2015: What has Buffett learned from Henry Singleton’s Teledyne?

AUDIENCE MEMBER: Hi. My name is Dan Hutner from Vermont.

I was wondering if you could talk about Henry Singleton’s Teledyne, and whether you learned lessons from that, used it as a model, and what you think about how it ultimately unwound, and how you might want Berkshire to continue differently?

WARREN BUFFETT: Yeah. That’s a very good question. And Charlie knew Henry Singleton. I knew a lot about him. I mean, I studied him very carefully, but Charlie knew him personally, as well as studying him.

So I’m going to let Charlie answer that. But there’s a lot to be learned from both what Singleton did in his operating years and then what happened subsequently.

CHARLIE MUNGER: Henry Singleton was very interesting. He was a lot smarter than either Warren or I.

Henry was the kind of guy that always got 800 on every test and left early. And he could play chess blindfolded, at just below the grand master level, when he was an old man.

That said, I watched him invest, and I watched Warren invest, and Warren did a lot better. He just worked at it.

Henry was thinking about inertial guidance, and Warren was thinking about securities. And the extra work enabled Warren to get by with his horrible deficit of IQ, compared to Henry. (Laughter)

And the interesting thing —

WARREN BUFFETT: But let’s not quantify it. (Laughter)

CHARLIE MUNGER: No. The interesting thing about Singleton is he had very clever incentives on all the key executives, and they were tough, and they were important, and they were meaningful.

And in the end, he had three different Defense Departments that got into scandals.

He wasn’t doing anything wrong. He wasn’t trying to hurt the Defense Department on purpose. But the incentives got so strong, and the culture of performance got so strong, that people actually — it went too far — in dealing with the government, Teledyne did.

And so, we haven’t had any trouble like that, that I know of. Can you think of any, Warren?

WARREN BUFFETT: No. And Charlie and I, we really believe in the power of incentives. And there’s these hidden incentives that we try to avoid.

One — we have seen, both of us, more than once, really decent people misbehave because they felt that there was a loyalty to their CEO to present certain numbers — to deliver certain numbers — because the CEO went out and made a lot of forecasts about what the company would earn.

And if you — if you go and say — if I were to say that Berkshire’s going to earn X per share next year, and we have a bunch of executives in the insurance business that set loss reserves and do all kinds of things, or companies in other areas that can load up channels at the end of quarters, at the end of years, I’ve seen a lot of misbehavior that actually doesn’t profit anybody financially, but it’s been done merely because they don’t want to make the CEO look bad, in terms of his forecast. Or he’s done it, because he doesn’t want to look —

When they get their ego involved, people do things that they shouldn’t do.

So we try to eliminate incentives that would cause people to misbehave, not only for financial rewards, but for, you know, ego satisfaction.

I think that’s probably pretty unusual to even be considering that in the business, but we’ve seen enough, so we do consider it.

CHARLIE MUNGER: I might also report that at the end, Henry wanted to sell his business to Berkshire for stock, so he was very smart right to the very end.

WARREN BUFFETT: We had a case at National — it’s interesting.

You really have to understand — should understand — human behavior, if you’re going to run a business, because when National Indemnity — we’re going back to the late 1960s —

Jack Ringwalt was a marvelous man, and he ran it, and he had another marvelous man who worked for him, his tennis partner, and that fellow was in charge of claims.

And when the claims man would come in to Jack and say, “I just received a claim for $25,000” or something, for some long-haul truck or something, Jack would say — Jack — it was just his personality.

He would start berating the fellow and say, “How could you do this to me?” and “These claims are killing me,” and all of that, and he was joking.

But the fellow he was joking with couldn’t take it, really, and he started hiding claims. And he just didn’t — he stuck them in a drawer.

And that caused us to not only misreport fairly minor figures, but it also caused us to misinform our reinsurers, because they had an interest in the size of claims.

And the fellow that was hiding the claims had no financial interest in doing it at all, but he just didn’t like to walk into the office and have Jack kid him about the fact that he was failing him.

And you really have to be very careful in the messages you send as a CEO. And if you tell your — if you tell your managers you never want to disappoint Wall Street, and you want to report X per share, you may find that they start fudging figures to protect your predictions.

And we try to avoid all that kind of behavior at Berkshire. We’ve just seen too much trouble with it. (Applause)