The sage of Omaha and the UMC

Warren Buffet is one of the wealthiest men in the world and a guru to aspiring billionaires. His observations about business and finance are often ignored by the broader market – he saw the great recession coming a few years in advance – but are usually pretty sound.

Here’s something he wrote in 1989 about the perils of institutional inertia in the business world:

My most surprising discovery: the overwhelming importance in business of an unseen force that we might call “the institutional imperative.” In business school, I was given no hint of the imperative’s existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn’t so. Instead, rationality frequently wilts when the institutional imperative comes into play.

For example: (1) As if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.

Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided.

How well does this describe the behavior of the UMC over recent years? Inertia and herd-following: Do these sound familiar to anyone?

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