One of the fascinating things about covering Warren Buffett (Trades, Portfolio) is that there’s always more to learn about the billionaire investor. There’s always an article that I’ve missed in the past, or a part of an interview that didn’t seem relevant at the time but has since become important.
I recently stumbled across an old article by Fortune Magazine writer Carol Loomis. Published all the way back in 1988, the article was titled “The Inside Story of Warren Buffett.”
Unlike many other articles, which focused on Buffett’s investing skill, Loomis’s report from 1988 looked at Buffett’s business management skill. “The Wizard of Omaha may well be America’s best investor, but another talent is practically a secret: He’s an ace at running businesses,” the subheading stated.
The article painted an interesting picture of Buffett as somewhat of a ruthless business manager who did not tolerate high costs and set stringent targets for his employees. For example, on the topic of Berkshire Hathaway’s (NYSE:BRK.A) (NYSE:BRK.B) compensation policy, Loomis noted:
“Buffett sets the pay of the top man in an operating company but plays no role in compensation beyond that. All the top people are paid through incentive plans that Buffett carefully tailors to achieve whatever objectives fit – higher profit margins in a business, for example, or reductions in the capital it employs, or improved underwriting results for the insurance operation and more “float” for Buffett to invest. The incentives do not have ceilings. And so it is that Mike Goldberg, of the insurance business, earned $2.6 million in 1986 and $3.1 million last year. On the other hand, in 1983 and 1984, when the insurance business was rotten, he earned his base salary, which is roughly $100,000.”
Later in the article, she said that Buffett could be “quite tough,” noting that he once recalled “landing” on one of Berkshire’s operating divisions when it put in new “labor-saving” data-processing equipment. The headcount then rose around 25%. The article’s author went on to explain:
“For all of his laid-back management style, Buffett knows about numbers like that and deplores them. There is a right-size staff for any operation, he thinks, whether business is good or bad, and he is totally impatient with unnecessary costs and managers who allow them to materialize. He says: “Whenever I read about some company undertaking a cost-cutting program, I know it’s not a company that really knows what costs are all about. Spurts don’t work in this area. The really good manager does not wake up in the morning and say, ‘This is the day I’m going to cut costs,’ any more than he wakes up and decides to practice breathing.””
Over the years, Buffett has cultivated a folksy image of himself. He’s always said he likes to leave businesses alone when he buys them, and let the managers get on with what they do best. This article seemed to suggest that while Buffett employed this approach for the most part, but when costs got out of control, he didn’t hold back.
It also suggested that he employed carefully structured incentive plans for Berkshire’s managers to get the best out of them and their businesses. It seemed that Berkshire’s managers were happy with this approach. Loomis noted in her article that the managers hardly ever complained about his style.
When they did, it was because they thought he was “too-rational and demanding about numbers.” While some managers might have thought these factors were a downside to working with Buffett, they’ve helped Berkshire grow into the giant it is today.
By pushing divisions to increase cash flow, keep unnecessary costs low without cutting cash-producing costs and having the right incentives in place, Berkshire has become a fortress.
Disclosure: The author owns shares in Berkshire Hathaway.
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This article first appeared on GuruFocus.