After my blog on What I Tell Young Researchers, a friend of mine suggested I add the annual shareholder letters of Warren Buffet * (Berkshire Hathaway), Jeff Bezos (Amazon) and Jamie Dimon (JPMorgan) to my recommended readings. I read their latest letters and my friend could not have been more right. This trio of leaders talk about bureaucracy, high standards and the dangers of debt:
Bezos on high standards
“I believe high standards are teachable. In fact, people are pretty good at learning high standards simply through exposure. High standards are contagious. Bring a new person onto a high standards team, and they’ll quickly adapt. The opposite is also true.
I believe high standards are domain specific, and that you have to learn high standards separately in every arena of interest. When I started Amazon, I had high standards on inventing, on customer care, and (thankfully) on hiring. But I didn’t have high standards on operational process: how to keep fixed problems fixed, how to eliminate defects at the root, how to inspect processes, and much more.”
How to achieve high standards in a particular domain area
“First, you have to be able to recognize what good looks like in that domain. Second, you must have realistic expectations for how hard it should be (how much work it will take) to achieve that result – the scope .
Unrealistic beliefs on scope – often hidden and undiscussed – kill high standards. To achieve high standards yourself or as part of a team, you need to form and proactively communicate realistic beliefs about how hard something is going to be –something this coach understood well.”
High standards in action – meetings
“We don’t do PowerPoint (or any other slide-oriented) presentations at Amazon. Instead, we write narratively structured six-page memos. We silently read one at the beginning of each meeting in a kind of “study hall.”
Not surprisingly, the quality of these memos varies widely. Some have the clarity of angels singing. They are brilliant and thoughtful and set up the meeting for high-quality discussion. Sometimes they come in at the other end of the spectrum.
It would be extremely hard to write down the detailed requirements that make up a great memo. Nevertheless, I find that much of the time, readers react to great memos very similarly. They know it when they see it. The standard is there, and it is real, even if it’s not easily describable.
Here’s what we’ve figured out. Often, when a memo isn’t great, it’s not the writer’s inability to recognize the high standard, but instead a wrong expectation on scope : they mistakenly believe a high-standards, six-page memo can be written in one or two days or even a few hours, when really it might take a week or more!
The great memos are written and re-written, shared with colleagues who are asked to improve the work, set aside for a couple of days, and then edited again with a fresh mind. They simply can’t be done in a day or two. The key point here is that you can improve results through the simple act of teaching scope – that a great memo probably should take a week or more”
Dimon on bureaucracy
“Organic growth … is hard work. institutionally, there is often a lot of resistance to it. It’s easier not to add expenses, even when they are good for the business. And growing any sales force [for example] is usually met by some opposition from – guess who? – the existing sales force.
Sometimes people are afraid the change will take away from their compensation pool or their client base. And it’s hard work to properly recruit and train salespeople. Building new products and services is sometimes in conflict with existing products and services. All of these efforts require huge team coordination. So it’s no surprise that it’s sometimes easier
not to push organic growth”
Bureaucracy is a disease
“I was recently at a senior leadership offsite meeting talking about bureaucracy. We heard bureaucracy described as “a necessary outcome of complex businesses operating
in complex international and regulatory environments.” This is hogwash. Bureaucracy is a disease.
Bureaucracy drives out good people, slows down decision making, kills innovation and is often the petri dish of bad politics. ..Leaders must continually drive for speed and accuracy to eliminate waste and kill bureaucracy. When you get in great shape, you don’t stop exercising.
Below are [some] examples of how we’ve set out to combat this condition:
- Meetings. Internal meetings can be a giant waste of time and money. [Have] fewer of them. If a meeting is absolutely necessary, the organizer needs to have a well-planned, focused agenda with pre-read materials sent in advance. The right people have to be in the room, and follow-up actions must be well-documented. …There should be clarity around who chairs the meeting. The chair is responsible for making sure all issues are properly raised, facilitating effective and productive discussions and driving to decisions.
- War rooms. Simplify processes while accelerating the pace of change and driving new innovations…“War rooms” – spanning lines of business, geographies, functions and levels– make firms more agile and to put a laser focus on several hot-button issues… Each war room is staffed with a dedicated group of employees tasked with solving specific problems within a set number of weeks or months. You would be amazed at how quickly our employees can come up with new solutions when they are galvanized around solving a problem in a concentrated time period.
- Reimagining. You can take any part of your business and reimagine it. You can get all the right people in the room to think about a certain process and reimagine how it could be done from the ground up.
- Fighting complacency by being self-critical.Complacency is another disease. It is usually borne out of arrogance or success, but it is a guarantee of future failure. …The only way to fight complacency is to always analyze our own actions and point out our own weaknesses. It’s great to openly celebrate our successes, but when the door is closed, management should emphasize the negatives.
Buffet on debt
“Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well.
…There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.
When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:
“If you can keep your head when all about you are losing theirs .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you . . .
Yours is the Earth and everything that’s in it.”
Bonds are riskier than equities (in the long-run)
“After our purchase [of a bond in 2007], however, some very strange things took place in the bond market. By November 2012, our bonds – now with about five years to go before they matured – were selling for 95.7% of their face value. At that price, their annual yield to maturity was less than 1%. Or, to be precise, .88%.
Given that pathetic return, our bonds had become a dumb – a really dumb – investment compared to American equities. Over time, the S&P 500 – which mirrors a huge cross-section of American business, appropriately weighted by market value – has earned far more than 10% annually on shareholders’ equity (net worth)….
…Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained.
By that standard, purportedly “risk-free” long-term bonds in 2012 were a far riskier investment than a long- term investment in common stocks. I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.
It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.”
*His annual meeting this weekend is also worth watching (on Yahoo finance)