Warren Buffett’s 10 Commandments for Running a Successful Business

Lawrence A. Cunningham has pulled together what he calls Warren Buffett’s “10 commandments,” in an article for the National Association of Corporate Directors’ summer edition of NACD Directorship. They are:

  1. Selecting the right CEO comes before all other tasks.
    Above all, recruiting, overseeing and, when necessary, replacing the chief executive officer is the board’s most important job. If they secure an outstanding CEO, they will face few of the problems directors otherwise address.
  2. You should discuss a CEO without him/her.
    A board’s outside directors should form a set of performance standards and regularly evaluate the CEO without him/her being present.
  3. Act as if you work for a single absentee owner.
    All directors should act as if there is a single absentee owner and do everything reasonably possible to advance that owner’s long-term interest. Corporate leaders should think in terms of years, not quarters; they must not rationalize continued subpar performance by perpetual pleas for shareholder patience. To that end, it is desirable for directors to buy and hold personal stakes in the companies they serve so that they truly walk in the shoes of owners.
  4. Be fair, swift, decisive – and prepared to fire people.
    If the CEO’s performance consistently falls short of the standards set by the outside directors, then the board must replace the CEO. The same goes for all other senior managers they oversee.
  5. If you perceive a problem, speak up about it.
    Directors who perceive a managerial or governance problem should alert other directors to the issue. If enough are persuaded, action can be taken to resolve the problem.
  6. If no one is listening, reach out to the absentee owner: shareholders.
    When a director remains in the minority and the problem is severe, reaching out to the shareholders is warranted.
  7. Sometimes a leader has to be impolite.
    Even high-quality directors can fail because of what Buffett calls “boardroom atmosphere.” Raising certain topics, such as questioning the wisdom of an acquisition or CEO succession, are seen by some boards as impolite as belching at dinner. Try adjusting the social atmosphere of the room. How to do so, of course, depends on the corporate culture and personalities involved.
  8. Don’t let an outside consultant decide compensation.
    “Directors should not serve on compensation committees unless they are themselves capable of negotiating on behalf of owners,” Buffett says. In other words, this task should not be delegated to consultants. In the negotiations, directors must make one point non-negotiable: all forms of compensation, especially equity-based, must be treated as an expense for accounting purposes.
  9. There is only one way to avoid audit issues: pry.
    The audit committee occupies a central role in today’s financial reporting ecosystem, yet directors cannot conduct the audit and sometimes feel overwhelmed. Buffett’s advice is to focus on what is possible, which is simply getting the auditors to candidly divulge what they know
  10. When it comes time to choose your own replacement, use the above commandments.
    Those who are skilled managerial recruiters and overseers are owner-oriented, engaged, articulate, communicative and astute. Basic habits such as diligence, preparation and attendance are also essential.