More Praise for The Warren Buffett Way, First Edition

institutional imperative
—blindly following industry peers.
All this has taken on a new level of urgency, as shocking discoveries
of corporate wrongdoings have come to light. Buffett has always insisted
on doing business only with people of the highest integrity. Sometimes
that stance has put him at odds with other well-known names in the
corporate world. It has not always been fashionable in business circles to
speak of integrity, honesty, and trustworthiness as qualities to be ad-
mired. In fact, at times such talk might have been disparaged as naive
and out of touch with business reality. It is a particularly sweet bit of
poetic justice that Buffett’s stand on corporate integrity now seems to
be a brilliant strategy. But his motivation is not strategic: It comes from
his own unshakable value system. And no one has ever seriously accused
Warren Buffett of being naive.
Later in this chapter, we look more deeply into Buffett’s responses to
these issues of ethical corporate behavior, particularly excessive executive
compensation, stock options, director independence and accountability,
and accounting trickery. He tells us what he thinks must be changed to
protect shareholder interests and gives us ideas on how investors can eval-
uate managers to determine whether they are trustworthy.
R AT I O N A L I T Y
The most important management act, Buffett believes, is allocation of
the company’s capital. It is the most important because allocation of
( Text continues on page 85.)
When you have able managers of high character running busi-
nesses about which they are passionate, you can have a dozen or
more reporting to you and still have time for an afternoon nap.
2
W
ARREN
B
UFFETT
, 1986

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8 3
C A S E I N P O I N T
S
H A W
I
N D U S T R I E S
, 2 0 0 0 – 2 0 0 2
In late 2000, Warren Buffett’s Berkshire Hathaway group agreed
to acquire 87 percent of Shaw Industries, the world’s largest car-
pet manufacturer, for $19 per share, or approximately $2 billion.
Although the price was a 56 percent premium over the trading
price of $12.19, Shaw’s share price had been a good deal higher
a year earlier. Buffett paid the premium because the company
had so many of the qualities he likes to see: The business was
simple and understandable, had a consistent operating history,
and exhibited favorable long-term prospects.
Carpet manufacturing is not simplistic, given the gargantuan
and complicated machines that spin, dye, tuft, and weave, but
the basic premise is simple and understandable: to make the best
carpets possible and sell them profitably. Shaw now produces
about 27,000 styles and colors of tufted and woven carpet for
homes and commercial use. It also sells f looring and project
management services. It has more than 100 manufacturing plants
and distribution centers and makes more than 600 million
square yards of carpet a year and employs about 30,000 workers.
Buffett clearly believed that people would need carpets and
f looring for a long time to come and that Shaw would be there to
provide them. That translates to excellent long-term prospects,
one of Buffett’s requirements.
What really attracted Buffett, however, was the company’s
senior management. In his 2000 annual report to shareholders,
he commented about the Shaw transaction. “A key feature of
the deal was that Julian Saul, president, and Bob Shaw, CEO,
were to continue to own at least 5 percent of Shaw. This leaves
us associated with the best in the business as shown by Bob and
Julian’s record: Each built a large, successful carpet business be-
fore joining forces in 1998.”
3
From 1960 to 1980, the company delivered a 27 percent av-
erage annual return on investment. In 1980, Bob Shaw predicted