Warren Buffet's Leadership Lessons

 "I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business."

"Without more output of desired goods and services per working hour - that's one measure of productivity gains - an economy inevitably stagnates."

- Warren Buffett

From Geoff Colvin, Fortune:

In his annual letter to shareholders this year, three key leadership traits stand out and explain the secret to Berkshire's and the country's prosperity - labor productivity (see below).

Warren Buffett's annual letter to Berkshire Hathaway  BRK.A 0.24%  shareholders, released last Saturday, is scrutinized worldwide for economic and investing insights. Understandably so; in 2015 Berkshire had, guess what, another knockout year. Yet I can't recall ever seeing it read as a leadership document. That's what it is, though, and this year's letter shows why Buffett has been so extraordinarily successful not just as in investor but also as a business leader. Three traits stand out.

- He's optimistic.

What comes through most strongly, as it does almost every year, is a powerfully upbeat attitude. No one has ever answered the call of someone who says, "Our situation is hopeless. Follow me." Effective leaders have figured out how to be optimistic while simultaneously confronting reality, regardless of the circumstances. Buffett does that this year by responding to the presidential candidates, who "can't stop speaking about our country's problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do." Nonsense, Buffett says: "The babies being born in America today are the luckiest crop in history."

Unfounded wishful thinking? Through simple math - this is the confronting reality part - Buffett supports his argument. He shows that even "the much-lamented 2%" annual growth of America's economy in recent years "delivers astounding gains" in just one generation. And he's right. At that rate, and if America's population continues to expand as it's doing now, real per-capita GDP will grow 34.4% in 25 years. That is indeed a giant increase, and Buffett explains its full meaning at some length. By the time he's done, it's hard to dispute his conclusion, based on hard facts, that "America's kids will live far better than their parents did."

- He explains what he's doing so that anyone can understand it. 

Trusting leaders is important, but we all feel more comfortable knowing what they're doing and why. Part of Buffett's genius has long been his ability to explain the financial workings of a massive conglomerate in language that real people use. This year he devotes most of the letter to explaining just how each of Berkshire's main businesses operates and how each performed. I defy anyone who reads those pages to come away confused. On the contrary, you come away thinking, "This guy knows what he's doing." Because he doesn't ask you to trust him, you trust him more.

- He admits mistakes and makes no attempt to sugarcoat them. 

I'm not aware of any other leader who every year acknowledges his errors as openly as Buffett does. Again this year he admits "serious errors I made in my job of capital allocation" and mistakes "in evaluating either the fidelity or the ability of incumbent managers or ones I later appointed." And then, as usual, he goes further: "I will commit more errors; you can count on that." Again, this makes you more confident in him, not less. Yet most leaders haven't learned that lesson.

American Express  AXP 1.70%  CEO Ken Chenault, a leader whom Buffett admires greatly - Berkshire owns almost 16% of Amex - says "The role of a leader is to define reality and give hope." You won't find that done any better than Buffett does it in this year's letter.

Here is an outtake of his annual letter that spells out how vital productivity improvement is to the profitability and prosperity of this country.

The Secret Sauce - Productivity

Jorge Paulo and his associates (Heinz) could not be better partners. We share with them a passion to buy, build and hold large businesses that satisfy basic needs and desires. Their method, at which they have been extraordinarily successful, is to buy companies that offer an opportunity for eliminating many unnecessary costs and then - very promptly - to make the moves that will get the job done. 

Their actions significantly boost productivity, the all-important factor in America's economic growth over the past 240 years. Without more output of desired goods and services per working hour - that's the measure of productivity gains - an economy inevitably stagnates. At much of corporate America, truly major gains in productivity are possible, a fact offering opportunities to Jorge Paulo and his associates.

Earlier, I told you how our partners at Kraft Heinz root out inefficiencies, thereby increasing output per hour of employment. That kind of improvement has been the secret sauce of America's remarkable gains in living standards since the nation's founding in 1776. Unfortunately, the label of "secret" is appropriate: Too few Americans fully grasp the linkage between productivity and prosperity. To see that connection, let's look first at the country's most dramatic example - farming - and later examine three Berkshire-specific areas.

In 1900, America's civilian work force numbered 28 million. Of these, 11 million, a staggering 40% of the total, worked in farming. The leading crop then, as now, was corn. About 90 million acres were devoted to its production and the yield per acre was 30 bushels, for a total output of 2.7 billion bushels annually. Then came the tractor and one innovation after another that revolutionized such keys to farm productivity as planting, harvesting, irrigation, fertilization and seed quality. Today, we devote about 85 million acres to corn. Productivity, however, has improved yields to more than 150 bushels per acre, for an annual output of 13-14 billion bushels. Farmers have made similar gains with other products. Increased yields, though, are only half the story: The huge increases in physical output have been accompanied by a dramatic reduction in the number of farm laborers ("human input"). Today about three million people work on farms, a tiny 2% of our 158-million-person work force. Thus, improved farming methods have allowed tens of millions of present-day workers to utilize their time and talents in other endeavors, a reallocation of human resources that enables Americans of today to enjoy huge quantities of non-farm goods and services they would otherwise lack. It's easy to look back over the 115-year span and realize how extraordinarily beneficial agricultural innovations have been - not just for farmers but, more broadly, for our entire society. We would not have anything close to the America we now know had we stifled those improvements in productivity. (It was fortunate that horses couldn't vote.)

Vern Harnish's take on the Letter:

Buffett highlights on p. 21 how his various companies focus on productivity - and he goes on to list the huge gains many have made. This is a weakness for most small to mid-market firms which have a tendency to just throw people at a problem or look at labor as an expense and hire on the cheap and get what they pay for.

For many industries good measures are Revenue and Profit per employee. For Berkshire, it's $584,000 and $48,163 respectively for its 361,270 employees ($814,675 Rev/Emp for Primerica!). Take a moment to calculate yours and then for a large company in your similar space. In general, I find the FORTUNE 500 generate 3x the revenue per employee of their smaller counterparts. This is a SIGNIFICANT issue.

Keys to increasing productivity from Rick Wallace:

• Think and act like your Total Cost of labor is an investment, not an expense.
• Uncover the right productivity metrics to benchmark, set goals and track, measure and celebrate.
• A Players - pay them more but get A players in every position. Again it is not what you pay them (expense) but the return you get on every dollar. (Container Store - pays 50% more than the industry but gets 3X the productivity.)
• Focus on People (Coach) - help them get better at what they do, help them reach their goals, get them engaged with the team and the company.
• 2 Second LEAN - Paul Aker's simple yet powerful program for empowering employees to clean, sort, sustain every morning and then observing waste and "fixing what bugs them". Empowering everyone, every day, to make their jobs easier and more enjoyable (secret - more productive in the process, engaged with their jobs and a great place to work.)

Uncover the secret to success in business - quit thinking that labor is an expense and start looking at it as your biggest investment and what the return is on that investment. Your profits will increase, your business will be less chaotic, it will not rely on you to work but instead work for you. Your employees will like working there.

There are only two areas you can increase profit to any large degree: Gross Margin % and Labor Productivity. Begin today to focus on those two and the results will begin to show.