Letters to a new leader

I wrote this as a way to crystallise some thoughts I have about what makes good managers and leaders — it’s written to a new manager — maybe it’s useful; maybe it’s not. It certainly helped me think about what I look for where I invest.

Regular programming back tomorrow.

Hi there,

You’re probably wondering what my qualifications to write this are. I don’t have any, to be honest — I’ve never led a corporation or company, but I’ve spent the majority of my investing career watching managers perform either very well or very poorly. The ones who perform well I heap praise on and invest in. The ones who don’t — well — they bear the brunt of my criticism and more often than not they move on (sadly, sometimes people fail upwards — often bad managers end up going to some other place and doing it all over again).

Here are things I have noticed that seem to work in running a good company and things that don’t work. Take it or leave it — as I always tell people who read this newsletter — I am an idiot at a keyboard.

1. Surrounding yourself with “yes” men is akin to death

Poor old Bill Paley founded CBS and built it into America’s biggest broadcaster. The more powerful he got, though, the more he surrounded himself with sycophantic hangers-on who would agree with his every word — even though CBS was a great business it didn’t matter, because nobody would tell Paley anything bad and they’d agree with every idea he had (like buying Fender guitars, even though that had very little to do with the TV business). Paley eventually was so insulated from the real world he banned discussion of television or “shop talk” from his house and his dinner table. At some point he started cancelling hit shows, like The Beverley Hillbillies, because he decided that “urban audiences” needed “sophistication”. Eventually CBS vanished into Sumner Redstone’s fold and was no more.

The point is — if you find yourself surrounded by people who only agree with you (and nobody wants to deliver you the bad news) then you’re in trouble. Avoid this at all costs. Many good companies have been destroyed by this kind of thing — CBS is only one example.

2. Transparency is key

This seems obvious but it is amazing how many companies descend into secret societies, where managers squirrel themselves away in rooms and have hushed phone calls. It inevitably ends up breeding a culture of paranoia. Your employees will begin to distrust you, and they will echo you, and eventually the whole thing will come tumbling down.

Of course, occasionally there is good reason to keep things hush-hush. But in my experience, it’s a lot less than what people think. It is much better to leave things out in the open (as they say — “sunlight is a great disinfectant”.)

Great organisations are open, both with investors, the public, and their employees. I am always harping on about the fact that Don at Mainfreight will email you back straight away, but it’s true. Think about how many companies will hem and haw around a tortured PR-company statement written by committee (there’s many on the NZX, and they are almost always not the successful ones).

3. You are a servant

People often conflate titles like “CEO” with “his Holiness the Emperor”. If you are in charge of an organisation you have two main jobs. The first is capital allocation (I will speak to this later), and the second is being a servant to your people. You are responsible for them. Sometimes you will make decisions they do not like and that is OK — see rule 2 (“be open”). You are a servant to your newest employee who is sweeping the floor — it’s you and your team’s job to show them the culture and the ethos of your company. Expecting anyone to work as an automaton is a fool’s errand.

You are never too good to sweep the floor.

You are never too good to take out the trash.

You are never too good to spend the day peeling potatoes, or calling clients, or helping file documents.

Your team will follow your lead. So be intentional.

4. You are a capital allocator

Lots of managers get elevated to a title like CEO and — to paraphrase Buffett — it’s as if the final step for a highly-talented musician was not to perform at Carnegie Hall but, instead, to be named Chairman of the Federal Reserve.

Your job is to allocate capital that the business generates. Again, Buffett — after ten years on the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business. That is incredibly significant.

To put it another way, over ten years Costco has grown from 663 warehouses worldwide to 884. In that time it has grown revenue from $110bn to $253bn. In that same time, the company has consistently grown average sales per Warehouse). Talk about capital allocation!

5. Hire well, manage little

If you hire smart good people, then your management time will be dramatically reduced. There are always inevitably bad apples and bad employees (just like there are bad managers). You’ll end up managing those people a lot more. Hiring well drastically reduces your time spent doing this.

5.1 An addendum to this — if you have heavy hitters, you don’t need to tell them how to swing. Let ‘em swing. Hermes has a famously decentralised structure — the head of perfume is given carte blanche, as is the head of clothes, and so on. Too much structure can strangle creativity.

6. Incentives drive outcome

Never forget that incentives drive everything. I am always saying “show me the incentive and I will show you the outcome” — it is true — I will keep on saying this until the cows come home.

Likewise — dumb incentive, dumb outcome. Both are true.

7. Have humility

You are going to be wrong, and you are probably (almost certainly) going to be wrong more than once. Have the humility to be wrong, to accept it, and to learn from this. Admit it to your staff and your colleagues. You will end up learning a lot more from mistakes than from your successes. This is why I will always tell people about my awful youthful investment in Doc Martens. Again, this seems simple (and is almost trite) but it is amazing how many people (including myself) get carried away by ego. You know, at one point the CEO of General Electric had a private jet and another private jet following the jet, in case of mechanical failures. That’s such a disgusting waste of money — and such an act of hubris — that any onlooker could see the implosion of GE at the time.

8. Only sell what you would buy

If you are a fund manager, only invest in stocks you’d invest in yourself (“eat your own cooking”). If you are a retailer, only sell stuff you’d buy or gift to others (hence why The Warehouse is such a failure!). If you are a tractor salesman, only sell the best tractors.

When the manager stops eating their own cooking they risk Bill Paley syndrome — and we all know how that ends.

I think, if you can do these, you’re more likely to succeed. They are mostly obvious. Over the decades all good managers tend to share the above qualities — from Sam Walton to Rose Blumkin to Axel Dumas. I’ll conclude with another quote from our good friend St. Munger —

The easiest way to get what you want is to deserve it

Eden Bradfield

Auckland, 2024.

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