Warren Buffett, widely regarded as one of the most successful investors of all time, is well-known not only for his extraordinary financial acumen but also for his straightforward and insightful commentary on management practices. His observation that managers often discard performance metrics when results falter, rather than addressing managerial shortcomings, remains especially relevant in contemporary business and investment circles. Companies often push the boundary between hyping themselves up and remaining compliant with SEC regulations, but this can distort the actual reality of the business.
In his 1982 shareholders' letter, Buffett famously pointed out how the goal post can constantly shift depending on the performance of the business. Buffett explained this by saying, “Yardsticks seldom are discarded while yielding favorable readings. But when results deteriorate, most managers favor disposition of the yardstick rather than disposition of the manager.”
Some managers might focus on net income, while others focus on EBITA or even revenue growth. Buffett is saying that whichever metric managers choose to focus on often depends on which one is doing the best. He further clarified that point, saying, “Managers faced with deterioration often prefer a more flexible measurement system: just shoot the arrow of business performance into a blank canvas and then carefully draw the bullseye around the implanted arrow.”
Buffett, born in 1930 in Omaha, Nebraska, began his investment career early, famously purchasing his first stock at the age of 11. Over the decades, he transformed Berkshire Hathaway (BRK.B) (BRK.A) from a struggling textile manufacturer into a global conglomerate valued in the hundreds of billions of dollars, earning him the nickname “Oracle of Omaha.” His disciplined investment strategy and ethical approach to management have solidified his authority on topics concerning corporate governance and managerial practices.
Buffett’s insight into managerial tendencies to change performance metrics resonates deeply because it reflects a common, yet problematic, practice within many companies. By altering or even discarding yardsticks of evaluation, managers might temporarily conceal performance deficiencies. However, Buffett argues that this action delays necessary managerial changes, allowing underlying issues to persist and ultimately impacting long-term organizational performance.
