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Berkshire Hathaway
Good to Great!

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By hartmanbirge
November 16, 2004

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Hi gang. I broke down over the Veterans Day weekend and decided to PHYSICALLY go into a bookstore (always a dangerous proposition) and I came away with what I think is a jewel. "Good to Great" by Jim Collins is not a new book or anything � copyright 2001 � but I am thoroughly impressed by the conclusions and the underlying thesis. If someone else has already reviewed this or if I over-simplify then please forgive me.

What I find so remarkable is that the crux of the book really boils down to CEO personality and leadership style and how it correlates to business performance and of course its offshoot, which is investment performance. As a guy who's forever on the quest for the greatest businesses this certainly has merit to my quest for the superstar business franchises. Perhaps my quest has been over complicated in that I try to use multiple inputs to define "great business." Perhaps if one just finds the right CEO then the quest is over. To say the least the results that Collins and his research team proffer are breathtaking. I found the results to be not only very relevant to investing in general but also to Berkshire specifically. Collins and his team set out to define what it was that turned good companies into great companies. The enemy of "great" he said was "good" in that good is usually seen as satisfactory ("If things are going good, then heaven forbid we rock the boat!!"). Those satisfied with good would never become great. What turns good into great? The answer I found to be startling.

By definition the company had to be good to start with, and then undergo some sort of transformational process to become truly great. They had to discount for things like superior industry dynamics so the great ones had to outperform their peers. These could not be grouped into a "rising tide lifts all boats" sort of scenario. Great they defined by the tough hurdle of beating the market by three times over a fifteen year period � no small feat. Out of the 500 companies they studied 11 made the grade of GREAT (Abbott, Circuit City, Fannie Mae, Gillette, Kimberly Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens, and Wells Fargo). Note the very disparate industries. Here's what I find so utterly amazing and heartening.

- The celebrity CEO? Forget it. The highly acclaimed superstar riding in from on high with all his celebrity status, magazine covers, and glare is largely proven to be a...ta da!! DUD. The great ones...ten out of eleven to be exact... came from the inside. I find that to be absolutely amazing because it bucks the standard solution.

- Executive compensation was a non-factor. The great ones need no monetary motivation. Money isn't what drives them. They have an internal drive and external incentives just ain't gonna do it.

- Strategy or vision was not the defining factor. The "comparison companies" as Collins called them all had visions and strategies so it's not like the great ones were unique.

- Munger would LOVE this one. The great companies did not focus entirely on what to do. They focused also on what NOT TO DO.

- Technological change did not transform good to great. It may have accelerated the transformation but did not define the transformation.

- Mergers and acquisitions played no discernable role (Earth to Pfizer...earth to Pfizer).

- Managing change, motivating people, or aligning things were not a factor. (Wow!)

- There was no point in time that the change occurred. It was not an announced event. It just happened.

- By and large, the great ones were not in great industries ... did anyone say Nucor?

What's the key to being great? In a word it's great people who are nurtured and allowed to do their thing. The FIRST thing that the CEO does before he/she does anything else is to first find, then hire the very best people that they can. This comes before ANYTHING else. It comes before the vision. It comes before the strategy. It comes before goal setting. It comes before even deciding what the heck the company is going to do. Great people can change with changing circumstances. They will figure it out. They will be committed. They will be loyal. It isn't that people are the #1 asset... it's that the RIGHT people are the #1 asset. Task #1 is to find the right people for the bus ride and to get the wrong people off the bus. I seriously underestimated this factor in earlier describing Buffett's leadership skill. It may be an analytical skill, but finding the right people is everything about leading change. And what sort of CEO do we have at the top?

The great company CEOs were what Collins calls "Level 5 leaders." Every one of the 11 companies had a level 5 leader. He lists a transformation of leadership and certain levels of attainment. A level 4 leader for example "catalyzes commitment to and vigorous pursuit of a clear and compelling vision..." The problem occurs when the Level 4 leaves the scene. The great ones have all evolved to attain Level 5 status. What's that?

- They possess a "paradoxical mix of personal humility and professional will."

- They are ambitious, but ambitious for the company � not themselves. You will definitely find a well defined succession plan and the successor will be set up to exceed even the great leader's record.

- Compelling modesty, self effacing and understated.

- Fanatically driven � with an incurable need to achieve results

- Workmanlike diligence. More plow horse than show horse.

- When it goes bad they blame themselves. When it goes good they credit their people.

The findings fly in the face of the usual solution. They fly in the face of what we first think of when we think great CEO. Jack Welch, frankly, is the antithesis of the above. Lou Gerstner doesn't cut it. Larry Ellison falls far short. Think for a moment about the great collection that Buffett has assembled. I for one am dumbstruck at how many of them embody the character traits as outlined above. The parallels are startling. Berkshire has a smorgasbord of level 5 leaders � the Tony Nicely's of the world. Buffett himself and Charlie Munger are certainly Level 5 leaders. The whole company is riddled with them. They are self effacing. They are modest � tell me that it doesn't take modesty in the extreme to sell your company to Berkshire and essentially take yourself off the radar screen. This inherent design of Berkshire I think attracts the Level 5s like flies to fly paper (brilliant design if I do say so). They are fanatics. They credit their people. They exhibit everything as outlined above.

The book has an underlying thesis of DISCIPLINE. Disciplined people to begin, disciplined thought to plan, and disciplined action to execute. All that discipline has at its very core a certain type of person and a certain type of personality. I will leave the rest of the book to the reader and I characterize it as a must read if you are involved in running an organization � any organization.

As an investor on the quest for greatness it highlights the fact that performance � no matter what the industry � has at its root great people. This does not mean famous, spotlight craving people. If you don't know they're there that's probably a good indication of where to look. The anecdotes will not be easily deciphered from afar as these organizational cultures by design shun the limelight. One will have to glean small, yet discernible clues from the reams of documents and articles. But somewhere out there is a hard-working, quiet, introverted, stud who does nothing but get results and take care of his people without giving a damn about what we all think of him. There's your twenty bagger.

HB


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