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Josh Zachariah
Josh Zachariah
Articles (89) 

Warren Buffett On Labor Relations

December 18, 2011 | About:

In 1996 Warren Buffett reprinted the owner’s manual in the shareholder report and described conditions for holding stock in some companies:

We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations

This statement was initially made in 1983 and perhaps Buffett’s opinion on sub-par businesses may have changed since. Early on he had held onto the fledgling textile business that was Berkshire in its infancy. Not until 1985 and after heavy losses did he shut down that line of business. But more to the point, Buffett emphasized the importance of labor relations by conditioning that as a reason to sell a business.

Labor relations are an extremely important element for business. Many great businesses tout their relations with employees and go so far as to say their critical stakeholders start with employees then customers and lastly investors. This is not to say investors are least important, but that if employees are taken care of then customers will naturally be taken care of and by deduction investors will be taken care as goods sell.

The CEO-founder of Southwest espouses this view, Howard Schultz of Starbucks, Alibaba and its founder Jack Ma push this ideal also. Many other great businesses that have rewarded investors likely pushed an employee first standpoint also. Consistent with this notion, businesses that have had perennial problems with their employees such as GM (pre-bankruptcy) and American Airlines tend to perform poorly.

There has been a minor contradiction to Buffett’s labor relations rule in his holding of Wal-Mart. Wal-Mart has historically had a fractious relationship with their employees and has tried busting up any attempts at unionization. Though relations are not exactly cold, there could be room for improvement. The British subsidiary Asda formed a union at Wal-Mart’s displeasure. Wal-Mart’s poor reputation with labor was nearly a deal breaker for their acquisition of South African based Massmart.

But Wal-Mart’s employee structure is different than most businesses. Just as Wal-Mart turns over products at a high rate they also turn over employees at a high clip. Employees at stores and even upper level managers of Wal-Mart have stays with the company that is of a very short duration (Nelson Lichtenstein writes about employee trends about Wal-Mart in The Retail Revolution). For this reason it may be costly to invest in labor relations or perhaps it may be that the high turnover is because of poor labor relations.

Employee appreciation is not limited to pay and examples abound of companies rewarding employees in areas other than compensation. In Charles Ellis’s The Partnership he describes Goldman Sachs’s strategy of supporting and rewarding employees. He writes:

"Frank, could I see you for a minute?" [Bob] Rubin had followed partner Frank Brosens out of a management committee meeting. The meeting had been a triumph. Brosens had presented a compelling case for a bold commitment to arbitraging Japanese equity warrants.... Brosens had made the entire presentation but, as a learning experience, he had invited Zachary Kubrinick to sit in on the meeting as an observer. Brosens... could hardly believe Rubin had been so impressed that he would leave the meeting to compliment him immediately. Brosens was right; Rubin was not rushing to compliment him....

"Frank," said Rubin in his soft, relaxed voice, "you and I both know that, as young as he is, Kubrinick knows all that you know about Japanese warrants and he could have made the case equally well. You really should have let him make the case--and get the experience of coming before the management committee. By not taking the credit, you become more effective. If you do right by people, they win and you win. Frank, always go out of your way to share credit"...

This quote really stuck with me as this kind of appreciation can be far greater than any remunerative form. Warren Buffett uses a similar strategy in his shareholder letters. He regularly praises managers [performing ones] of the companies he owns with incredible grace and sincerity. In a shareholder letter he wrote of Ajit Jain:

“Ajit came to Berkshire in 1986. Very quickly, I realized that we had acquired an extraordinary talent. So I did the logical thing: I wrote his parents in New Delhi and asked if they had another one like him at home. Of course, I knew the answer before writing. There isn’t anyone like Ajit.”

A thanks is one thing, but this kind of genuine appreciation will probably earn Buffett great loyalty by those he has publicly rewarded. As significant as it is to the organization, relations with employees generally gets a sentence or two in annual reports. Its unfortunate as something so central to the business deserves much more explanation.

Josh Zachariah

About the author:

Josh Zachariah
I credit my father and Warren Buffett for molding me into the investor I am today.

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