MARGIN OF TRUST

Lawrence Cunningham and Stephanie Cuba have published on Warren Buffett and Berkshire Hathaway extensively, and it’s perhaps in that context that Margin of Trust: The Berkshire Business Model is best appreciated.

The book isn’t a history of the famous investor or his investment vehicle per se, but instead focuses on Berkshire Hathaway’s corporate culture. Specifically, it zeroes in on trust as the secret ingredient behind Berkshire’s success, citing numerous examples from the way the company handles investment decisions, the operations of its subsidiaries, and from the relationship between its C-suite executives (and Buffett’s likely successors).

It’s not entirely clear whether Cunningham and Cuba had any special access to Berkshire’s principals, and thus Margin of Trust often comes across as so much outside-looking-in armchair theorizing. This is not necessarily bad; after all, it’s unlikely that anyone intent on writing about such a subject would gain unfettered access to Buffett or Charlie Munger. And in spite of this limitation, Cunningham and Cube manage to describe a company whose value appear to come from a more germane era of doing business—where deals could be done on a handshake, and where managers abiding by the highest professional standards earned the implicit trust of their principals.

There’s a missed opportunity in Margin of Trust in that Cunningham and Cuba are adept at describing how Berkshire Hathaway’s operates but not really how this culture of trust came to be or can be sustained. It all just seems intertwined with Buffett’s personal ethos and thereby idiosyncratic. Hence, it’s easy enough to come to the conclusion about how important it is to have a culture of trust in an organization, but difficult to draw lessons about how to build that culture itself.

While the author says that Berkshire looks for solid returns on unleveraged equity,

insulation from adversity
Strategic buyer Vs financial buyer
Circle of Competence

You get to see how Warren Buffet has been so succesful with his trust principle.

This is a wonderful account of Warren Buffet’s Berkshire Hathaway business model. It is full of details and stories on how this legendary investor manage his company.

“Trust is a powerful motivator and...autonomy is more value-enhancing than control” and, in essence, trust based cultures can be a competitive advantage, resulting in more effective leadership, lower administrative costs and further organizational efficiencies. While many analysts, researchers and investors focus on the financial and investment success of Berkshire and Warren Buffet, this book looks at the company from a different lens; one of organizational design and innovation.

As with many publications on Warren Buffet they are typically collected from Cunningham’s compilation of essays written by Buffet, many of which are compiled from the annual shareholder letters. What sets this book apart is the focus of the author on the Berkshire management strategy and what it means for company growth and success centered upon trust as the motivator behind the company’s profound sustainability and continued performance, contributing to lower operating costs, higher employee satisfaction and feeling of ownership in the company and brand locality resulting in a competitive advantage that has many studying up on this target operating model and implementing the common principals in their own organizations.

In my field of study it is well known that Buffet filled key roles throughout his companies and even shareholders with people close to him that he trusted. Simple analysis of his acquisitions over the years will show a common theme of long time family own businesses as well. Some of this information is touched upon within the book (see Partnership Practices) but if you want to know more about Warren Buffet to further your knowledge and context on the historical growth and trends of Berkshire I would recommend the Tao of Warren Buffett. The book is short (90-120min read time) but will further your knowledge on the investment, portfolio and hiring strategies of the man behind the successful Berkshire brand. If you can’t tell already, I’m a BIG Buffett fan, both for his solid investment strategy but also his leadership qualities which you can really see firsthand in Margin of Trust. Buffett is a simple man from Omaha, he buys solid businesses and stock at low prices when opportunity presents itself, and he bases many of his business deals upon trust and the relationships he has with the PEOPLE behind the company, deal, or in day to day conversation.

I was surprised to learn that researchers and organizations have only recently, in the last 10-20 years (considering the long legacy of the Berkshire investment brand) begun looking at the internal operational approach to the organization. Interestingly enough, entrepreneurs from Silicone Valley to college classrooms now pay particular attention to the company in an effort to gain greater insights on building strategic capabilities including strong mission statements, capital allocation and courses leveraging the work of Berkshire in the areas of management and competitive advantage.

Bershire’s management principals center on decentralization and autonomy. In this environment, management is lean and employees are empowered to rely their better judgement to make decisions on behalf of the company. This culture of autonomy creates a “safe” environment essentially where employees closest to the product can focus on the work directly tied to the product, service, or client. Most company’s with lean organizational structures struggle to retain employee motivation and build strong culture among the ranks. Berkshire is different. Everyone has ownership in the company and given the autonomy to act as stewards in the product or business’ best interest without fear or threat of downsizing. I teach and mentor in leadership and always stress upon the importance of building a safe environment where employees are not afraid to make a mistake if it is for the right reasons and with the best interests at heart. Innovation and growth cannot thrive in such an environment and the concepts and methodology outlined in Margin of Trust is a perfect foundational framework that neatly compiles these concepts into a beautiful model for my own management and leadership courses because they apply in the real world, too.

Buffett is a simple man with a brilliant mind and his vision extends far beyond Berkshire’s portfolio, it is engrained within the buildings and the hearts of its people. While trust is the overarching theme, I would it is courage , too. When markets fail, or Berkshire does not perform as well as anticipated critics make their voices heard. Yet, Buffett is not a man to yield to pressure or make decisions based upon the assessment of others. He finds his true north and stays the course. Time and again he has weathered the storms, protecting his investors through many storms, and consistently rising high on the next tide. This resilience, is not because of the effort of one man, but rather an entire organization with a heart that beats as one.