Newspaper article International New York Times

Success Built on a Radical Notion: Trust

Newspaper article International New York Times

Success Built on a Radical Notion: Trust

Article excerpt

Charlie Munger believes trust in his managers, without the safety net of lawyers and compliance officers, outweighs the risk they may help mitigate.

"By the standards of the rest of the world, we overtrust. So far it has worked very well for us. Some would see it as weakness."

That was Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett's best friend, speaking during the weekend at the company's annual meeting, known as "Woodstock for Capitalists."

Mr. Munger, 90, was ruminating on the state of corporate governance, offering a counternarrative to the distrustful culture of most businesses: Instead of filling your ranks with lawyers and compliance people, he argued, hire people that you actually trust and let them do their job.

Here's a little-known fact: Berkshire Hathaway, the fifth- largest company in the United States, with some $162.5 billion in revenue and 300,000 employees worldwide, has no general counsel that oversees the holding company's dozens of units. There is no human resources department, either.

If that sounds like a corporate utopia, that's probably because it is. To some people in this day and age -- given the daily onslaught of headlines about scandal and fraud in corporate America - - that also may sound almost like corporate negligence.

Mr. Munger's thought experiment about trust is being studied at the Rock Center for Corporate Governance at Stanford University in California. A paper was published last month about his contention, examining its suitability to corporate structures.

As Pollyannaish as Mr. Munger may sound, his view has a profound counterintuitive truth to it: Behavioral scientists and psychologists have long contended that "trust" is, to some degree, one of the most powerful forces within organizations.

Mr. Munger and Mr. Buffett argue that with the right basic controls, finding trustworthy managers and giving them an enormous amount of leeway creates more value than if they are forced to constantly look over their shoulders at human resources departments and lawyers monitoring their every move.

It may seem irresponsibly idyllic, but Mr. Buffett, 83, has always followed a sometimes unusual -- if not counterintuitive -- approach. "We are very disciplined in some ways, and by ordinary business standards we're sloppy in other ways," he conceded.

And Mr. Munger and Mr. Buffett say they readily accept the risk of such a permeable system. "We will have a problem of some sort at some time," Mr. Buffett said to his faithful audience. He added, "300,000 people are not all going to behave properly all the time."

Mr. Munger also acknowledged that he knew that when there was a problem, shareholders and other critics would wag their fingers and question why there were not more controls.

But he added that he believed trust in his managers, without the safety net of lawyers and compliance officers, outweighed whatever risk they might help mitigate. …

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