s point? He later elaborated that Berkshire Hathaway is run by “rules that are extraordinarily lax by the standards of good corporate governance…Standards and practices have to change.”
Do Trust Violations Invalidate Trust?
Nocera’s examples amount to once per decade over the last 30 years. Buffett’s reputation is probably pretty safe, because a great truism about trust isn’t true at all: you know, that bit about how trust is hard to gain, but can be lost in an instant? Not true: trust takes roughly as long to dissipate as it took to create (see Toyota, J&J, Madoff).
But Nocera’s reaction is the norm. Ethical problems? Time to double up on compliance, standards and practices, procedures.
Nocera is speaking for business when he sees violations of trust as prima facie evidence of the failure of trust as a strategy.
In this regard, he could not be more wrong.
Charlie Munger and Wisdom of Managing through Trust
Charlie Munger is Buffett’s much-less-in-the-press partner. Buffett credits Munger with at least half the wisdom of the two, and quotes him often.
Munger lives up to his reputation in a trenchant article[1] by Darden Professors Brian Moriarty and Edward Freeman:
In response to a question about whether Berkshire needs more compliance controls Munger said:
…the greatest institutions in the world…select very trustworthy people and then trust them a lot.” He added, “I think your best compliance cultures are the ones which have this attitude of trust, and some of the worst with the biggest compliance departments, like Wall Street, have the most scandals.”
To Munger’s comment: Amen.
The violation of trust by someone who was trusted does not justify giving up on a strategy of trusting. In fact, if you never have a violation, one has to wonder how real your trusting is.
If all of Wall Street ran themselves like Berkshire Hathaway, and had one scandal per decade, we’d all be vastly better off.
Instead, we have an institutionalized belief system that the solution to ethical problems is a set of adversarial business processes. Dealing with ethical issues solely via compliance departments is the best way to take the trust and ethics out of management.
And if the bar is set at once per decade by famous journalists thinking they are acting in service to greater trust in business–well, heaven help us.
[1] The article was in the Washington Post, though the Post will make you jump through hoops to get it. I’ve linked to the hoops.
Charles,
I think the truth may lie somewhere in between on this specific incident, vis-a-vis Berkshire. Munger’s philosophy is spot on. But Buffett’s announcement of Sokol’s resignation was defiantly arrogant: I’ve said everything I’m going to say on the topic and will take no further questions.
No CEO is above questioning, not even Warren Buffett. And if you’re going to follow Munger’s approach you have to recognize you may get nailed from time to time–and you’ll end up having to take responsibility for it. Buffett’s arrogance is charming and hard-won, but sometimes it tips over the edge to inappropriate, I think–potentially jeopardizing others’ trust in him.
I’ve just heavily criticized Nocera myself for an article he recently wrote on IPOs, so I’m not so keen to defend him, but he and others may, in part, have been responding to Buffett’s stonewalling, when they reacted as they did to the Sokol issue. Seems to me that a touch of open humility from Buffett at the outset might have set a different tone to the entire conversation, thereby reinforcing peoples’ ongoing willingness to take their own hands-off approach to trusting him, Munger and Berkshire.
Marian
Marian,
I agree with your comment; Buffett shot his own foot with his intransigence, and no doubt Nocera et al were reacting in large part to that. WB should know better.
I see that not so much as a case of the truth lying somewhere in between, but rather as truth being bi-modal:
-It is true that trust-based management has a lot to like and Berkshire-Hathaway does an admirable job of practicing it.
–It is equally true that Buffett himself fails to live the principles on occasion and deserves what he gets when that happens.
I’d add that Nocera should be able to make that same distinction; unless he truly believes (hey maybe he does) that these few incidents are merely the tip of the iceberg and Warren Buffett is largely a phony.
I myself still pretty much buy the Buffett mystique, modified by the fact that he’s on occasion quite human and therefore far from divine.
And thank you very much Marian for taking the time to contribute to the dialogue. For readers who don’t know, Marian writes a delightful blog with fascinating comment loosely built around business and emotional intelligence. You might want to sample her Monday Miscellany post at http://mcompany.co/2011/06/mondays-miscellany/
Charles,
I think the truth may lie somewhere in between on this specific incident, vis-a-vis Berkshire. Munger’s philosophy is spot on. But Buffett’s announcement of Sokol’s resignation was defiantly arrogant: I’ve said everything I’m going to say on the topic and will take no further questions.
No CEO is above questioning, not even Warren Buffett. And if you’re going to follow Munger’s approach you have to recognize you may get nailed from time to time–and you’ll end up having to take responsibility for it. Buffett’s arrogance is charming and hard-won, but sometimes it tips over the edge to inappropriate, I think–potentially jeopardizing others’ trust in him.
I’ve just heavily criticized Nocera myself for an article he recently wrote on IPOs, so I’m not so keen to defend him, but he and others may, in part, have been responding to Buffett’s stonewalling, when they reacted as they did to the Sokol issue. Seems to me that a touch of open humility from Buffett at the outset might have set a different tone to the entire conversation, thereby reinforcing peoples’ ongoing willingness to take their own hands-off approach to trusting him, Munger and Berkshire.
Marian
Marian,
I agree with your comment; Buffett shot his own foot with his intransigence, and no doubt Nocera et al were reacting in large part to that. WB should know better.
I see that not so much as a case of the truth lying somewhere in between, but rather as truth being bi-modal:
-It is true that trust-based management has a lot to like and Berkshire-Hathaway does an admirable job of practicing it.
–It is equally true that Buffett himself fails to live the principles on occasion and deserves what he gets when that happens.
I’d add that Nocera should be able to make that same distinction; unless he truly believes (hey maybe he does) that these few incidents are merely the tip of the iceberg and Warren Buffett is largely a phony.
I myself still pretty much buy the Buffett mystique, modified by the fact that he’s on occasion quite human and therefore far from divine.
And thank you very much Marian for taking the time to contribute to the dialogue. For readers who don’t know, Marian writes a delightful blog with fascinating comment loosely built around business and emotional intelligence. You might want to sample her Monday Miscellany post at http://mcompany.co/2011/06/mondays-miscellany/
Charlie,
Yes, I think we’re pretty much in agreement–I like your characterization of the situation as bi-modal and agree with you about Nocera. I do hope that Buffett’s pedestal is in tact–it’s been a very tough spring for heroes!
Thank you for the nod on my blog–I’ve been a quiet reader of yours for some time–so valuable.
Marian
Charlie,
Great post and in particular Munger’s comments. Too often we react to an incident (be it trust or otherwise) with a new set of regulations and or contracts and SLA’s (Service Level Agreements). I believe much of this could be avoided it we apologized when we messed up. If we do our best to make our colleagues whole, and we entered into business with good intent.
I think we’ve had the conversation before, when we regulate trust or rely too heavily on rules and contracts we no longer have personal responsibility for trust, or behavior. That may be an opportunity.
Thanks for keeping me thinking
Charlie,
Yes, I think we’re pretty much in agreement–I like your characterization of the situation as bi-modal and agree with you about Nocera. I do hope that Buffett’s pedestal is in tact–it’s been a very tough spring for heroes!
Thank you for the nod on my blog–I’ve been a quiet reader of yours for some time–so valuable.
Marian
Charlie,
Great post and in particular Munger’s comments. Too often we react to an incident (be it trust or otherwise) with a new set of regulations and or contracts and SLA’s (Service Level Agreements). I believe much of this could be avoided it we apologized when we messed up. If we do our best to make our colleagues whole, and we entered into business with good intent.
I think we’ve had the conversation before, when we regulate trust or rely too heavily on rules and contracts we no longer have personal responsibility for trust, or behavior. That may be an opportunity.
Thanks for keeping me thinking