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BirdsEye View

lessons from the master, warren buffett - creating shareholder value

I recently participated in an ingenuous board retreat.  There were five board member and management teams, each focused on a strategic, not necessarily bank-related topic.  The groups worked together and produced presentations that were shared at the retreat.  I learned a lot.

One of the reports covered Berkshire Hathaway and Warren Buffett’s approach to business.  As much as I’ve read about him, the lessons in his communications, effectively conveyed by the team presentation, were striking.  I’d like to share them with you.

The presentation outlined ten major insights:

10.  Measure yourself consistently over time.  Often times we shy away from measurement because it is imperfect, manual or fluctuating over time.  The key to measurement, says Buffett, is consistency and tenure.  It is the trends we are after, as well as a candid look at our performance.  Hence, zero earnings management.  Show the good, the bad and the risky.  Buffett also recommends being very stingy with your stock and slow to issue it.  In addition, when acquiring stock, consider not only what you are getting, but the value of the stock you are giving up.

9.  Efficiency.  Efficiency is the key to lowering operating costs, NOT cost reduction drives.  Tone from the top is critical here.  If you redecorate your office while laying off people, the message is clear, and it isn’t the message you intend to send.  Further, as holding companies get bloated, the message regarding efficiency also gets blurred.  At Berkshire, it takes 21 headquarters staff to manage a company with 260,000 associates.  This doesn’t happen by accident.  Hiring good people is key.  More on that later.

8.  Take the long term view.  Buffett’s timeframe is forever.  His vision assumes that in the long-term economy will grow and he is generally optimistic about America.  I thought about this one long and hard.  I can hear the groans from CFOs and CEOs of public companies as they read this and roll their eyes, thinking “You don’t have to deal with all these analysts and their quarterly earnings focus”.  However, we can all name deals that were frowned upon by Wall Street for months and years, and ended up creating tremendous shareholder value, so I certainly see his point.  Need I say “Wells Fargo” or “BB&T” to get my message across?

Also, consider core deposits: we are awash in them and have little to invest them in.  Another dollar in interest-free checking means minimal margins.  But core deposits are what our franchises are all about, and they define the long-term value of our companies.  Long-term views that impact your short-term actions and decisions are a strong predictor for success.

7.  Devotion to liquidity.  Having dry powder allows you to be opportunistic.  The opportunity cost of having it is meaningful, but the long-term value creation is meaningful as well.  It also matters greatly what you buy.  Buying quality merchandise when it is marked down is the optimal strategy.  Think back at the best acquisitions you’ve made or observed.  They follow this principle.

6.  Align shareholder and director interests.  Buffett believes in no D&O insurance and in directors whose wealth is highly dependent on the company’s performance.  His interest is to have the directors think as much like shareholders as possible.  While this might seem extreme, the idea behind it is sound.  Looking for more ways to align management and the directors with the shareholders is one of the board’s main responsibilities and an important ingredient to franchise value creation.

5.  Risk management.  Buffett is the Chief Risk Officer of his company.  He believes the CEO must not delegate risk control.  It is simply too important.  I believe that our industry has developed the risk management function in response to regulatory demands, and generally is less committed to enterprise-wide risk management as a discipline than need be.  ERM does not have to be paper- and labor-intensive, but it is an analytical discipline that can limit shareholder downside and enhance the return on capital of any enterprise.

4.  Hire well, manage little.  We hire people for skill sets, books of business, experience.  Buffett hires people who love their work.  It improves their tenure and effectiveness.  He says he’d rather suffer the few visible costs of bad decision rather than the many invisible costs of moving slowly, or even not at all due to a stifling bureaucracy.  Hiring well facilitates flatter organizations and strong execution while maintaining the entrepreneurial spirit throughout the enterprise.

3.  Integrity, honesty, transparency.  Motherhood and apple pie. The message here is clear:  reputation is all we’ve got.  We can afford to lose money - even a lot of money - but we can’t afford to lose reputation.

2.  Culture, culture, culture.  Some companies live by their culture.  Others swear by it, and others still pay lip service to it.  I worked for companies where the culture was palpable and truly guided daily decisions.  That’s what culture is all about, and it CAN be tangible and inculcated throughout the organization.  Many companies say people are their biggest asset, but only some actually believe and practice it.

1.  Zig when others zag.  Our industry is not known for its originality.  Some call us lemmings.  In the final analysis, it pays to compete where others are not. When everyone is flocking to a market segment, it makes sense to be the contrarian.  Many banks operate under the LILO principle:  Last In, Last Out.  Don’t do it!  Marching to your own drum and identifying market opportunities that are less competitive surely increases the likelihood of success.