Buffett, the well-written biography of Warren Buffett by Roger Lowenstein, offers an interesting biographical sketch with several insights into principled business and investing. In this first reflection I am going to compare Warren Buffett's management philosophy with that of Charles Koch's.
While their businesses face a host of different incentives — Berkshire Hathaway a publicly owned company and Koch Industries privately held — their principled approach to business echoes many similarities.
Both Buffett and Koch approach business with an openness to change and with a focus on creating value, wherever they can find it.
"Buffett did not think of Berkshire necessarily as a textile company, but as a corporation whose capital ought to be deployed in the greenest possible pastures." As Berkshire's textile business struggled, Buffett began directing it's profits into new sectors and opportunities.
Similarly, Koch, initially in the oil refining business, diversified his re-investments in the company into other more value-rich propositions — from commodities trading to fiber. Koch Industries' vision does not focus on a particular industry, but on value creation:
"Apply Market-Based Management to identify and capture those opportunities for which our capabilities will create the greatest value and develop and implement strategies that will maximize this value long-term."
To reach these lofty goals both Koch and Buffett rigorously look to align the incentives of their companies and employees with creating value for shareholders and society.
"I believe in establishing yardsticks prior to the act; retrospectively, almost anything can be made to look good in relation to something or other." Buffett's basic theory of return on investment is to focus on "the return on equity capital — that is, the percentage profit on each dollar invested." He strongly emphasized not wasting time on quarterly projections and other time-wasters.
Koch also frowns on needless paperwork and aims to measure profitability whenever it is practical, placing emphasis on value created by the economics means rather than by the political means.
After a series of government investigations and media attacks in the 1980s 1990s, Koch restructured his company and added an entire division to focus on the public sector and compliance. This fueled a new stage of growth.
Buffett also sees the value in operating within the legal environment. While he does his best to invest in companies with high standards and good management, from time to time he finds himself holding a bad apple. When unordinary situations have arisen, such as they did with the fraud at Salomon Brothers, Buffett felt it his duty as a long-term investor to help restore the company's long-term position as a financial leader.
As Lowenstein frames it: by the end of the ordeal, Buffett had been so compliant that if the regulators had punished him too severely, they would be encouraging less cooperation in the future from other corporations under similar investigations.
Though perhaps the value that trumps all else is one of character. "[M]ost people, regardless of what they say, are looking for appreciation as much as they are for money," writes Lowenstein.
Buffett and Koch both seem to understand this and act accordingly as they search for new investment opportunities and new personnel. Their investment decisions focus on long-term value.
Koch avoids operating as a public company as he believes their quarterly requirements to be adverse short-term incentives. Buffett refuses to offer dividends or divide his stock in order to attract long-term investors. Koch upholds a rigorous hiring process and would place a higher value on someone with good character and adequate skills over someone with adequate character and high skills. Buffett chooses to invest in companies whose management he trusts and believes will be running their company for a long time.