Wall Street Journal first obtained a copy of Buffett’s memo to his top managers.
For more than 25 years, Buffett constantly emphasized that their highest priority is the reputation of Berkshire Hathaway in his memos. He reiterated that they can trump everything else including profits, but they can’t afford to lose even a bit of the company’s reputation.
Warren Buffett’s 2018 Activist Investment
Most investors are aware of Warren Buffett's most high profile long-term investments. However, there is one long term investment that is often overlooked. Q2 2020 hedge fund letters, conferences and more This is building materials maker USG, which was owned by Berkshire Hathaway for more than 17 years before it was acquired in 2018. If Read More
“We can afford to lose money—even a lot of money. But we can’t afford to lose reputation—even a shred of reputation,” wrote Buffett.
Buffett advised his top managers to continue to evaluate every business action they take against not only what is legal and with an article that would be written and published by an unfriendly, but intelligent reporter in a front page of a national newspaper.
Buffett tells top managers to weigh every business action
He pointed out that the rationale, “Everything else is doing it” is “almost always a bad justification for a business action” and” totally unacceptable when evaluating a moral decision.”
Buffett added that his top managers should give him a call if they perceived any proprietary of legality that causes them to hesitate. According to him, any course of action that evokes hesitation should be abandoned because it might be too close to the line.
Buffett wants to be informed about bad news immediately
Furthermore, Buffett told his top managers to immediately inform him about any significant bad news. He said, “I can handle bad news, but I don’t like to deal with after it has festered for a while.”
Buffett mentioned Salomon Brothers as an example of bad news, which should have been easily disposed of, but it became a problem that almost led to its demise because of reluctance to immediately face the issue.
Salomon Brothers was a one-time powerhouse in bond trading. Buffett invested $700 million in the firm given its good reputation and it appeared stable. However, weeks after his investment Solomon Brothers made a surprise disclosure of a $70 million write down from its bad bets on junk bonds, which led to a series of events that ended to the market crash of 1987. Buffett lost one-third of his investment in the firm.
After a few years, Salomon Brothers was caught in a bond trading scandal that almost compelled the firm to file for bankruptcy. Buffett was forced to step in as interim chairman of the firm to protect his investment—at the time he owned 14% stake. He discovered that every $1 of shareholder equity was supporting $37 of the assets of Salomon Brothers.
He succeeded in turning around and improving the reputation of the firm after ten months.His $700 million investment became $1.7 billion. Buffett described his experience at Salomon Brothers “far from fun, was interesting and worthwhile,” in his 1993 annual letter.
Buffett needs help in succession planning
Going back to his memo, Buffett emphasized that he needs the help of his top managers when it comes to planning about their successors (not his). He instructed them to give their recommendations through a letter or e-mail and mark it “Personal for Warren.”
“These letters will be seen by no one but me unless I’m no longer CEO, in which case my successor will need the information. Please summarize the strength and weaknesses of your primary candidate as well as any possible alternatives you may wish to include,” said Buffett.