Taking the Blame: Why Warren Buffett Has Class and Competence, and is Practicing Evidence-Based Management

Check out the difference between Warren Buffett and some of his peers:

“When Lehman Bros. CEO Richard Fuld testified on Capitol Hill this month, members of Congress grilled him to own up. Fuld said he takes full responsibility for his decisions, that he "felt horrible about it," but that the largest bankruptcy in history was due to circumstances beyond his control. Likewise, a trio of former AIG chief executives — Hank Greenberg, Martin Sullivan and Robert Willumstad — deflected blame in oral and written testimony to Congress.” From USA Today.

‘Mozilo says he was blindsided. “Nobody saw this coming,” he told investors in a conference call. “S&P and Moody’s didn’t, but they simply downgrade bonds. They don’t take hits. Bear Stearns certainly didn’t.” Mozilo’s take seems to be that aggressive lending by mortgage companies had nothing to do with the industry’s troubles: “It was the deterioration in real estate values that was the base cause. We had none of these problems as real estate values were going up.”  Mozilo also blames the Federal Reserve. “The Fed knowing that well over 60% of the loans made were indexed to the Fed funds rate, increased the rate seventeen times. You never knew when they were going to stop. So for a Fed governor to say the lending industry had this coming is unbelievable when the Fed was a contributing factor to this.’  On former Countrywide CEO Angelo Mozilo, from BusinessWeek.

‘"Our industry ... needs a bridge to span the financial chasm that has opened up before us," General Motors CEO Rick Wagoner told the Senate Banking Committee in prepared testimony. He blamed the industry's predicament not on failures by management but on the deepening global financial crisis.’   On GM CEO Rick Wagoner in November 2008, From the Associated Press.

‘General Motors Corp on Monday unveiled an unusually frank advertisement acknowledging it had "disappointed" and sometimes even "betrayed" American consumers as it lobbies to clinch the federal aid it needs to stay afloat into next month. The print advertisement marked a sharp break from GM's public stance of just several weeks ago when it sought to justify its bid for a U.S. government on the grounds that the credit crisis had undermined its business in ways executives could never have foreseen. "While we're still the U.S. sales leader, we acknowledge we have disappointed you," the ad said. "At times we violated your trust by letting our quality fall below industry standards and our designs became lackluster."  GM CEO Rick Wagoner backtracks in December 2008, from Reuters.

‘Even the world's best-known investor couldn't get it right in 2008, apologizing to his shareholders for doing "some dumb things" with their money.  Billionaire Warren Buffett said in his annual letter to shareholders that while last year was a bad year for all investors, he made some mistakes that he now regrets. "I made some errors of omission, sucking my thumb when new facts came in that should have caused me to reexamine my thinking and promptly take action," Buffett wrote in a letter released this morning.’  From ABC News. February, 2009.

These are hellish times, but they are also interesting times in that they reveal a leaders’ character.  Wagoner finally apologized because he eventually realized that the American public would accept no other account.  Buffett apologized because he seems to believe that, economic conditions aside, that he personally screwed-up and he believes – but cannot assure his shareholders – that he has learned from it.  Note only does this show class, it turns out that research on CEO and management apologies shows that the firms with the best performance over the long haul are led by people who get credit when things go well and take blame when things go badly. Taking blame indicates that the CEO has learned something from the troubles and is going to take steps to correct course; denying blame is seen as a sign of self-delusion, a lack of control over the company, and an inability to learn. As Jeff Pfeffer and I wrote in Hard Facts:

Leaders who claim that “it isn’t my fault” and “I couldn’t have done anything about it” aren’t doing themselves or their organizations any favors over the long haul.  Deflecting blame might help them keep their jobs for a time, enjoy better mental health, and persist in the face of failure.  But ducking the heat shatters the illusion of control.  Investors, customer, employees, and the press conclude that leaders who don’t take responsibility for mistakes and setbacks lack the power to make things better.  Controlled experiments by Fiona Lee and her colleagues show that hypothetical managers who took responsibility for bad events like pay freezes and failed projects were seen as more powerful, competent, and likeable than managers who denied responsibility. 

The wisdom of acknowledging blame is confirmed by two studies that tracked Fortune 500 firms over long periods.  Both were careful studies designed to rule out alternative explanations.  Gerald Salancik and James Meindl examined 18 Fortune 500 firms over 18 years.  They found that, especially in firms with wild swings in performance from year to year, performance was superior down the road when executives attributed both good and bad performance to internal actions.   Similarly, Fiona Lee and her colleagues examined yearly stock price changes in 14 companies over a 21-year stretch.  They found that taking blame for setbacks wasn’t just effective in companies with wild performance swings. In years when senior management blamed their firm’s troubles on internal and controllable factors, stock prices were consistently higher the next year, compared to when executives denied responsibility for setbacks.

Of course, taking blame isn’t enough, a leader actually needs to change the organization’s course, but I do admire for Buffett refreshing bluntness.  And if anyone can turn things around, he can.

P.S. Also see this related post on "mea culpa"

Comments

[dblwyo]

Actually I've always rather preferred the Navy's approach. If you're Captain they court-martial you no matter who was directly at fault. If the ship grounds and you were in your bunk asleep you still get a Court.

On the other hand Warren is actually being benignly disingenuous for the most part. You really owe it to yourselves to read the letter. He's apologizing for a couple of errors that could result in $BBs of profit in the long-run.

You also need to read the letter aside from it's pithy macro obs and critiques but for the lessons in general management over a wide variety of businesses.

[Dave Brown]

I wonder how much the threat of legal blowback prevents some of these fat cats from pronouncing their own failures. It might be more noble for them to admit mistakes, but could it also be opening them up to scores of lawsuits? I'd like to hear an expert in corporate law comment on this....

[Rod Johnson]

I have to wonder, whose script was manufactured by their PR guru, and which one's were their own. My guess is, Buffet's comments were his own words. Maybe this is why we admire buffet, even when he admits he screwed up.

Leadership Lesson: Lead with your own words.

[CV Harquail]

No wonder that Buffett's biography is on the NYT Best Seller List (The Snowball, by Alice Schroeder). Maybe as part of getting bailout-stimulus-recovery funds, top executives should be required to read Buffett's biography, just to be reminded that there are other ways to approach bad business situations.

I had some fun with the connection between taking responsibility & future business success over at www.AuthenticOrganizations.com , in posts about how "Taking Responsibility Can Be Good for Your Organization" and "6 Reasons Why Taking Responsibility Can Be Good For Your Organization" and I wish that the conversation about responsibility were more sustained.

I do believe that taking responsibility is important, yet I see how our inability to distinguish between responsibility and blame makes it hard(er) for executives to acknowledge their roles. Not that this excuses executives...rather, it points out just how unskilled we are in our business culture with accepting and acknowledging responsibility in bad times as well as good.

Thanks for keeping the issue alive.

[Apolinaras]

It is sad to see that lately integrity is not part of the required characteristics of business leaders. Candor, humility, and some of the other features that describe a superb leader are rarely to be found in large corporations.
It may be too late for large corporations, but startups and mid-markets still have a chance to break the trend.

[Michael Sporer]

One word sums up Warren Buffett: Integrity. We all make mistakes, but admitting fault then following up with something actionable tips the scales. WB is indeed a high-class individual.