“Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.” – Warren Buffett
Imagine you could understand the secrets behind one of the world’s most successful investors when choosing his team. Imagine if you could apply the same rigorous criteria he uses in his billion-dollar investment decisions to hiring and firing decisions within your organization. This article unveils the wisdom of such a billionaire business tycoon, showing his key team selection and management principles in his own words. Get ready to dive deep into an approach that values passion over financial necessity, emphasizes integral human attributes, and exhibits a healthy skepticism toward employees and deals that are too good to be true. These principles have shaped the landscape of one of the most successful companies in the world, Berkshire Hathaway, and can guide you in your leadership journey or hiring and firing.
Warren Buffett on Selecting the Right People
The below transcript is from the Berkshire Hathaway Annual Shareholders Meeting in 1998. [1]
Question from the audience, “You obviously have filters that you apply on selecting people, as you do on stocks. Can you tell us a little bit about what those filters are?”
Warren Buffett replied, “That is a key question because when we buy businesses, we don’t have managers to put in them. I mean, we’re not buying them that way. We don’t have a lot of MBAs around the office.”
Charlie Munger interjects, “Thank God.”
Buffett continues, “Yeah, that I, you know, have not promised that they’re going to have all kinds of opportunities. So as a practical matter, we need management with the businesses that we buy.”
“And three times out of four, thereabouts, the manager is the owner and is receiving tens of millions, maybe hundreds of millions of dollars. So they’re not—they don’t have to work. And we have to decide, in that time when we meet them, whether they love the business or love money. And we’re not making a moral judgment. Charlie may, but I’m not making a moral judgment about whether it’s better to love the business or love money. But it’s very important for me to know which of the two is the primary motivator with them.”
“And we have had extremely good luck in identifying people who love their business. So all we have to do is avoid anything that, on our part, that diminishes that love of the business or makes other conditions so intolerable that they overcome that love of the business. And we have a number of people working for us that have no financial need to work at all. And they probably outwork, you know, 95% or more of the people in the world. And they do it because they just—they love smacking the ball.”
“And we almost—we virtually had no mistakes in that respect. And we have identified a number of people, Charlie and I have, in terms of proposals to us where we felt that they did really, they liked the money better than the business. They were kind of tired of the business, you know. And they might promise us that they would continue on, and they would do it in good faith. But something would happen six months later, a year later, and they’d say to themselves, “Why am I doing this, you know, for Berkshire Hathaway when I got when I could be doing whatever else they want to do?”
“I can’t tell you exactly how we, what filter it is that we put them through, mentally. But I can tell you that if you’ve been around a while, you can, I think, have a pretty high batting average in coming to those conclusions, as you can about other aspects of human behavior. I’m not saying you can take 100 people and take a look at them and analyze their personalities or anything of the sort. But I think when you see the extreme cases, the ones that are going to cause you nothing but trouble or the ones that are going to bring you nothing but joy, I think you can identify those pretty well. Charlie?”
Charlie adds, “Well, yeah. I think it’s pretty simple. You’ve got integrity, intelligence, experience, and dedication. And that’s what human enterprises need to run well. And we’ve been very lucky in getting this marvelous group of associates to work with all these years.”
Buffett interjects, “But we filter out a lot of people. And then they say, ‘Well, how do you filter them out?’ I would say, and I think Charlie would agree with this, people give themselves away fairly often. And maybe it does help to have been around as long as we have in seeing the various ways they give themselves away.”
“When somebody comes to me with a business, then I probably shouldn’t tell this publicly because they’ll probably tailor their approach subsequently. But when they come, just the very things they talk about, what they regard as important and not important—there are a lot of clues that come with subsequent behavior. And, as I say, we’ve really had a batting average I wouldn’t have thought we would have had with the people that we’ve joined with. But it hasn’t been a hundred percent. It’s been well above 90. And I get asked, you know, ‘How do you make those judgments?’ And I don’t know, Charlie, can you articulate the way we do it?”
Munger concludes, “Well, partly we’re deeply suspicious when the proposition is too good to be true.”
People Warren Buffett Fired
Regarding managing personnel, the billionaire investor Warren Buffett holds nothing back. Using the same rigorous selection criteria as he does for his stocks, Buffett isn’t afraid to make tough decisions when the need arises. Let’s examine some high-profile departures from Berkshire Hathaway, illustrating the driving principles behind Buffett’s unique management style.
David Sokol
David Sokol’s exit from Berkshire Hathaway was one of the most controversial in the company’s history. The former chairman of several Berkshire subsidiaries resigned in 2011 following an internal investigation into stock trades he made ahead of Berkshire’s acquisition of Lubrizol. Sokol was considered a potential successor to Buffett, but his departure underlined the company’s commitment to integrity and ethical behavior, regardless of an individual’s position.
Jordan Hansell
When NetJets CEO David Sokol resigned abruptly, Jordan Hansell stepped into the role. He led the company through a tumultuous period, but in 2019, it was announced that he would be stepping down, making way for a new leadership era at NetJets. Hansell’s departure highlighted Berkshire Hathaway’s commitment to strategic shifts when needed for business growth and success.
Denis Abrams
Denis Abrams served as the CEO of Benjamin Moore, a Berkshire subsidiary, until his unexpected termination in 2012. Despite leading the company through consistent growth, Abrams was let go due to alleged disagreements about the company’s distribution strategy. His dismissal emphasized Buffett’s firm stance on strategic alignment and the importance of a shared vision for the company’s future.
Robert Merritt
Robert Merritt, who became Benjamin Moore’s CEO after Abrams, also cut his tenure short. Merritt was dismissed in 2014, after less than two years at the helm, due to reported management and performance issues. This decision underscored Buffett’s uncompromising commitment to excellence and readiness to make tough decisions when performance standards are unmet.
Richard Santulli
Richard Santulli, the CEO of NetJets, a company Buffett purchased due to Santulli’s innovation in fractional jet ownership, unexpectedly resigned in 2009. While he left on amicable terms to spend more time with family and pursue personal interests, his departure underlined Berkshire Hathaway’s flexibility in recognizing and respecting individual life choices.
Throughout these high-profile departures, Buffett’s ethos remains consistent. He upholds integrity, commitment, and shared vision, not hesitating to make challenging decisions when these are at stake. By applying the same discerning criteria to personnel as he does to his investments, Buffett has sculpted Berkshire Hathaway into the towering success story it is today.
Key Takeaways
- Selecting the right people, much like picking the right stocks, involves applying stringent filters and rigorous criteria.
- Ensuring managers or business owners genuinely love their businesses and are not just financially motivated is crucial in Buffett’s selection process.
- Identifying individuals who find joy in their work, despite having no financial necessity can significantly contribute to the organization’s success.
- Prioritizing values like integrity, intelligence, experience, and dedication can set the foundation for a robust team and successful human enterprises.
- Being cautious about propositions that seem too ideal or lucrative is crucial to avoid pitfalls or disappointments.
Conclusion
According to Warren Buffett, selecting people mirrors his approach to choosing stocks. It involves discerning criteria and keen insight into human behavior. The key to success lies in the financial potential and, more importantly, in the genuine passion and love for the business these individuals exhibit. Integrity, intelligence, experience, and commitment are fundamental to an enterprise’s success. Moreover, maintaining a healthy skepticism towards seemingly perfect propositions safeguards against unforeseen challenges. Buffett’s philosophy emphasizes the importance of personal attributes and emotional investments in businesses’ long-term success and growth.