Warren Buffet on why the institution matters more than individuals
Among all of Warren Buffet's legendary shareholder letters, the 1989 edition is among my favorites. In it, he makes a powerful argument that, when it comes to firm performance, institutional design is far more important that the talents of individual executives.
Here's the key passage, drawn from the section where Buffet discusses his biggest mistakes of the 25 years at Berkshire Hathaway:
"My most surprising discovery: the overwhelming importance in business of an unseen force that we might call "the institutional imperative." In business school, I was given no hint of the imperative's existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn't so. Instead, rationality frequently wilts when the institutional imperative comes into play. For example:
As if governed by Newton's First Law of Motion, an institution will resist any change in its current direction;
Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds;
Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and
The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.
Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided. After making some expensive mistakes because I ignored the power of the imperative, I have tried to organize and manage Berkshire in ways that minimize its influence."
Amen to that. I wish more execs were as deliberate as Buffett at guarding against the institutional sources of inertia, incrementalism & inefficiency. It'd also help if the business world (and management literature) were less reliant on the assumption that oganizational success is largely driven by picking the "best" people.
PS: You can read Buffet's letter here: https://www.berkshirehathaway.com/letters/1989.html