The Master Gives It Back
Warren Buffett, the legendary chairman of Berkshire Hathaway, stunned the world this past summer when he announced that he would contribute the bulk of his roughly $40 billion fortune to philanthropy. Even more surprising, the "Oracle of Omaha" committed more than $30 billion to the Bill and Melinda Gates Foundation, to double its efforts to improve global health.
The world's second-wealthiest person, just behind his good friend Gates, Buffett is known for his acumen as an investor, not as a philanthropist. For years, people have quietly wondered when Buffett would start giving away his accumulated wealth, but none suspected he was preparing to make the largest gift in history. Characteristic of Buffett, he directed that $1.5 billion be given away each year but declined even to put his name on the foundation.
Such bold moves are typical of Buffett's leadership. He rarely invests for the short term or changes his mind. But what is less familiar to the public is his generosity of spirit to others, from students contemplating their careers to new CEOs facing difficult challenges. Consider this example from one of my M.B.A. students. Vitaliy Pereverzev of Kazakhstan was part of an investment club that recently traveled to Omaha to meet Buffett and have lunch at Gorat's, his favorite restaurant. When his classmates started having pictures taken with Buffett after lunch, Pereverzev realized he had left his camera back in the Berkshire Hathaway boardroom.
Rather than sending a staff person, Buffett offered to drive Pereverzev himself. And he took the opportunity to provide the young Kazakh with some counsel. "Vitaliy, you have to do what you love. I do not want to live like a king. I just love to invest," Buffett said. "Money aside, there is very little difference between you and me in terms of lifestyle. I eat simple meals. I drive a regular car. I make decisions, and, yes, I, too, make mistakes." Buffett went on to describe his childhood and what he learned working in his grandfather's grocery store.
He asked Pereverzev about his life in Russia and Kazakhstan, eager to learn what people thought about the United States-and American companies. Then Buffett offered the young student advice he won't forget: "Be a nice person, Vitaliy. It's so simple that it's almost too obvious to notice. Look around at the people you like. Isn't it a logical assumption that if you like traits in other people, then other people would like you if you developed those same traits?"
Deceptively simple. That piece of leadership advice reflects Buffett's wisdom: His lessons are often the simplest and the most empowering. Anne Mulcahy of Xerox told me about her encounter with Buffett shortly after becoming CEO in 2001. Facing a liquidity crisis with $18 billion in debt, Mulcahy was under intense pressure to declare bankruptcy. Determined to save the company she loved, she made a "cold call" to Buffett, who invited her to Omaha for a chat.
Mulcahy later confessed that she had hoped Buffett would put money into Xerox, in spite of his well-known aversion to investing in technology companies. But the advice she got proved more valuable. After listening patiently to her problems for two hours, Buffett told her, "You're thinking that the investors, bankers, and regulators are the people you need to survive. Put them all aside, and give priority to talking to your people and your customers about what is wrong and what you have to do."
For the next six months, Mulcahy did just that as she toured the country, rallying support for changes required to restore the company. Xerox stock continued to decline, but she was unfazed. Ultimately, Buffett's advice proved fortuitous as Mulcahy warded off bankruptcy, paid back $10 billion in debt, and continued to invest for the long term. Xerox stock tripled in value.
Now 76, Buffett made his first investment in the stock market when he was just 11 years old. After graduating from the University of Nebraska, he studied economics at Columbia University, where he met his mentor, Benjamin Graham, the influential value investor. There he developed the investment theories and practices that have been the hallmarks of Berkshire since he founded it in his mid-30s. Among them: the principle of "intrinsic business value" as the measure of a business's true worth, independent of its stock price.
Notably, Buffett goes beyond his mentor in two ways: He focuses on companies with a sustainable competitive advantage and believes the quality of their leadership is integral to their value. Unlike the vast majority of acquirers, Buffett retains the management. A master evaluator of people, he asks them, "Do you love the business, or do you love the money?"
For all Buffett's success in parlaying a $100 investment into a $40 billion net worth, Wall Street continues to pursue the opposite path, much to Buffett's dismay. Buffett invests in only a few companies, minimizes his management costs, and hangs on. "Our favorite holding period is forever," he says. That wisdom has been proved with the huge gains of companies like American Express and Coca-Cola. If you'd put $1 in Berkshire Hathaway in 1965, it would be worth $7,000 today-compared with $60 if you'd bought the S&P 500.
During the 1990s technology boom, Buffett patiently outlasted his critics by avoiding the Internet stampede. At the 1999 Microsoft CEO Summit, I listened as he patiently explained to a leading Internet CEO that there was no amount of growth that could make his stock worth 100 times earnings. True to his prediction, the stock collapsed within the year.
While Wall Street pressures boards to fire CEOs who do not produce short-term results, Buffett has an unblemished record of retaining the leaders of his companies. The funds fight to keep their investors and their investments confidential, but Buffett's philosophy is full transparency. Nowhere is that openness more evident than in his famous shareholder letters, where he not only delivers the bad news along with the good but painstakingly points out his mistakes, often with self-effacing humor. Once, when his firm's results fell far short of its traditionally high returns, Buffett candidly commented, "Even Inspector Clouseau could find last year's guilty party: your chairman."
Every March, more than 20,000 people trek to Omaha for Berkshire Hathaway's annual meeting. At "Woodstock for Capitalists," as it is known, Buffett and longtime partner Charlie Munger answer questions for more than four hours. What a contrast to companies like Home Depot, which cut off their meetings in less than 30 minutes, refusing to let shareholders ask any questions.
"Berkshire is my painting," Buffett says, "so it should look the way I want it to when it's done." His fondest hope is that Berkshire will adhere to his principles long after he is gone. "It would be a tragedy," he says, "if someone whose achievement was issuing the most junk bonds or having the silliest stock price took over the company and all that we've built evaporated."
Transparency. But Warren Buffett did not become one of "America's Best Leaders" just for his investing prowess. Rather, he was selected for his leadership and influence in the greater corporate world. His commitment to sound ethics and principles, his self-discipline and consistency, his transparency in disclosing mistakes, his criticism of Wall Street fees and compensation of underperforming CEOs, and his pleas for improving corporate governance-all have had a salutary influence on the corporate community.
Having served on 20 corporate boards, Buffett also understands the responsibilities of governance that many of today's directors seem to have forgotten. When Salomon Brothers was embroiled in a scandal with the U.S. Treasury Department, Buffett stepped in on a Sunday, took over as chair, installed a new CEO, and saved the firm; he offered federal investigators full disclosure and waived attorney-client privilege, enabling the firm to avoid criminal indictment. He told Salomon employees: "You don't need to play outside the lines. You can make a lot of money hitting the ball down the middle."
The rest of us would be well advised to follow his wisdom.
This story appears in the October 30, 2006 print edition of U.S. News & World Report.