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The Responsibility of Running a Business

I love Warren Buffett’s sense of the social responsibility inherent in running a business. Here, from his annual report (pdf), he discusses the particular responsibilities of owning a railroad:

Earlier I explained just how important railroads are to our country’s future. Rail moves 42% of America’s inter-city freight, measured by ton-miles, and BNSF moves more than any other railroad – about 28% of the industry total. A little math will tell you that more than 11% of all inter-city ton-miles of freight in the U.S. is transported by BNSF. Given the shift of population to the West, our share may well inch higher.

All of this adds up to a huge responsibility. We are a major and essential part of the American economy’s circulatory system, obliged to constantly maintain and improve our 23,000 miles of track along with its ancillary bridges, tunnels, engines and cars. In carrying out this job, we must anticipate society’s needs, not merely react to them. Fulfilling our societal obligation, we will regularly spend far more than our depreciation, with this excess amounting to $2 billion in 2011. I’m confident we will earn appropriate returns on our huge incremental investments. Wise regulation and wise investment are two sides of the same coin.

At MidAmerican, we participate in a similar “social compact.” We are expected to put up everincreasing sums to satisfy the future needs of our customers. If we meanwhile operate reliably and efficiently, we know that we will obtain a fair return on these investments.

While there may be a particularly strong responsibility in running “a major and essential part of the American economy’s circulatory system,” every business, large or small, plays a key role in an economy, a business ecology.

Just as we have responsibilities as individual citizens, businesses have responsibility as corporate citizens. The world doesn’t become a better place just on its own, or by wishing. It is through the kind of wise stewardship that Buffett describes above. Think about it for your business? How can you create more value for others as you create value for yourself?

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  • http://tim.oreilly.com Tim O'Reilly

    Another great example from later in Buffett’s letter, describing the compensation of one of his new investment managers:

    “Todd, as was the case with Lou, will be paid a salary plus a contingent payment based on his performance relative to the S&P. We have arrangements in place for deferrals and carryforwards that will prevent see-saw performance being met by undeserved payments. The hedge-fund world has witnessed some terrible behavior by general partners who have received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their limited partners losing back their earlier gains. Sometimes these same general partners thereafter quickly started another fund so that they could immediately participate in future profits without having to overcome their past losses. Investors who put money with such managers should be labeled patsies, not partners.”

  • http://about.me/palpaldal Nuruzzaman Sheikh

    Hmm.

    Mr. Buffett is as wise as his gigantic business is.

  • http://www.kepeklian.com/blog Gabriel

    Merci Tim for that interesting note. When I observe the behavior of bankers, traders, oil companies, I think there is still much work to do. They do not live in the land of men. For example, the revolutions that shook the world benefit … those who sell oil. This is a big shame for the humankind. Corporate responsibility goes beyond borders, we are world citizens.

  • http://www.edwardgtalbot.com Edward G. Talbot

    Buffet is certainly one of the good guys on this score. But Buffet himself has pointed out that active trading of a company’s stock winds up discouraging good business, including these kinds of responsibilities. It’s one thing to accurately talk about how businesses can and should take it into account; it’s another thing to attack the thornier issue of why it rarely happens on the scale it needs to.

  • http://tim.oreilly.com Tim O'Reilly

    Another lovely comment in the report, on the hiring of the same investment manager:

    “One footnote: When we issued a press release about Todd’s joining us, a number of commentators pointed out that he was “little-known” and expressed puzzlement that we didn’t seek a “big-name.” I wonder how many of them would have known of Lou in 1979, Ajit in 1985, or, for that matter, Charlie in 1959. Our goal was to find a 2-year-old Secretariat, not a 10-year-old Seabiscuit. (Whoops – that may not be the smartest metaphor for an 80-year-old CEO to use.)”

    Creating opportunity for talent to flourish is one of the best things about running a business.

    In that regard, I also loved Buffett’s comment earlier in the piece, about hands-off management:

    “At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years (it’s reproduced on pages 104-105) and call me when they wish. And their wishes do differ: There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A “hire well, manage little” code suits both them and me.”

  • Anonymous

    Tim,

    While Warren Buffet enjoys talking about the social responsibility of some of his businesses he also owns large shares in businesses that are not very socially responsible. For example Buffet owns a large portion Coca Cola, a company whose main product is detrimental to peoples health.

    While I am a big fan of Buffet and am a personal stockholder of BerkshireHathaway, I think at the end of the day Warren Buffet’s main goal is to maximize shareholder wealth. If that aligns with socially responsible investments, all the better but I doubt that he takes such factors into consideration when making an investment.

  • http://www.brekiri.com Greg

    Every business managed for the long term should create value for customers and employees in order to be able to generate returns for shareholders. Some companies have always circumvented that logic by exploiting one group or another (or finding other ways to externalize the costs of their business – e.g., pollution), but I’d like to think the potential to do that will continue to decline over time.

  • Chris

    My husband works for BNSF and they have hired non union contractors to come in and do some of the work that my husband’s crew use to do. Well the problem with that is this company’s employees have not had the same training and do not have any idea of what they are doing and IT SHOWS in their work! They hardly do there jobs right and my husband crew who is getting paid to watch these guys take over their work and do it very poorly. So the company is paying the contractors and also paying BNSF guys to babysit them and then paying BNSF guys to go back and do the job again. The BNSF guys do not want to go back but are told they have to. The contractor got paid for the work done they should have to come back and fix it for free! The higher ups have been told about the problem but nothing changes because there’s a contract and the company thinks they are saving money, in reality they are spending more money to get the same work done. So I ask how is that financially responsible?

  • http://www.civiguard.com Zubin Wadia

    Great article.

    The good stewardship mantra applies to Government agencies too.

    Cheers.

  • http://www.akoper.com Andrew Koper

    Tim, I love your blog and your important role in the technology and innovation ecosystem. I also have a lot of respect for Warren Buffett and his abilities as an investor. Having written that, I would say your above post is quite off. Buffett’s great at buying part or all of fairly ho-hum businesses that generate a good amount of cash, and avoiding trends and pitfalls – I’ve never known him to be a “socially responsible investor.” Companies, generally speaking, produce the goods and services that people want and need; all companies contribute to societal good that way. He is a regular capitalist in that regard.

  • http://tim.oreilly.com Tim O'Reilly

    I hear you, Andrew, but I don’t think I was saying that Buffett is a socially responsible investor. I was just saying that they way he described his values resonated with me, and my idea about the fundamental social responsibility in running any business. And I do think that Buffett’s style of “value investing” tends to recognize and support the kinds of companies that do create social value; the way he thinks about business is very different from the way, for example, that Goldman Sachs appears to think. (That being said, Buffett invested in “the great vampire squid” so perhaps you’re right that what he wrote in his report is just rhetoric.)

  • http://tatacommunications.com/ David Ryan

    Such an attitude displayed by a business leader is inspirational – be it a small gesture or a larger transformational action. Some business groups have social good as their sole aim, and not just a stated one. I work for Tata Communications, part of the Tata Group, which grew from a foundation of serving society. Such organizations may be few, but they end up altering entire nations, as is shown by efforts of foundations like the Bill and Melinda Gates foundation, or those of Jamsetji Tata’s endeavors started more than a century earlier. Even today, the Tata Group goes out of its way to ensure that its group companies are aware of the needs and interests of the communities they operate in, irrespective of whether it is in the home country or outside. In the US for example, we work with First Book to donate new books to children from low income families. Aside from community initiatives, ‘social good’ also transpires in the service areas that we have developed for the business community, such as Telepresence that provides benefits for the environment and better work-life-balance from reduced corporate travel and increased productivity, through better quality business collaboration. This service is not limited to those businesses that have deployed their own rooms, but also to the wider ecosystem through our extensive public room network – the largest in the world – located in hotels and business centres in 33 locations globally, including 8 cities in the US.

    We are lucky that we have people like Warren Buffet, Bill Gates – here in the US, as well as others in countries across the globe, who help keep humanity on the right track. Of capitalism’s several silver linings, this is definitely one of the brightest!

    David Ryan
    Executive Vice President, Americas Region
    Tata Communications

  • Pete

    Hi Tim,
    Sorry if this isn’t exactly related to your blog post here, but I was just curious. How did you get the capital to start O’Reilly Media? Maybe that brief history could be a blog post.

    thanks.

  • Pete

    Hi Tim,
    Sorry if this isn’t exactly related to your blog post here, but I was just curious. How did you get the capital to start O’Reilly Media? Maybe that brief history could be a blog post.

    thanks.

  • http://tim.oreilly.com Tim O'Reilly

    @Pete –

    I started O’Reilly with $500 in used furniture. That was our startup capital.

    We funded everything out of cash flow.

    There is a whole class of company that is off the VC radar, of companies that never take outside money, because they are focused on selling goods or services at a profit from day one.

    We were initially a tech writing consulting company. We invested in publishing out of the proceeds and the experience of that business. We expanded into each of our other businesses with the proceeds of our publishing.