Posted March 2011
“The extraordinary business does not require good
management” says investor Warren Buffett
Over-paid managers will throw
themselves on their swords. Warren Buffett, the billionaire
investor, said he rates businesses on their ability to raise
prices and sometimes doesn’t even consider the people in charge.
His cynical view on corporate suits and flunkies clashes with
Carlos Brito’s, the CEO of the world’s number one brewer. He
likes to hammer home the message that the success of a
corporation hinges on its managerial elites. ”Great companies
are formed by great people,” not by popular products, cash flow
or assets, Mr Brito told Stanford University graduates in
November 2010.
Who’s right? Mr Buffett or Mr Brito?
When interviewed by the
Financial Crisis Inquiry Commission, which had been set up by
the U.S. Congress to examine the causes of the current economic
and financial crises, Mr Buffett reportedly said: “The single
most important decision in evaluating a business is pricing
power.”
In the interview, which was
released by the panel in early February 2011, Mr Buffett
explained: “If you’ve got the power to raise prices without
losing business to a competitor, you’ve got a very good
business. And if you have to have a prayer session before
raising the price by 10 percent, then you’ve got a terrible
business.”
Mr Buffett, 80, accumulated
the world’s third-largest personal fortune through a career of
stock picks and takeovers. He has bought companies such as
railroads and electricity producers, whose pricing power stems
from a lack of competitors.
In other words, if you have a monopoly or
near-monopoly, your pricing power is quite high - as consumers
will know who have a nervous breakdown each time they receive
their utilities bill. Moreover, as long-suffering travelers on
let’s say state-owned European airlines or trains they will have
first-hand experience of how badly these companies are run since
they enjoy almost no competition.
In contrast to Mr Buffett, the
head of the world’s largest beer marketer, Carlos Brito of AB-InBev
sounds like a luvvy-hugging and kissie-blowing philanthropist.
He said that the success of a corporation hinges on hiring
high-performing individuals, who bring passion and commitment to
the job, and on building a company culture that keeps them.
So – is Mr Buffett a contemptuous old misanthrope
and Mr Brito a touchy-feely type of guy?
The answer is: Mr Buffett is just more honest
than Mr Brito.
It’s a fact that businesses the world over love
market dominance. Unlike Mr Buffett, though, they don’t often
say it out loud.
In its annual reports, AB-InBev boasts of its
leading positions (number one preferably) in the markets it
operates in. Once you enjoy this sort of power, as AB-InBev
indisputably does, its managers have to screw up big time to
have a measurable negative effect.
Besides, what are we to make
of AB-InBev’s claim that the world’s number one brewer is a
great company formed by great people? Where are its
top-managers, who helped pull off the USD 52 billion takeover of
U.S. brewer Anheuser-Busch in 2008 and were granted 28.4 million
stock options during the takeover, currently representing a EUR
850 million (USD 1.2 billion) windfall?
Beer Insights, a U.S. trade
publication, recently wrote that about half a dozen of the
original 40 granted those options have already left the company
and so aren’t eligible for them.
Have these guys decided to vote with their feet
against Mr Brito’s much praised corporate culture at AB-InBev?
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