98 THE WARREN BUFFETT WAY
able to convince owners to accept a short-term loss in earnings and a
change in the direction of their company if it means superior results over
time. Inability to resist the institutional imperative, Buffett has learned,
often has less to do with the owners of the company than the willingness
of its managers to accept fundamental change.
Even when managers accept the notion that their company must
radically change or face the possibility of shutting down, carrying out
this plan is too diff icult for most managers. Many succumb to the
temptation to buy a new company instead of facing the f inancial facts of
the current problem.
Why would they do this? Buffett isolates three factors he feels most
inf luence management’s behavior. First, most managers cannot control
their lust for activity. Such hyperactivity often f inds its outlet in busi-
ness takeovers. Second, most managers are constantly comparing the
sales, earnings, and executive compensation of their business with other
companies in and beyond their industry. These comparisons invariably
invite corporate hyperactivity. Lastly, Buffett believes that most man-
agers have an exaggerated sense of their own management capabilities.
Another common problem is poor allocation skills. As Buffett points
out, CEOs often rise to their position by excelling in other areas of
the company, including administration, engineering, marketing, or pro-
duction. Because they have little experience in allocating capital, most
CEOs instead turn to their staff members, consultants, or investment
bankers. Here the institutional imperative begins to enter the decision-
making process. Buffett points out that if the CEO craves a potential ac-
quisition requiring a 15 percent return on investment to justify the
purchase, it is amazing how smoothly his troops report back to him that
the business can actually achieve 15.1 percent.
The f inal justif ication for the institutional imperative is mindless
imitation. If companies A, B, and C are all doing the same thing, well
then, reasons the CEO of company D, it must be all right for our com-
pany to behave the same way.
It is not venality or stupidity, Buffett believes, that positions these
companies to fail. Rather, it is the institutional dynamics of the impera-
tive that make it diff icult to resist doomed behavior. Speaking before a
group of Notre Dame students, Buffett displayed a list of thirty-seven
failed investment banking f irms. All of them, he explained, failed even
though the volume of the New York Stock Exchange had multiplied