Corporate Expense Accounts-"A New Normal?"

In yesterday's New York Times, Joe Sharkey reports on Vince Vitti's book, Travelogy: Managing Travel Thru the Great Recession, "intended, Mr. Vitti says, for senior executives, chief financial officers who need to exercise far greater control and get more personally involved in expense account monitoring.....All the C.F.O. has to do is hang one or two people for expense account padding. Then everybody will straighten out, at least for a couple of years." ________________________________________

Joe Sharkey, Paying Closer Attention to Expense Accounts, New York Times, October 27, 2009

Warren Buffett's frugality and strict corporate cost controls are legendary, beginning 31 years ago.

"....our after-tax overhead costs are under 1% of our reported operating earnings and less than 1/2 of 1% of our look-through earnings. We have no legal, personnel, public relations, investor relations, or strategic planning departments. In turn this means we don't need support personnel such as guards, drivers, messengers, etc. Finally, except for Verne, we employ no consultants. Professor Parkinson would like our operation - though Charlie, I must say, still finds it outrageously fat.

At some companies, corporate expense runs 10% or more of operating earnings. The tithing that operations thus makes to headquarters not only hurts earnings, but more importantly slashes capital values. If the business that spends 10% on headquarters' costs achieves earnings at its operating levels identical to those achieved by the business that incurs costs of only 1%, shareholders of the first enterprise suffer a 9% loss in the value of their holdings simply because of corporate overhead. Charlie and I have observed no correlation between high corporate costs and good corporate performance. In fact, we see the simpler, low-cost operation as more likely to operate effectively than its bureaucratic brethren. We're admirers of the Wal-Mart, Nucor, Dover, GEICO, Golden West Financial and Price Co. models.
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Warren Buffett, 1992 Letter to Berkshire Hathaway Shareholders

"We cherish cost-consciousness at Berkshire. Our model is the widow who went to the local newspaper to place an obituary notice. Told there was a 25-cents-a-word charge, she requested "Fred Brown Died" She was then informed there was a seven-word minimum. "Okay" the bereaved woman replied, "make it "Fred Brown died, golf clubs for sale.'"
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Warren Buffett, 2002 Letter to Berkshire Hathaway Shareholders

"I can't resist one more Chandler quote: "Beginning this year about March 1st...we employed ten traveling salesmen by means of which, with systematic correspondence from the office, we covered almost the territory of the Union." "That's my kind of sales force."
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Warren Buffett, 1996 Letter to Berkshire Hathaway Shareholders

"Our experience has been that the manager of an already high-cost operation frequently is uncommoningly resourceful in finding new ways to add to overhead, while the manager of a tightly-run operation usually continues to find additional methods to curtail costs, even when his costs are already well below those of his competitors."
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Warren Buffett, 1978 Letter to Berkshire Hathaway Shareholders

Talented Managers And The Right Environment-Part II

In today's New York Times, Carol Bartz, CEO of Yahoo, answers the question, "What about leading others?"

"A lot of it is just picking the right team and picking people so much better than you are, and involving them in a decision."
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Adam Bryant, Imagining a World of No Annual Reviews, Corner Office, October 18, 2009

Talented Managers And The Right Environment

In today's New York Times, Ruth Reichl, former Editor-In-Chief of Gourmet magazine and producer of "Gourmet's Adventures With Ruth," offers her advice for running an enterprise:

"How you be a good boss is you find really talented people and you give them the means to work."
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Mike Hale, Gourmet Brand Survives, On a New Platter for PBS, New York Times, October 17, 2009

Warren would agree.

"Charlie and I know that the right players will make almost any team manager look good. We subscribe to the philosophy of Ogilvy & Mather's founding genius, David Ogilvy: "If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants."
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Warren Buffett, 2002 Letter to Berkshire Hathaway Shareholders

"Usually the manager came with the companies we bought, having demonstrated their talents throughout careers that spanned a wide variety of circumstances. They were managerial stars long before they knew us, and our main contribution has been to not get in their way. This approach seems elementary: if my job were to manage a golf team--and if Jack Nicklaus or Arnold Palmer were to play for me--neither would get a lot of directives from me about how to swing."
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Warren Buffett, 1987 Letter to Berkshire Hathaway Shareholders

"I believe the GEICO story demonstrates the benefits of Berkshire's approach. Charlie and I haven't taught Tony a thing--and never will--but we have created an environment that allows him to apply all of his talents to what's important. He does not have to devote his time or energy to board meetings, press interviews, presentations by investment bankers or talks with financial analysts. Furthermore, he need never spend a moment thinking about financing, credit ratings or "Street" expectations for earnings per share. Because of our ownership structure, he also knows that this operational framework will endure for decades to come. In this environment of freedom, both Tony and his company can convert their almost limitless potential into matching achievements.
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Warren Buffett, 1998 Letter to Berkshire Hathaway Shareholders

Tell Me the Bad News Now

Yesterday, in a New York Times interview, Lawrence W. Kellner, Chairman and CEO of Continental Airlines, said:

“People have a tendency to deliver good news. I mean if somebody unscheduled pops up to my office, the odds are they’ve got a piece of good news and they’re eager to share it. But when something is going wrong, they have to feel they can flag it as quickly as when it’s going right, so that you can shift the organization and try to solve the problem. It’s a leadership structure that says, “Look, I don’t care how bad the situation is — the sooner you catch it, the better.” But if you’ve known about it for months and have been hoping against hope that all your other contingencies would solve the problem and you’ve burned up all our opportunities to solve it, I’m going to be a whole lot more unhappy.”
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Corner Office, “Bad News or Good, Tell Me Now,” New York Times, September 27, 2009

Warren would certainly agree. In recalling the 1990-1991 Salomon scandal, in a July 23, 2008 memo he told Berkshire Hathaway managers:

“…..let me know promptly if there’s any significant bad news. I can handle bad news but I don’t like to deal with it after it has festered for awhile. A reluctance to face up immediately to bad news is what turned a problem at Salomon from one that could have easily been disposed of into one that almost caused the demise of a firm with 8,000 employees.”
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A Case Study of a Buffett Business Principle

As both a “student” and “teacher” of Warren Buffett’s business principles the past three years, I am continually amazed at their timelessness. I remember once reading that he said they’re not principles if they’re not timeless.

Twenty-four years ago, he wrote:

“ When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”
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Warren Buffett, 1985 Letter to Berkshire Hathaway Shareholders

Now, let’s fast forward to a recent article in the New York Times regarding Chrysler. Included below are selected excerpts from the article:

"FOR Steve Feinberg, the onetime owner of Chrysler, the past year has been a crawl toward defeat. He lost billions of dollars. He lost prestige. He lost his privacy. And he ended up a ward and supplicant of the federal government…..

Mr. Feinberg took over Chrysler almost exactly two years ago, promising to revive the company. Chrysler filed for bankruptcy protection at the end of April. So how he and his private equity firm, Cerberus Capital Management, chose to describe their journey with Chrysler is a delicate matter.

If he says he should have shelled out more money to help Chrysler, he could face the ire of investors who have already suffered heavy losses on his gambit. If he says he should have simply dumped Chrysler’s auto arm, while clinging to its more promising finance unit, he could be accused of caring more about his wallet than he did about Chrysler’s workers and the automaker’s role in the economy.

When Cerberus began poking around Detroit, some at the firm said that the American automobile industry was going to be the biggest turnaround story in history. In sessions with potential investors in the last few years, the Cerberus team came across as passionate, skilled and incredibly confident that they should succeed where others had failed.

Cerberus and its co-investors ultimately invested $7.4 billion in Chrysler, a sum now worth an estimated $1.4 billion. Ideally, Cerberus hoped to wed Chrysler’s finance arm to another finance company it controlled, GMAC. To that end, the risks in Chrysler’s auto business were something that the Cerberus team thought it could manage and that wouldn’t stand in the way of making billions of dollars for investors.

……GMAC and Chrysler became so weak that they needed $22.6 billion in government aid in the last year to stay afloat. For Chrysler and its workers, investors, business partners and customers, was all of that worth it?
According to Maryann Keller, a longtime auto analyst and consultant, the company that Mr. Feinberg took over was already suffering from myriad problems: a bad cost structure, a limited product line and no pipeline of more diverse offerings. In short, she says, Cerberus had simply bought a “basket case.”

Cerberus now values its Chrysler stake at 19 cents on the dollar. It is humbling and embarrassing figure for Mr. Feinberg. But its better than zero cents on the dollar, which is what his stake might have been worth had the government not bailed him out."
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Louise Story, For Private Equity, a Very Public Disaster, New York Times, August 9, 2009

The Fallout

"Investors in hedge funds run by Cerberus Capital Management LP, whose audacious multi-billion dollar bet in the U.S.auto industry went bust, are bolting for the door, clinching one of the highest-profile falls from grace of a superstar in the investment world.

Clients are withdrawing more than $5.5 billion, or nearly 71% of the hedge fund assets, in response to big investment losses and their own need for cash, according to people familiar with the matter."
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Peter Lattman and Jenny Strasburg, Clients Flee Cerberus, Fallen Fund Titan, New York Times, August 29, 2009