Investor's Business Daily
Why Warren Buffett's Laissez-Faire Management Style Works
by Gary M. Stern
For many senior executives, someone is always looking over their shoulders.
In these tough times, many CEOs put their management team under a microscope. Are the execs hitting the numbers and expanding market share? But a super honcho at one company has become known for giving subsidiary heads lots of leeway and freedom: Warren Buffett.
In the 2010 Berkshire Hathaway (BRKA) annual report, Buffett wrote of his holding company: "We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. Most managers use the independence we grant them magnificently, by maintaining an owner-oriented attitude."
CEO Abrams poses at the Montvale, N.J., headquarters of Benjamin Moore & Co. He says Warren Buffett left the details of operating the paint maker to...
CEO Abrams poses at the Montvale, N.J., headquarters of Benjamin Moore & Co. He says Warren Buffett left the details of operating the paint maker to... View Enlarged Image
Delicate Balancing Act
When CEOs nix micromanaging and give their lieutenants plenty of slack, it involves walking a fine line. Giving the exec team lots of latitude to make decisions instills confidence. But CEOs must still oversee performance to ensure results. When executed effectively, this balancing act of providing autonomy with loose oversight can boost performance and revenue.
Buffett's laissez-faire management style paid off in 2009 as Berkshire Hathaway's stock rose by 19.8%. How can hands-off management work? If it succeeds for Buffett, can it work for other CEOs?
Not every CEO micromanages, says Marshall Goldsmith, a leadership consultant and co-author of What Got You Here Won't Get You There" "The best CEOs only micromanage teams that need micromanagement," he said. CEOs that provide structure and direction to people who need this guidance are offering effective situational leadership.
Buffett employs a hands-off management style because "he knows that people perform best when given autonomy. If you give people autonomy, it's motivating for most people," said Alice Schroeder, author of "The Snowball, Warren Buffett and the Business of Life."
Schroeder says Berkshire Hathaway operates as a holding company that acquires other firms. Buffett's style works because he buys companies with experienced CEOs who are self-sufficient and focused on profitability. Buffett's philosophy: get out of their way and let them run their business.
CEOs who show hands-off managing are balancing over-management and under-management, Goldsmith says. Over-management can demoralize talented people, and under-management can lead to problems when leaders aren't qualified for the job. Another wrinkle is that the job changes and they can't adapt to the new environment.
Laissez-faire thrives at Berkshire Hathaway because "each company has its own culture," Schroeder said. "Berkshire Hathaway doesn't impose a conventional human resources and promotions process on them. If it did, laissez-faire wouldn't work."
In Sync With Warren
In many of its businesses, CEOs like Benjamin Moore's Denis Abrams, Dairy Queen's John Gainor and Borsheim's Susan Jacques are highly competent, experienced, and attuned to Buffett's style. These CEOs "appreciate the autonomy," Schroeder said. "They're capable people and they're judged by results."
Abrams, the CEO of Montvale, N.J.-based Benjamin Moore, says Buffett "buys companies because of the management team; he doesn't buy fixer-uppers. He knows about investing. But making paint, he leaves to the experts." Buffett bought the company in 2000.
Abrams is glad that there's no central human resources unit at Berkshire Hathaway. Benjamin Moore's HR needs are much different from those of Geico, the insurance company, or NetJets, the fractional plane leasing firm.
Buffett even offered Abrams and Benjamin Moore support when paint sales declined in 2009 because of the housing slowdown. Buffett once told Abrams, "If your results look like a straight line, something is off." Business goes through recessions and booms, and Buffett accepts that revenue for a paint company will decline when houses aren't selling and rise when the economy bounces back.
Despite Buffett's hands-off style, Abrams can call Buffett if he needs to bounce something off him. When Benjamin Moore was mulling an acquisition, Abrams contacted Buffett, who asked insightful and clarifying questions.
Of course, not providing considerable oversight has its drawbacks. As Buffett acknowledged in his latest annual report, "We are sometimes late in spotting management problems."
Hands-off managing can trigger "legal" issues, Schroeder said. Improprieties can crop up that Buffett won't know about until a scandal hits the newspaper. "He places trust in managers to handle diversity, legal and ethical matters," Schroeder said. If that trust is misplaced, it can come back to haunt him.
Operating autonomously creates its own set of pressures for CEOs. Buffett encourages his leaders by saying "do more and more, you're capable of so much, and it'll take three people to replace you," Schroeder said. Buffett's subtle message: Exceed expectations and everything will be fine. Leaders who can't produce results will fall by the wayside.
For example, one Berkshire subsidiary that faced a bump was NetJets, which lost $157 million in 2009. On Aug. 6, 2009, NetJets CEO Richard Santulli resigned from the job and was replaced by David Sokol, Buffett's handpicked successor.
Laissez-faire management is neither good nor bad, Goldsmith concludes. If leaders are capable, confident and motivated, it fits and can work well. If leaders lack ability, know-how or confidence, it can backfire. Goldsmith recalls one hands-off CEO who kept promoting people who lacked leadership skills, contributing to the company's demise.
But if laissez-faire works for Buffett, can it help other CEOs succeed? Schroeder contends that many other CEOs could employ this technique, but it takes finesse. "You need to be sensitive to people" and feel comfortable letting leaders be themselves, she said.