While Tom Ricks is away from his blog, he has selected a few of his favorite posts to re-run. We will be posting a few every day until he returns. This originally ran on April 1, 2010.
If Warren Buffett were the chief of staff of the Army, we likely would be better off, with a military that is more effective in combat, and also with a better selection of leaders. That's the thought that occurred to me while reading his latest annual report. You can learn a lot about how to run a large organization from a guy like Buffett.
First of all, Buffett, the chairman of Berkshire Hathaway Inc., didn't follow a "zero defects" philosophy during the course of investing his way to becoming one of the richest people in the country. Unlike some Army leaders, he knows that if you aren't making some mistakes, then you aren't trying hard enough. Punishing all errors simply will deter subordinate leaders from taking necessary risks, or even making timely decisions. You want prudent risk taking and you want it done as fast as possible. Time is the great variable in both investing and war, but that isn't acknowledged often enough in the military strategic discussions. Buffett writes that,
We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly -- or not at all -- because of a stifling bureaucracy."
That said, he is quick to go on to describe what he sees as his role in risk taking and other leadership tasks: He and his deputy, he writes, "limit ourselves to allocating capital, controlling enterprise risk, choosing managers, and setting their compensation." In military terms, I think that would mean allocating resources and people, deciding where to take strategic risks, and selecting subordinate commanders. Everything else? That stuff "we delegate almost to the point of abdication," he states in his management principles, printed later in the same annual report. Buffett is so serious about limiting himself that in a company with 257,000 employees, his headquarters office numbers just 21. (This is an approach that reminds me of William Slim, the greatest British general of World War II, who insisted that his corps headquarters be able to travel in just a few trucks and jeeps.) Of course, as Buffett notes, he has to be more careful than most to keep his subordinates happy, because they tend to be wealthy people who can walk if they feel micro-managed or mistreated.
A significant part of discouraging a "zero defects" mentality is leading the way in confessing your own mistakes, which Buffett is quick to do. He notes that the chiefs of GEICO (yeah, he owns that too) opposed his idea of issuing credit cards to the insurance company's customers, a project that ultimately lost about $50 million.
GEICO's managers ... were never enthusiastic about my idea. They warned me that instead of getting the cream of GEICO's customers we would get the -- well, let's call it the non-cream. I subtly indicated that I was older and wiser.
I was just older."
Despite his willingness to see mistakes made, Buffett, whose company is bigger than the Marine Corps, is a big believer in accountability. I believe we need more of this in our military, which used to relieve senior commanders quickly (such as 17 division commanders in World War II), but no longer does. In all walks of life, if you screw up big time, you should suffer the consequences. For what it is worth, I agree with him -- too often we have privatized profit and socialized risk, letting the taxpayer pick up the tab when Wall Street's bets go wrong.
This is how he puts it:
If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or a Chief Risk Officer.
In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he's incapable of handling that job, he should look for other employment. And if he fails at it -- with the government thereupon required to step in with funds or guarantees -- the financial consequences for him and his board should be severe. ...
The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style."
Unlike many in the military, Buffett also writes clearly and simply, and as George Orwell teaches us, clear writing reflects clear thinking.
Finally, lots of people talk nowadays about how military officers need to thrive on chaos or be comfortable with ambiguity. If you can do that, you can seize on opportunities when they arise. Buffett thrives on turmoil. Listen to the master discuss how he did that during the financial crisis of a couple of years ago, when many people ran for the hills:
We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend."
He isn't kidding. He explains that:
When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured $15.5 billion into a business world that could otherwise look only to the federal government for help."
In other words, he spent billions on his belief that it was a good time to buy, and so picked up big parts of major companies for a relative pittance. Or, as he summarizes his thinking about that crisis, "When it's raining gold, reach for a bucket, not a thimble."