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At 95, Buffett steps back from writing Berkshire Hathaway’s annual report a ritual that everyone used to wait to read and listen to his long speeches. I will no longer be writing Berkshire’s annual report or talking endlessly at the annual meeting. As the British would say, I’m ‘going quiet.’ This is the beginning of his 6,000-word letter addressed to the shareholders of his company. Through this letter, Buffett has shared some important messages for everyone in society, not just for corporate executives or shareholders.
Reading through the letter provides a signal to us that he is not only an excellent value creator for his shareholders, but also a great human being and a great storyteller with a powerful message. Using 6,000 words, he took us on a journey of 90 years and showed us the future, too.
Though the letter is addressed to the shareholders of Berkshire, I felt it is loaded with messages that can be used by anyone. The letter contains invaluable message from the sage of finance who has the ability to create value for his shareholders without compromising on the greater values of life.
In this article, I will expand on the ideas he shares in the final section of his letter, using examples of financial irregularities from well-known Indian companies. Below are Buffett’s Eight Principles of Financial Leadership drawn from his eight-page letter.
Warren Buffet’s Eight Principles
- Learn from past mistakes: “Don’t beat yourself up over past mistakes, learn at least a little from them and move on.” According to Buffett, every action, irrespective of the result, should be followed by a thoughtful post-mortem analysis. In finance, this mindset is equally important. After every financial failure it is necessary to conduct dispassionate examination and take action accordingly. Such actions may reduce the likelihood of repeating costly errors.
In the case of the Kingfisher Airlines, its management refused to acknowledge early operational problems and instead continued reckless expansion. Similarly, ILFS, instead of admitting solvency stress and addressing liquidity problems early, the company buried them by continuously rolling over debt. Buffett warns that the cost of ignoring mistakes compounds if they are not fixed early.
- Choose your heroes very carefully and then emulate them. He stressed the benefit of utilizing the performance and ethics of industry leaders (heroes) to set internal standards and models for behavior and strategy. Emulating the leader means adopting high standards for ethical practices in different aspects of management.
In case of Videocon – ICICI Bank scandal, leadership failed to embody the ethical stewardship by allegedly sanctioning loans despite known financial distress due to internal influence.
- Live Your Obituary: Buffett advises: “Decide what you would like your obituary to say and live the life to deserve it. Manager must resist pressure to make decisions that boost short-term earnings at the expense of long-term sustainable value.
Satyam Computers committed falsification of cash balances and inflated revenues. Had the Founder and CFO applied the Obituary Test (“Do I want my obituary to say I engineered fake earnings?”), long-term reputation would have taken priority over short-term valuation boosts.
- Focus on Intrinsic Value. “Greatness does not come about through accumulating great amounts of money, great amounts of publicity or great power in government. Buffett reminds leaders to focus on durable value, not just on market excitement.
Finance leadership at DHFL prioritized aggressive expansion and valuation over solvency. DHFL chased size and market share instead of focusing on compounding ethically, as Buffett advises.
- Manage market expectations and volatility prudently. The market system creates immense opportunity but is also “capricious” (volatile) and “venal” (can reward bad behavior in the short term). Buffett stresses the importance of long-term approach that focuses on maintaining a strong balance sheet to survive inevitable short term fluctuations.
IL&FS, through innovative accounting practices concealed liquidity problems and over-relied on short-term borrowings, failing to build a strong balance sheet.
- Reduce Compliance and Ethical Risk. Buffett said, “whether you are religious or not, it’s hard to beat the Golden Rule as a guide to behavior.” The Golden Rule is to be ethical in all dealings. For Finance Managers, this means zero tolerance for deceptive accounting, insider trading, or predatory pricing schemes. A strong ethical culture is the best defense against regulatory fines, lawsuits, and reputation damage, which are major financial risks.
Satyam Computers was found to have inflating cash and margins. Satyam used the gaps in the GAAP in creating a surreal world of prosperity. Buffett’s Golden Rule would have stopped the fabrication.
- Be kind: “Kindness is costless, but priceless too. A positive and kind culture fosters trust within the organization. A finance team that trusts and respects its operational counterparts gets better data.
NSE Co-location Scam. Buffett says treat all stakeholders fairly. NSE violated this by giving select brokers an unfair speed advantage. A fear-driven environment prevented employees from speaking up, stifling information flow.
- Respect the role of people around you. Buffett’s final wisdom distills a lifetime of market success into a set of human principles. He said, “a cleaning lady (man) is as much a human being as the Chairman(woman)”. Following this the companies are expected reduce the gap between the top executives and the person working on the shop floor.
For the finance manager, the lesson is clear: long-term financial prosperity is not a function of financial tricks, but of enduring character, strong ethics, and the humility to learn from every mistake.
You will never be perfect, he concludes, “but you can always be better.”