Warren Buffett takes on bloat inside corporate America: 'A lot of stuff that’s done at big companies is unnecessary'
OMAHA — Warren Buffett and his investing partner Charlie Munger took fresh swipes at the bloat inside corporate America Saturday, suggesting companies could get by with fewer employees, meetings and paperwork.
Calling his company's practices unique in the Fortune 500, Buffett said Berkshire had found ways to thrive without centralized policies on executive pay, a general counsel or even a human resources department at the headquarters level.
Instead, widespread autonomy is granted to Berkshire's dozens of subsidiary companies that include Geico, Dairy Queen, NetJets, Fruit of the Loom and more. The company employs 370,000 people across its divisions, but just about 30 at its home office, half working as internal auditors.
The subsidiaries are not required to submit budgets, and while they do report results on an individual level, no one spends time consolidating the reports each month, the type of paperwork that eats up time.
"We know where we stand," Buffett said. "We don’t do unnecessary things around Berkshire."
He added: "A lot of stuff that’s done at big companies is unnecessary."
The comments came in the midst of a more than five-hour Q&A session, the centerpiece of Berkshire Hathaway's annual meeting. More than 40,000 shareholders descend on the company's hometown of Omaha each spring for what Berkshire describes as a "gloriously capitalistic weekend."
Buffett and Munger regularly use the meeting to rebuke modern management practices. In previous years, they have criticized "make-work activities" inside offices and delivered sharp critiques of consultants. Even if the crowd, some eating popcorn and Dairy Queen Dilly Bars as they watched the stage, had heard echos of this sort of message before, they embraced it anew.
"Bureaucracy is sort of like a cancer, and it functions sort of like a cancer," Munger said, having to pause his comments after applause broke out in the arena. "So we’re very anti-bureaucracy, and I think it’s done us a lot of good."
In response to a question about whether zero-based budgeting could spread across Berkshire, Buffett said his managers should already be thinking in a similar way, justifying each cost. The controversial zero-based budgeting method resets a budget annually and requires managers to justify each expense; layoffs and cost-cutting can follow. It's employed most notably by 3G Capital, the Brazilian private-equity firm Berkshire Hathaway partnered with to acquire Kraft in 2013.
Buffett said Berkshire Hathaway's headquarters was so committed to frugality that it employed "sub-zero based budgeting." Even 3G would struggle to find places to cut at some of Berkshire's biggest units, like 39,000-employee Geico, he said.
"You would not find a way for a 3G operation to take thousands of people out of there," Buffett said. "On the other hand, I could think of some organizations where you could take a whole lot of people out where it isn’t being done because the businesses are very profitable to start with."
The hands-off approach can have its limits. Employees of Berkshire Hathaway have criticized its subsidiaries for offering 401(k) retirement plans with relatively high investment management fees, exactly the sort of practice Buffett and Munger rail against, as ProPublica and the Washington Post reported.
When asked about those retirement plans Saturday, Buffett said company managers had a right to choose their own options for employees, despite his preference for low-cost index funds. Buffett said the company would not start imposing retirement policies from Omaha.
His desire for delegation now extends even to his top managers. The chiefs of Berkshire's 61 subsidiaries no longer report directly to Buffett, but instead to vice chairs Greg Abel and Ajit Jain, Buffett told Fox Business anchor Liz Claman. The decision is also seen as part of Berkshire’s succession planning.
Asked if he is now semi-retired, Buffett said he had been "semi-retired for decades," spending the bulk of his days reading and thinking — not micro-managing.
"Part of the Berkshire secret," Munger interjected, "is if there’s nothing to do, Warren is great at doing nothing."
Managers still have a choice of whether they want contact with Buffett.
Buffett said he’s talked to one of Berkshire’s most-successful chiefs a total of three times in the past decade. "He does remarkably well. He might have done even better if I hadn’t talked to him those three times," Buffett joked.
Product Owner/Scrum Master at Unnamed
6yYeah, in the case of a company like Berkshire he's of course right, because all of the subsidiaries are stand-a-lone companies anyway. Most of them existed on their own before being gobbled up by Berkshire, and they and their business operations have nothing to do with each other. So why would you have centralized governance of these different organizations? Berkshire is just a holding company for a couple of investors...a shell corp creating an umbrella around their portfolio. Its not an actual, unified corporate structure running a synergized business operation. I would think that all such holding companies would mostly operate as he's suggesting. I'm surprised if they don't. If he's referring to large corporations whose different business units are mostly focused on the same general market; its a different story because the different units have interlocked operations. They're not totally independent of each other the way that Geico has nothing to do with Dairy Queen.
Conversation | Collaboration | Transformation
6yAt the risk of stating the obvious, the challenge for large organizations is to provide sufficient clarity that allows good people to know what needs to be done and the resources that allow them to do it ... bureaucracy arises in the absence of clarity and individual discipline. To paraphrase Jim Collins ... "When you have disciplined people you don’t need hierarchy; When you have disciplined thought, you don’t need bureaucracy; When you have disciplined action, you don’t need excessive controls. When you combine a culture of discipline with an ethic of entrepreneurship, you get the magic alchemy of great performance." Where does this discipline come from? Ahh - the $64K question - but perhaps it starts by asking people to make simple old-fashioned promises to each other and to look each other in the eye when they break them.
Business Analyst, Project Coordinator & Computer Systems Validation (CSV) Specialist - Agile Methodologies & SCRUM Master
6yTo further Mr. Shelby's comment, I am wondering if Executive salaries are considered bloated as well.
Assistant Counsel TRIDENT Submarine Refit Facility
6yI wish Congress would pay attention to this and zero based budgeting especially.
Continuous Improvement Leadership Solutions
6yIf corporate America held itself to the same levels of efficiency that it holds workers to the pay gap would not be so wide. An interesting turn of events would be to allow workers to perform a lean study of the corporate process eliminating waste and duplication of task. When change initiatives are not sustained and fail to exceed expectations the trail to understanding why often leads to the corporate culture where status quo ways are living large providing job security for the unnecessary task. Of course as soon as the change agents reveal the real answer to why change failed to exceed expectations HR shows them the door. Remember HR will always protect legacy status quo thinking first.