Tuesday, March 7, 2017


US billionaire Warren Buffett last week released the annual report of his company Berkshire Hathaway.

Beyond the big numbers – net earnings were down marginally to $24.07b from $24.08b in 2015 and the announcement that his company has $86b in cash and near cash stored up, his annual letter to his shareholders always makes for good reading as it lays out his thoughts on business, corporate governance and investing.

This year he wrote about his confidence in the US economy’s prospects and about his more than half a century investment philosophy.

For the uninitiated Buffett is the world’s richest investor having built his wealth over the last 70-odd years threw shrewd investments in everything from insurance, manufacturing, media, consumer goods, energy and railways.

He has led his company Berkshire Hathaway for the last 51 years. He has almost all his $76b of net worth in the company. He built the company from a failed textile mill into a conglomerate now valued at about $440b through a series of equity investments and outright company purchases.

His stellar record as an investor – his company value has sky rocketed about 9,000-fold over the last half century, his having come out not only unscathed but stronger from every major financial crisis of the last half of the 20th century means that when he speaks everyone, who is anyone listens.

"Corporate Uganda is currently suffering through a trying economic environment. Falling revenues, thinning margins and unrelenting competition from regional and international competition are making for many sleepless nights...

Buffett’s thoughts on the economics of business are insightful and well delivered but where he really stands out is on his emphasis on corporate governance as grower of company value is what sets him apart from many.

He thinks it all begins with company culture.

“Cultures self-propagate …. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behaviour. … As long as Charlie (Munger, vice-chairman) and I treat your money as if it were our own, Berkshire’s managers are likely to be careful with it as well.

“Our compensation programs, our annual meeting and even our annual reports are all designed with an eye to reinforcing the Berkshire culture, and making it one that will repel and expel managers of a different bent. This culture grows stronger every year, and it will remain intact long after Charlie and I have left the scene.”

Isn’t the challenge these days that many managers or employees don’t see the company’s fortunes as tied to their own? That what is good for the company is good for them? That the attitude seems not to be about building legacy but plundering the company as fast as possible, hopefully before they get caught?

And Buffett recognises that beyond culture the next filter for improved corporate governance is in the recruitment process.

“In looking for people to hire, look for three qualities – integrity, intelligence and energy. And if they don’t have the first, the other two will kill you...”

Enough said.

As a logical follow-on he puts a high premium on reputation – his own and his company’s.

“The priority is that all of us continue to guard Berkshire’s reputation. We can’t be perfect but we can try to be. As I’ve said in these memos for more than 25 years: “We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.” We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”

And he doesn’t stop there.

“Sometimes your associates will say “everybody else is doing it.”… It is totally unacceptable when evaluating a moral decision. Whenever somebody offers that phrase as rationale, in effect they are saying that they can’t come up with a good reason. If anyone gives this explanation, tell them to try using it with a reporter or a judge and see how far it gets them.”

And finally he argues that companies may get away with poor corporate governance but the day of reckoning is never far behind.

“When the tide goes out you will know who has been swimming naked...

When the economy is in good shape everyone looks like a fantastic business manager. But the boys will be separated from the men in hard times, with those coming out the other end being those who have beefed up their systems, managed their costs and have enough built in buffers to weather the storm.

Buffett has been writing and speaking for more than a generation. The Chinese say that if you want to climb a mountain study all the possible routes and then ask someone who has been there.

Corporate Uganda would be doing itself a big favour if it read up on Warren Buffett aka the Oracle of Omaha.

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