Lose the Bad Apples


Like many police departments these days, Seattle’s is under fire for the handling of a number of incidents, and the possibility that the officers overreacted. I’m not going to dive into the depths of the argument over individual cases. It is so hard to be sure of the facts, and all sides immediately jump to polar positions. No, I’m more interested in the effect this has on the department and its leadership.

Unfortunately that effect is not good. And it’s not at all assisted by the Chief, Gil Kerlikowske, who has spent the last few weeks angrily lashing out at the various review boards that have criticized the department and specifically his leadership of it. His reaction has been shrill, and embarrassing. It’s achieved a level that the only reasonable result can or should be his resignation.

But then today comes the Seattle Post-Intelligencer with an interesting article about this issue. In the article entitled “Few police officers trigger complaints” the Police Officer’s Guild (the union) attempts to shine a good light on the department.

Their main point is that, in a department of over 1200, something around 10 officers get more than three complaints a year. That’s less than 1%, they argue, and that shows this is a good department. Their point is that everyone should get their knickers out of a twist, this just isn’t that big of an issue.

To me, this is just a leadership problem

In some sense, they are right. This is a small number, and we shouldn’t overreact. However, to me, this is just a leadership problem… and a union problem.

You see, I’m a strong advocate of losing the bad apples promptly. I have always advised leaders to cut their losses, and to escort the poor performers, the troublemakers, and the bad attitudes quickly to the door. And choose again from the barrel of apples.

I always tell managers: “wouldn’t you like to be done with this problem, and have a chance at getting a superstar in the exchange?” Imagine life without the hassle of this person, and with the true possibility that you replace them with someone who could really light the place on fire. Most managers with whom I have this conversation realize the logic immediately. Their eyes glaze over and they dream of life in the post-hassle era.

I even advocate moving on from the only average performers. “Wouldn’t you want to change that C player for a chance that you could get an A+ player?” As long as you hire carefully, make decisions quickly, and cut your losses often, you’ll end up with an A team in no time.

In the case of the Seattle Police Department, my question after reading this article, is “why the heck do these officers still work there?” Move them on. Choose again from the barrel of apples.

Why the heck do these officers still work there?

I’m not advocating firing officers who get any complaints. Clearly some complaints are baseless. But when only 13% get one complaint, fewer still get two, and only 10 get three or more, the course is clear. Move them on. I don’t even care if these complaints are questionable. By the time you get three complaints, something is wrong. Where there’s smoke there’s fire.

And this is especially true when there are people lining up to be police officers. They got 1200 applicants for their last police academy class. Surely somewhere in that mod are some truly good apples.

The stickler in all this, of course, will be the Guild themselves. They have, no doubt, negotiated a terrible contract where firing someone takes years and something just short of an act of God to accomplish. They should be embarrassed themselves to be creating an environment where these bad apples can sully the reputation of the whole department.

But the lesson here is clear, if you are spending time managing the bad apples, lose them and choose another from the barrel. You will thank me for it.

How NOT to Quit

Seattle Mariners Logo

Mike Hargrove, the manager of the Seattle Mariners walked into work this morning as said “today is my last day as manager of the Seattle Mariners”. To say this was a shock would be a vast understatement.

The thing that was most curios about the announcement was his reasoning. He said: “It was just getting harder and harder for me to get up for the games each day. I still could, it just took me longer than I would like.” When asked if he had “lost the fire for baseball”, he quickly replied “no, that’s not it.” In fact, other than this curious problem of getting motivated, he said essentially nothing. He’s just leaving.

Aside from my admittedly partisan view of the team, the thing that most bothers me about this is what it says about the organization and/or Mr. Hargrove. The team insists that they didn’t push him, and in fact begged him to stay. What team wouldn’t? Finding a manager before the All-Star Break is just a nightmare. So that leaves us with Mr. Hargrove.

Lacking a family member in immediate peril of death, there’s really no excuse for this behavior.

Lacking a family member in immediate peril of death, there’s really no excuse for this behavior. Unless the working conditions had become terrible, the situation so untenable, that he simply couldn’t walk into work, there’s just no way to justify leaving a job on 24 hours notice — especially a job like this. This job has annual contracts, a defined start and end to each year. What could possibly so bad that you couldn’t just grind it out for the balance of the year?

The most curious thing is that the team is hot. They’ve won seven straight. They are 11 games over .500 baseball. They’re on track for their best record in the last 5 years. He turned the team around, he’s just starting to look like a guy who knows what he’s doing. Then he quits. Ugh.

I’m sure we’ll find out a lot more about this in detail in a few weeks.

I’m sure we’ll find out a lot more about this in detail in a few weeks. He’ll eventually tell somebody the true story. And I sure do hope that it’s because the management is totally screwed up and the organization is a mess. At least, there’d be a good reason.

Because if that’s not it, it shows an incredible lack of class, judgment, and guts. I’d like to believe he’s a better guy that that.

Update: After listening to his press conference, and post-game interview (they won, BTW), I’m convinced what happened was an ultimatum. I’m willing to bet dollars to donuts that Mr. Hargrove deeply objected to some move/trade (trading Ichiro? bringing back Ken Griffey Jr.?) and said, “if you do that, I’m outta here.” They did it, he’s gone.

After the trade deadline, and whatever move is announced, I’m sure we’ll hear Mr. Hargrove’s real reason for leaving. Ugh, again. I hate this kind of thing. It just ruins the entire organization’s morale…

Too Many Dealers, Not Enough Customers

Car in a Shopping Cart

Here’s a quiz for you: who has more retail outlets — Starbucks or General Motors (GM)?

If you listen to all the late night comics with their shtick on Starbucks and how there’s one on every corner, you think you know the answer. Well, you’d be wrong. Starbucks has about 6,300 company-owned stores and GM has almost 7,000 dealerships. Wow…

Now this is just a little unfair, Starbucks has another couple thousand franchise locations inside places like grocery stores and theme parks. And GM owns virtually none of their stores. But the fact that the numbers are even in the same ball park is stunning to me.

I wrote a couple of months ago about what a terrible experience buying a car is, and the toll it takes on the people who have to do it for a living (see that piece here). And about how the differences between the retail experiences can be easily seen here.

It’s a sick business that someone needs to change.

Simply put, buying a car is the worst shopping experience that you can have. Bar none. And people with any scruples find it impossible to work in the business for very long. It’s a sick business that someone needs to change.

I don’t mean to pick on GM just for the excess of dealers. A piece in the Wall Street Journal today (subscription-only link here) points out that none of the US automakers are immune from this issue. All the “big three” have well over 2-1/2 times the number of dealers per point of market share of Toyota, for example. Perhaps that (and this) explains why Toyota is doing so well, and eating Detroit’s lunch.

I think this excess of dealers is one good reason for the problem. Too many dealers chasing too few customers. And it leads to a fetid culture of sleeze-ball sales tactics, terrible service, and lousy margins. It’s little more than vultures preying on the few customers there are.

Starbucks has nothing in their store that costs over $250, and the vast majority of sales are under $10. I don’t know for certain, but I would have to imagine that their average transaction is in the $5 range. This just begs for a lot of outlets, to make the impulse purchase easy.

Why on earth do they need so many stores?

GM, on the other hand, probably has an average transaction around $10,000. I don’t know many people who decide on a whim to just drop by the Cadillac store and pop for a new $60,000 Escalade. Or stop in for a quick brake job. Why on earth do they need so many stores (or brands, but that’s another story)?

If the new purchasers of Chrysler, Cerberus Capital Management LP, want to really make an impact on the car business, they could start here. And rumor has it, they are going to — by combining all the Dodge, Chrysler, and Jeep dealers together. It’s a good start.

Forgive the Hiatus


If you’ve followed along with this blog, you know a couple of things:

  • It’s past time for some sort of recognition for the one year anniversary, and
  • I’ve been quite remiss in posting over the last month or so.

As to the former, I say: “bah humbug!” I have grown weary of reading all the celebratory posts from people trumpeting their “blogiversary” as if it really mattered.

Suffice it to say, if you like doing this whole blogging thing, the first year flew by. If you did it for all the wrong reasons (because you’d become rich, or famous, or quoted, or perhaps even noticed) then it probably was a year of pure torture and pretty soon it will fade into obscurity. I like to think that for me, it was the first of these…

As to the lack of meaningful content herein over the last several weeks, I’d like to proclaim a number of really good excuses. To wit:

  • I came to the aid of a fellow blogger who, under relentless denial-of-service attacks, had to move immediately from one blogging platform to another. This resulted in herculean efforts to design, move, convert, and deploy an entirely new solution in record time. It went off with nary a hitch, and I’m pleased to note that the bad guys are being stopped at the gate (to the tune of 10,000+ attacks a day).
  • My main Windows computer breathed its last breath, a result of euthanasia. I’ve spent the last month making the final move of my life from Windows to the Mac — a sort of conversion that, like those of a spiritual nature, involves great joy and discovery coupled with several rites of passage. I plan to write much more about this experience in a more appropriate forum to be announced later.

  • Our eldest son just graduated from high school, and that comes with an inordinate amount of anticipation, preparation, visitation, celebration, and recuperation. This was a wonderful time for us all (dampened only slightly by a cruel theft of the diploma…), but one that is good to have behind us.

None of this is really justification for my lack of posting here, but it might explain to those around me the incredible lack of sleep I’ve had over the past month or two. And it does indicate why there has been at least a little to celebrate around here.

So, dear reader, please forgive the unintended hiatus, and stay tuned… I promise a reinvigorated effort in short order.

Are superstars worth the pain?


Once in a while, as a manager, you will be fortunate enough to have a team member who is a superstar. These people are not just above average, they are vastly better. They are smarter, more driven, highly focused, and they get far more work done than the rest. It often seems like they are just coasting through it, but miraculously they achieve well beyond the others.

If you are fortunate enough to have a superstar working for you, it usually comes with both benefits and curses. Certainly it can be a joy to have someone you can count on to excel every time you give them as task. As a manager, you dream about having the kind of team members who will just take what you give them, and exceed your wildest dreams every time. Get more than one of these people and you think you’ve died and gone to manager’s heaven.

It is common for superstars to be a royal pain when in a group.

That is, until it comes time to work as a team. There’s something about superstars that makes them innately incapable of “playing well with the other children”. Perhaps it’s their low tolerance for busywork, structure, and stupidity. It may be that they know they are superior. Maybe it’s their habit of picking and eating their ear wax… Whatever it is, it certainly is common for superstars to be a royal pain when you try to get them to work in a group.

I’ve seen dozens of superstars. Microsoft seemed to attract, select for, groom, and coddle them. I worked with some of the brightest minds in the world at Microsoft, and many people who I would consider well worth the title of superstar. I have managed more than my fair share of them. And I have the battle scars to prove it.

I made the mistake at one point of promoting one of the brightest minds at the company to be a team leader for me. One of the few pure geniuses I’ve ever encountered, his Ivy League degrees, Rhodes scholarship, and meteoric rise at the company couldn’t rescue his team from his short temper, low tolerance for mistakes, and his blatant misogyny.

On his watch, a team I’d carefully recruited and nurtured for months was disintegrating before my eyes. After numerous angry departures, threats of legal action, and failed attempts to counsel him and get the team back on track I removed him from a leadership position. And since I believe strongly in helping my fellow managers, I added “this person should never be allowed to manage people” to his performance review. He was recently mentioned in a prominent business publication as a likely future CEO of the company…

But, I digress. In this case, clearly the pain of a superstar wasn’t worth it. It was really my fault, I should have far more carefully considered his management skills before I promoted him out to a role that he wasn’t suited for. The larger question is: is it ever worth it to have superstars on the team?

The short answer is, yes, superstars are worth the pain.

The short answer is, yes, superstars are worth the pain. But only if they are in a role that suits them, and only if you can find a way to control their impact on the rest of the team.

The issues with the rest of the team are many. Very often people resent working with superstars. Even if the manager is careful to not show favoritism, people often perceive a bias in the superstar’s direction. How, after all, could they be doing so well, getting so much done, and attracting so much attention? They can’t stand watching someone else finish the task in half the time, and I don’t blame them.

But more often than not, superstars do get recognition and attention from management. And that just rubs some people the wrong way. Especially when it seems like their gift is not learned or earned, just that — a gift.

If you put superstars in charge, more often than not it ends up being a nightmare for everyone.

And if you put superstars in charge, more often than not they get frustrated, with the less competent members of the team, with the progress of the project, and especially with the bureaucracy — the processes and procedures inherent to management. It ends up being a nightmare for everyone, the team, you the manager, and even the superstar themselves.

So how do you take advantage of the seemingly infinite resource that a superstar can provide? Simple: put them in their sweet spot, their area of excellence, and do whatever it takes to make them successful. Usually that means giving them what they need and staying out of their way. And regular and earnest praise helps as well.

Superstars are worth the effort. But you have to recognize what they are good at, and let them wow you at it. Don’t mistake excellence in on thing as excellence in everything. This helps to avoid the Peter Principle and saves everyone’s sanity.

Help Me, Help My Boss

Excellent Performance Review

Recently, a good friend of mine told me the story of a sick performance review and reward system. I mean “sick” as ill, broken, maybe even sickening — not “sick” as the youth today refer to something really cool.

The system bases rewards on the performance feedback from those around the person. This has been in vogue as “360 degree feedback” and other names in the past. In this case, it is actually codified in the union contract under which these people suffer.

But while rooted in a concept that seems to make sense (those closest to you are the best judges of your performance), it completely disregards politics, personalities, and fundamental laws of human nature. I’ve said it before, and I’ll say it again: define a system that effects people’s pay and they will find a way to game the system. Period. No exceptions.

Define a system that effects people’s pay and they will find a way to game the system.

In this case, the supervisor gets a significant bonus (>5%) if the people in their organization give them a 95% or better rating. The interesting point is that it doesn’t matter what makes up the definition of a 95% rating, the system is doomed to failure. Because it is relying on people to rate their boss (or their peer, or even their subordinates) it becomes little more than a beauty contest.

This system is no different than American Idol where people can choose to keep voting for a talentless kid just because he’s cute. People will find all kinds of reasons to rate people one way or the other. Especially when money is at stake.

In the case of my friend, soon there was a buzz in the office: “Rate him great, the last thing we want is for him to not get the bonus. He’ll be unbearable to live with if he doesn’t get it.” That’s probably not what the designers of the system had in mind. And remind me again why I should be pulling for my boss to get a big bonus, when all I got was a 2.1% “cost of living” increase (which he also got)?

Some people are naturally hard graders and others are naturally sycophants

But even if you somehow persuade people to treat the system seriously and give ratings that they truly believe in, you’re still stuck with the fact that some people are naturally hard graders, and others are naturally sycophants. I’ve yet to find a system that can account for individual grading “curves”.

I also don’t know how you account for the fact that some people just woke up on the wrong side of the bed the day the review was solicited. In fact, in the case at hand, one employee who was misbehaving was explicitly not disciplined until after the review was turned in, just so as not to spoil the manager’s score and bonus.

Of course, any good pollster will tell you that you can ignore these anomalies through the “law of large numbers”. Any suitably large group will self-control for these kinds of effects and you can basically ignore them (“the poll has an error range of +/- x%”).

But that’s exactly the problem here. Pollsters talk to 500, 1000, or more people. Your manager is unlikely to have more than a dozen or so people filling out their survey. One or two people swinging drastically bad (or good) can spoil the accuracy of the whole system.

One or two people swinging drastically bad (or good) can spoil the accuracy of the whole system.

And there is an even more insidious problem. Like most polls, this system gathers “classification data” — gender, age, ethnicity and so on. The goal is clearly to be able to tell the manager “your african-american staff hates you”, and some such useful feedback. That’s all good, no?

But what if you are the only asian female in the group? “Asian females think you are a jerk” might well be your pink slip ticket out of there.

All in all, these systems are a bust. Yes, I think some good, constructive feedback from those around you can help people become better managers and employees. And I think there is value in knowing how well you are doing, in the eyes of those around you, especially for the criminally un-self-aware.

But you certainly shouldn’t rely on these 360 feedback mechanisms for any kind of vital decisions. And for most folks, there’s little about work that’s more vital than money.

Leadership Lessons from the “No” Meeting

Boeing 787

A good friend of mine is part of the senior management team for the Boeing 787 “Dreamliner” project. As a student of project management, I love to catch up with him every now and then to discuss this unbelievably complex endeavor.

While I’ve been up-close-and-personal to tremendously large and complex projects (like Windows NT) involving thousands of people and hundreds of thousands of variables, nothing can compare to the development of a new commercial airplane.

Just imagine hundreds of thousand of parts, some larger than a football field, some smaller than the tip of a pen, and all being built (especially for this project) by suppliers located around the world. Stir in tens of thousands of people, billions of dollars, and oh yeah, don’t forget that peoples’ lives are at stake, and you have a recipe for a project management nightmare. And my friend’s job is a key position in the coordination and assembly of all these various parts. With the plane scheduled for its maiden flight in a few months, he’s having a lot of fun these days.

With the plane scheduled for it’s maiden flight in a few months, he’s having a lot of fun these days.

One of the things that Boeing and many other companies have long struggled with is delivering the best product they can build while simultaneously pleasing their customers. With previous airplanes, Boeing has let customers design their own interiors, galleys, bathrooms, overhead storage, seats, avionics (cockpit controls), and so on. The company essentially offered a shell that flew and let customers make the inside to suit their needs and taste. This explains why your carry-on fits in some overhead bins and not in others. Each airline chooses their own style.

This approach was remarkably customer-friendly, but it exponentially increased the complexity of building aircraft. With every airline choosing different configurations, each plane — even each bathroom, was custom made. At most they would see a customer order 10 or so planes with the same configuration. Imagine the pain that Boeing and its suppliers would be in never getting to scale up production for even the soap dispensers. And try to imagine the complexity of assembling and testing these incredibly complex machines, each one different from the next.

This was all supposed to end with the 777 model a few years ago. My friend was told repeatedly by management that customers would be given only a few choices to make for each item, and that configurations would be standardized. But then the sales team began selling the planes. And customers began expecting the same custom-built planes they always had in the past. The sales people had a hard time telling a customer who was placing a multi-BILLION dollar order, “no, you can’t have fries with that”.

Boeing 787 Assembly

Pretty soon, the number of bathroom configurations mushroomed from 4 to 40, and they were back where they started. The 777 is widely different when flown by United than when flown by British Airways. It’s a complex and difficult product to build and test. And it’s nowhere near as profitable as the company had hoped it would be.

For the 787 project, to quote Bullwinkle J. Moose, “This time for sure!” This project is made significantly more complex by the choice of vendors quite literally from around the globe. Parts are being made in Italy, Japan, and all over the US. To allow customers to choose from an infinite variety of configurations would be a potential coordination disaster. So with this plane the company is being far stricter about forcing customers to stay “on catalog”.

In fact, my friend leads a weekly meeting they call the “no” meeting. Sales people from all around the globe call in trying to convince manufacturing to build just this one custom part for this very special customer. And the answer is always “no”. They push the sales person to escort the customer back to the catalog.

My friend leads a weekly “no” meeting.

And you know what? The customers are fine with that. The 787 is the fastest selling plane in commercial aviation history, with almost 600 orders before the thing has even left the ground [pun intended]. Turns out customers recognize the value of standardization in cost savings, quality, training, and time to delivery. They didn’t really need custom soap dispensers, they were just pushing as far as they could, because they could.

So far the “no” meeting has held, except for one special case. The galley carts (you know, those knee bashing things they drag up and down the aisle) are customized. You see, the airlines already have thousands of them, with each airline’s different from the next. Boeing just couldn’t tell them “no” in this case. So they’ve built adapters to make the standard galley accept your special cart. But they’re holding the line everywhere else.

What’s the leadership lesson here? The same lesson I preach about all the time: have a vision, stick to it, and sell the heck out of it. Your team will love you, and customers will beat a path to your door.

When the Boeing leadership let the customers run roughshod over the manufacturing team, they paid the price.

When the Boeing leadership let the customers run roughshod over the manufacturing team, they paid the price. Now that they have decided to stick by their team, sales are up, morale is up, all signs are that the product will be better, and it certainly will cost less.

How can you learn from the experience of one of the largest manufacturers in the world handling a project a thousand times more complex than yours? The same thing: believe in your vision, your product, and your team. The customer isn’t always right, sometimes you need to stand up for your vision. Sure you need to recognize your own “galley cart” case, but most customers, like children, appreciate it when you show a little discipline.

Quick, Cut the Good People

Cover of the New Yorker Magazine
New Yorker – April 30, 2007

The current issue of the New Yorker has an interesting article this week entitled “It’s the Workforce, Stupid!”. The article highlights the short-sidedness of companies that layoff huge portions of their workforce in an effort to appease Wall Street and other critics.

Using the current examples of Citibank and Circuit City, the article takes the leadership of these companies to task for their recent layoffs. It points out that layoffs rarely have any real long term effect on the finances of the company. But, with CEO tenures running so short (around six years), it doesn’t matter because layoffs aren’t done for the long-term. They are done in hopes of a near-term stock lift to fatten the option-laden leadership team.

The article touches on the ham-handed way so many companies handle “downsizing”:

More recently, however, downsizing has become less a response to disaster than a default business strategy, part of an inexorable drive to cut costs. That’s why Circuit City can proclaim, “Our associates are our greatest assets,” and then lay off veteran salespeople because they earn fifty-one cents an hour too much.

This, to me, is the crux of the issue with downsizing. In my experience with layoffs, the problem is the effect they have on the team. There is no way to do a layoff for purely financial reasons that doesn’t play havoc with organizational morale.

There is no way to do a layoff for purely financial reasons that doesn’t play havoc with organizational morale.

The problem is, as I have said repeatedly, that you can’t treat people like automatons. Constantly repeating “people are our most important asset” doesn’t make them feel any more valuable. In fact, it often makes them believe you think of them like the other assets — cash in the bank or that drill press over there.

The catch is that people can think. They draw their own conclusions about what you think is the most important part of the business. And it’s just really hard to send a good signal to person A while kicking person B out the door. It’s one thing if B was a loser who deserved to go. But more often than not, B just lost the layoff lottery, and A thinks “there but for the grace of god, goes me.”

In my experience, as a member of a leadership team trying to cut staff, as a member of a team with people being cut around me, and as a consultant trying to help people do it right, there is almost no way to cut people without causing collateral damage. There are only two ways to cut people for financial reasons: 1) voluntarily, where you ask people to self-select, or b) involuntarily, where management chooses the losers. This is a lose-lose situation.

In the first case, where you ask for volunteers, it should be obvious that the first people to leave are those with the best prospects for other employment — the good people. What remains are the losers who either can’t or won’t find work elsewhere. Not really the kind of team you upon which you want to build a turnaround strategy.

Rats deserting a sinking ship is an apt visual.

In the latter case, even if you chose to jettison only the lesser performers, the remaining good people are scared about the potential next round of layoffs. Since they have the best alternative job prospects, they leave as fast as they can. Now you have little or no team left at all to effect the desired turnaround.

I’ve seen several examples of both cases up close and personal. Rats deserting a sinking ship is an apt visual. And every scenario ended up getting far worse before they ever got back to anything resembling normal.

There’s only one way I can imagine a downsizing working effectively. I say “imagine” because I’ve yet to see it be done this way. The leadership needs to be absolutely positive about the stable financial state they need to obtain. They need to calculate precisely how many people need to go, with complete confidence, so that they can do one, and only one, layoff. Repeated fits and starts toward the final workforce numbers are just the kind of thing that makes people panic.

There’s only one way I can imagine a downsizing working effectively.

Then the management team needs to be stunningly frank with the employees, admitting the problem in detail, and drawing out the precise path to success. Like any other project they need to have a very clear, concise, and credible vision for the future, and be able to sell that vision to everyone. It’s vital that this vision is believable by everyone, as they will be almost infinitely skeptical.

Then, they need to individually go to the people they want to keep and sell them on that vision. Each “keeper” needs to understand why they are a key part of that future vision for success. Management can’t just be reassuring, the case has to be personal and credible. Remember, these people are just short of panic, they will be skeptical. They need to truly believe, so that they won’t bolt for the door.

Finally, the layoff needs to be done quickly — like tearing off a band-aid. Downsizing rumors ripen with age, and not in a good way. The mean-time to implosion is days, a couple of weeks weeks at most. Having something out there for a month or two just gives the good people time to polish their résumé. So once, it’s clear this has to be done, do it promptly.

This is a path to success with downsizing. But as I said, I’ve never seen it executed this way. Perhaps you have. I’d love to know about your experience with downsizing. Add your comment to the discussion to tell me about your take on it.

HT to Nancy for the pointer to the story

Proud Member of the Cult of Buffet

Warren Buffet

As I noted in this post, it’s annual report season again. I just opened my Berkshire Hathaway annual report and once again was not the least bit disappointed.

The Berkshire report confirms, as it does every year, why I am a card-carrying, stock-owning, unabashed member of the Cult of Warren Buffet.

The report, most of which can be found here, is such a wonderful read. Warren crafts his usual narrative about the state of the company, and it is with out a doubt the most readable annual report I’ve ever seen. Even though his note is long, at over 20 pages, there’s almost no business jargon, there’s no filler, and not a smidge of the spin so many reports are drowning in. I read every word — and every word of all the accompanying documents. All in one sitting on the airplane.

The report confirms again what a really great manager and leader he is. He simply does just about everything right, and does it with such frankness, charm, and sincerity, that I can’t help but gush over the guy.

It’s not that he’s perfect, and not that he’s magic. He’s made mistakes, and rubs a number of people the wrong way. But I think most of those people need to untwist their underwear and take some deep breathes (or a couple Valium).

Just like Warren, I’ll be straight with you: I’m a shareholder in Berkshire, and it’s just hard not to like the guy when the returns are so great. But in reality, that’s just a small part about what I think makes the guy so special.

Berkshire's Home Page
Berkshire Hathaway Home Page

Reading his report, or even looking at the Berkshire web site (seen at left), the first thing you notice is how upfront and frank the whole operation is. Who else has their link to their SEC filings as the fourth item on their home page, or includes the last 30 years of Chairman’s letters right in plain sight, or has their answer to the most controversial of their shareholder motions posted on the home page?

With most companies, this kind of stuff is buried in the filings, if it is available at all. Nothing is ever said that some spin doctor hasn’t crafted beyond intelligibility. And acknowledging mistakes? Well that just isn’t done, doncha know.

But with Warren, it’s all right there. In plain sight, in plain english, and it’s just the plain truth. After plowing through miles of other poop in other glossy annual reports, this one is like a cool ocean breeze. And there’s not a glossy picture of the CEO, or the Board, or the remarkably (intentionally?) diverse workforce in sight.

So stop reading me, go read Warren’s letter. Here’s the PDF file:

Then come back here, and tell me what you think.

The Art of the Annual Report

Closeup of financial documents

It’s annual report season again, and with it comes the flood of plastic wrapped envelopes to our mailbox that carry the once-a-year bounty of glossy, over-polished, and saccharin manifestos from publicly traded firms. This is “the art of the annual report”.

I look forward to this flood, it offers insights that are hard to get any other way. Inside these envelopes, you get an unmodified view of the company. Certainly it is not an objective view, yet that is what makes it such a clear view.

You can tell volumes about companies and their culture by what they choose to portray in their annual report. Once a year, companies get a chance to tell the world who they are, what they stand for, and what they are trying to accomplish. And they can do it in a forum that is completely unadulterated by outside forces like the media or their critics.

Yes, of course, the government and tradition mandate that some information be included. And since most companies include their proxy information in the same mailing, included are some required documents to support their voting process. But if you take the time to look carefully at the whole package, the insights are many.

First and foremost, the report itself is a gold mine of company culture information. Because most companies try so hard to make the report a show piece, it is quite telling to see how they present it. There are some very interesting things to look at:

  • Is it a very polished, glossy document (over-polished)? Or a businesslike and direct report (not professional enough)?
  • Does it feature pictures of just the CEO (are they an egotist)? Or the executive staff (diverse)? Or the products (hiding the leadership team)? Or the employees (trying too hard to appear egalitarian)?
  • Does it overflow with flowery language about “the world today” and “XYZ Corp.’s place in it” (taking themselves a little too seriously)? Does it have a sense of humor (or even too much) Or is it just a dry recounting of economics (oh, lighten up)?
  • Is it written in the form of a letter from the leader(s) or with the polish of a marketing piece?
  • Who is that target audience? Shareholders? Employees? Competitors?
  • How much did it cost to produce? Those are your shareholder dollars you’re holding…
  • Most importantly, what does it say about the vision for the company? What are they trying to accomplish? Is it clear, obvious, obtainable and yet still a stretch?

These are all interesting questions, and they tell you a great deal about the culture. I like to read it wearing several hats. What would this mean to me if I worked there? Is this company just a vehicle to express the ego of the CEO? What would I think if I were their competition?

It’s a gold mine of information about the company and its leadership.

And then there are the wonderful proxy materials. Here’s where you get a lot of interesting stuff. In here are all the gory details of executive compensation, perks, and other dark secrets they try to bury in pages of dense text on toilet-paper-thin paper. It’s a gold mine of information about the company and its leadership.

The proxy materials are where I (and most of the world) found out about Robert Nardelli (formerly CEO of Home Depot) and his truly absurd contract and pay package. I wrote about it here, and since they were required to quote essentially the whole contract, it was great fun to read. This info proved to be a key part of Nardelli’s downfall. But you had to read the annual report to see it.

So I encourage you to welcome this bounty of “annual report art”. Next, I’ll talk about my favorite one of them, but in the meantime, don’t just toss them in the recycle bin. Plumb each and every one for the hidden gems that lay within.