The Critical Importance of Principles in Business

One of the most important things any business leader can do for their business longevity, is to establish the principles by which they and their business will operate.

These principles form the foundation on which trust and relationships are built with all of the stakeholders of the business; shareholders, employees, customers, and suppliers.

Berkshire Hathaway is an example of a highly successful business from pretty much all perspectives. They are a solid company with decades of successful and profitable operations.

In 1983, Warren Buffett established 13 principles that defined how Berkshire Hathaway was to operate. He first published these in what he called Berkshire’s “An Owner’s Manual.” These 13 ideologies are still valid today at Berkshire and followed closely in all the business that they conduct.

Many of these are directly applicable to any business. We can all benefit from reviewing them and perhaps implementing them in our own businesses!

Berkshire’s “An Owners Manual”

I have highlighted seven of the thirteen principles below:

  1. Although our firm is corporate, our attitude is partnership. We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own the assets.
  2. We eat our own cooking. Most of our directors have a significant portion of their net worth invested in the company
  3. Our preference would be to reach our goal by directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital.
  4. We use debt sparingly.
  5. A managerial wish list will not be filled at shareholder expense.
  6. Noble intentions should be checked against results.
  7. We will be candid in reporting to you.

My takeaway from these principles is as follows:

  1. Attitude – Put your shareholders first. This does not mean setting and hitting quarterly targets for investor analysts. Rather, this means setting long term goals that set the business up for both short and long term success.
  2. Compensation – Leaders of the business should have their compensation tied to the overall health and performance of the business. Note that this does not mean the stock price.
  3. Long Term Goals – Every business needs to have long term goals that position it for long term success
  4. Debt – Avoid debt as much as possible. When you require capital for your business, ensure that you do not over leverage your business.
  5. Special Projects – Do not take on “pet projects” that cost the company money and don’t have a solid ROI. All projects should go through a review process before approval to proceed is given.
  6. ROI – Associate an ROI with every action and initiative and hold it accountable to its targets
  7. Transparency – A business needs to be transparent with all of its stakeholders. Transparency builds trust and loyalty.

Take Action

Does your business operate on a well-defined set of principles? Write out your principles so they are clear and communicate them to your employees. Then, ask your employees what they see you modeling as a leader of the business.

Now, ask yourself if the stated principles are actually being followed within your business? Are they the right principles? Do you need to make some adjustments and establish and follow some new principles?

Make some changes today to ensure that your business has clear principles that you communicate and live by in all your business dealings.

Finally, take a look at these posts for more information:

 

Expedients are for the hour; principles for the ages.” Henry Ward Beecher

 

What principles do you have for your business? Leave your comments below!

 


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