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The ABC of business failure

Legendary investor Warren Buffett’s letter to his shareholders is something I look forward to reading every year. He delivered his latest report recently at Berkshire Hathaway’s AGM in Omaha, attended by thousands of investors at an event that has become known as the “Woodstock of capitalism”. When the Sage of Omaha gives us the benefit of his 65 years’ experience in an investment career that made him the richest man in the world by 2008, I think any fund manager would be well advised to listen.

This year’s report from Buffett and his colleague Charlie Munger contained one particular observation that struck a strong chord with me. Describing the qualifications for a good CEO, Warren Buffet rated as a key strength “the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency. When these corporate cancers metastasise, even the strongest of companies can falter.”

The ABC contains the alphabet bricks of business failure. The most obviously damaging of the trio is arrogance. It was arrogance, more than any other factor, that caused the banking crisis. In any area of life, arrogance is a damaging character defect, undermining interpersonal relationships, but in business, it’s potentially lethal. A CEO who is arrogant will ignore the advice of colleagues who may have a far better insight into risks threatening the company.

The ABC contains the alphabet bricks of business failure.

That leads to bad decision-making, low corporate morale and loss of contact between senior management and employees. It destroys the culture of collegiality, of shared opinions and objectives, that is crucial to the effective functioning of any organisation. Once a CEO becomes isolated in a boardroom, he has lost his ability to lead the company effectively.

I believe it’s important for a CEO to remain integrated into the everyday activities of the organisation, mixing with employees, being visible and accessible to them. That’s why I work in an open-plan office, surrounded by colleagues. I respect them as the people on whom the success or failure of the organisation depends and I want to stay in touch.

As for Buffett’s second letter of his alphabet of “corporate cancers”, B for bureaucracy, most people recognise the sclerotic effect of red tape on government, but that doesn’t mean the private sector is immune to this crippling disease. The problem may actually originate from success. As an organisation grows, the temptation is to introduce ever more complex layers of bureaucracy to administer it.

Bureaucracy can spread like Japanese knotweed, choking the corporate mechanisms it was intended to facilitate. The bureaucratic minimalism created by Buffett at Berkshire Hathaway, where there are not even any committees, can’t be totally replicated everywhere else. But it’s not rocket science to ensure your organisation operates with a flat management structure, as we do at Aberdeen, even though it isn’t feasible for us to dispense entirely with committees. We keep lines of communication as short as possible, with hardly anyone between me and the people managing funds.

In his report, Buffett also said “The extraordinary delegation of authority now existing at Berkshire is the ideal antidote to bureaucracy.” I agree: a CEO shouldn’t try to micromanage. My modus operandi is to get everything that lands on my desk and doesn’t need to be there onto someone else’s desk as quickly as possible. A CEO shouldn’t be sitting on a heap of emails; it is other people’s responsibility to deal with. Meetings should be reasonably short, with everyone saying their piece concisely, rather than talking for the sake of it.

Buffett’s third letter, C for complacency, is the most dangerous. It, too, has its roots in past success. But ending up in the top league one season doesn’t mean the same will happen next year. Overconfidence following a period of revenue growth, expansion and increased profits is fatal. A good CEO will react to success by trying to improve performance even more and becoming doubly alert to risks. Managers need to strike a balance between caution and seizing the initiative where there’s opportunity. There is no room for complacency on the switchback ride that is the current global economy.

Warren Buffet always dispenses advice in plain language, explaining complex financial transactions in terms of the corner shop. This is capitalism as it should be practised. He reminded his investors that such industrial giants as General Motors, IBM, Sears Roebuck and U.S. Steel once seemed unassailable, but were brought down by the destructive behaviour listed in his ABC: arrogance, bureaucracy and complacency.

We need to heed that warning, not just with a view to improving performance, but also as a matter of survival. But one feature of Buffett’s “Woodstock of capitalism” I don’t intend to imitate is the bazaar of promotional products on sale there, including “Berky Boxer” shorts showing Buffett’s face. I don’t think the Aberdeen equivalent would enhance our AGM.

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