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.