The Buffett Newspaper Test: What It Means and Why It's Important | Protiviti United States

Transparency and consequences can be powerful leadership deterrents. For the board and CEO and their personal brands, the critical question is, what will key decision-makers in their organization do in situations when no one is watching?

When the subject of ethical and responsible business behavior arises, Warren Buffett advises managers to evaluate every action they take — and not just by legal standards, but also by what he calls the “newspaper test.” When managers have any doubt about whether a decision or action is right or wrong, they should imagine how they would feel if it were reported the following day in the local newspaper, with the assumption that the write-up is authored by a smart but unfriendly reporter and read by the manager’s family, friends and neighbors. Buffett’s bottom line: If your decision or action passes this test, it’s OK; if it doesn’t, it’s not.

This test isn’t just about transparency. It’s also about consequences, as illustrated by another well-known Buffett quote: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

The test itself is not a morality play. It’s more about the reality of losing one’s legacy and the specter of permanent damage to one’s personal brand. That reality alone makes the Buffett test one of preserving and sustaining reputation and the right to play.

We frequently see examples of individuals failing the Buffett test, such as using sales practices that deviate from a company’s core values; cutting corners on safety to reduce costs, accelerate speed to market or generate more revenue; installing software to defeat environmental emissions tests; leveraging one’s professional stature to sexually harass a subordinate; circumventing established internal controls to engage in fraud; and using offensive, racist language for years in personal emails. These are but a few examples and, whether those involved are C-level executives, rainmakers, industry luminaries or rank-and-file employees, eventually, the chickens come home to roost. Exposure is inevitable.

Given discovery is just a matter of time, there are many reasons why smart people fail the test. For those who aspire to act ethically and responsibly, decision-making processes are the ultimate reflection of how corporate values manifest themselves into action. For boards and their CEOs, this conversation is about preserving their personal brands and recognizing that their respective legacies are inextricably tied to the corporate brand itself. Thus, for the company’s leaders, incorporating the Buffett test into the thinking of decision-makers is a reputation play.

The Buffett Newspaper Test: What It Means and Why It's Important

Topics

Board Matters Internal Audit and Corporate Governance Risk Management and Regulatory Compliance

Industries

Financial Services

Focus on aligning the organization around core values and supporting the brand promise.

Given the mobility in the workplace, winning hearts and minds is an imperative that never ceases. To that end, the CEO’s message from the top around core values and what the company stands for has never been more important. The board should understand the message — and encourage the CEO to implement processes to ensure that it makes an impact. For example, confidential employee surveys conducted by an independent third party can provide feedback on the “mood in the middle” and the “buzz at the bottom” of the organization. These surveys can be quite effective if the CEO really wants to know the unvarnished truth about organizational alignment, is committed to implementing necessary improvements, and supports making the survey results and subsequent improvement efforts transparent to employees.

Set appropriate boundaries to reduce risk.

Ultimately, the CEO and board own the responsibility to protect the enterprise’s reputation. Their task: Encourage key decision-makers across the company to engage in ethical and responsible business behavior consistent with the organization’s core values. That task revolves around laying out the “sandbox” within which decision-makers function based on applicable laws and regulations, and internal policies. That entails articulating boundaries, which include:

The risks the organization is willing to accept (e.g., risks inherent in the strategy).
The risks the organization intends to avoid at all costs (e.g., operating in countries with high corruption risk, making extreme market bets, and exposing the public to health and safety risks).
The strategic, operational and financial parameters expressed as targets, ranges, floors or ceilings, which provide a context for establishing risk tolerances and limit structures.

Yes, it’s important to be aggressive in pursuing entrepreneurial opportunities, but it’s also crucial to clarify the parameters around those pursuits. Performance incentives are a critical component of creating this clarity. Extreme financial incentives should be avoided.

Foster diversity and a participative culture.

Building a trust-based, resilient corporate culture founded on mutual respect starts with valuing the differences in thought, experience, gender, sexual orientation, ethnic background and more. When diversity and inclusion are embraced as core values, and open dialogue is encouraged and expected, it’s easier to avoid the groupthink and unconscious bias that contribute to missing long-term growth opportunities and creating new threats to the business model. Building trust also begins with a passionate focus on improving the customer experience and interactions with other key stakeholders. It’s supported by data-driven systems that inform and underpin decision-making with a “single version of the truth.” A participatory, speak-up culture also requires effective escalation processes.

This discussion is not about morality. It’s about focusing employees on what the company stands for and having the necessary plumbing in place to reinforce expected behaviors. Periodic training can be helpful, but it only builds awareness of the importance of ethical and responsible business behavior. The above suggestions can help instill buy-in and ultimately lead to ownership. A commitment to do what is right strengthens the commitment to the company and its brand promise.

For more about the Buffett newspaper test, read the article here.

(Board Perspectives — Issue 146)

Leadership

James W. DeLoach

Jim DeLoach has more than 35 years of experience and assists companies with responding to government mandates, shareholder demands and a changing business environment in a cost-effective and sustainable manner, including the integration of risk and risk management with ...