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Power Sheet – February 29, 2016

Warren Buffett’s annual letter to Berkshire Hathaway shareholders, released last Saturday, is scrutinized worldwide for economic and investing insights. Understandably so; in 2015 Berkshire had, guess what, another knockout year. Yet I can’t recall ever seeing it read as a leadership document. That’s what it is, though, and this year’s letter shows why Buffett has been so extraordinarily successful not just as in investor but also as a business leader. Three traits stand out.

-He’s optimistic. What comes through most strongly, as it does almost every year, is a powerfully upbeat attitude. No one has ever answered the call of someone who says, “Our situation is hopeless. Follow me.” Effective leaders have figured out how to be optimistic while simultaneously confronting reality, regardless of the circumstances. Buffett does that this year by responding to the presidential candidates, who “can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.” Nonsense, Buffett says: “The babies being born in America today are the luckiest crop in history.”

Unfounded wishful thinking? Through simple math – this is the confronting reality part – Buffett supports his argument. He shows that even “the much-lamented 2%” annual growth of America’s economy in recent years “delivers astounding gains” in just one generation. And he’s right. At that rate, and if America’s population continues to expand as it’s doing now, real per-capita GDP will grow 34.4% in 25 years. That is indeed a giant increase, and Buffett explains its full meaning at some length. By the time he’s done, it’s hard to dispute his conclusion, based on hard facts, that “America’s kids will live far better than their parents did.”

-He explains what he’s doing so that anyone can understand it. Trusting leaders is important, but we all feel more comfortable knowing what they’re doing and why. Part of Buffett’s genius has long been his ability to explain the financial workings of a massive conglomerate in language that real people use. This year he devotes most of the letter to explaining just how each of Berkshire’s main businesses operates and how each performed. I defy anyone who reads those pages to come away confused. On the contrary, you come away thinking, “This guy knows what he’s doing.” Because he doesn’t ask you to trust him, you trust him more.

-He admits mistakes and makes no attempt to sugarcoat them. I’m not aware of any other leader who every year acknowledges his errors as openly as Buffett does. Again this year he admits “serious errors I made in my job of capital allocation” and mistakes “in evaluating either the fidelity or the ability of incumbent managers or ones I later appointed.” And then, as usual, he goes further: “I will commit more errors; you can count on that.” Again, this makes you more confident in him, not less. Yet most leaders haven’t learned that lesson.

American Express CEO Ken Chenault, a leader whom Buffett admires greatly – Berkshire owns almost 16% of Amex – says “The role of a leader is to define reality and give hope.” You won’t find that done any better than Buffett does it in this year’s letter.


A correction: On Friday I said that activist investor Jeff Smith had launched a proxy fight against Yahoo. He has signaled his intention to to do, but until he actually proposes a rival slate of directors, he hasn’t launched a contest.

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What We’re Reading Today

Valeant CEO returns to work 

J. Michael Pearson has been on medical leave from the pharmaceutical company since late December, battling pneumonia. The company also announced it would delay releasing fourth quarter results today, citing Pearson’s return. Under interim CEO Howard Schiller, the company announced last week it would reissue 2014 and 2015 results because of accounting errors associated with its relationship with the Philidor pharmacy. The Valeant board reportedly questioned whether Pearson should return as CEO. CNBC

Putin calls in his oilmen 

Russian president Vladimir Putin has ordered a meeting with the country’s top oil producers. Oil- and gas-related revenue accounts for nearly half of Russia’s government budget, which has withered in the wake of low oil prices. The meeting could relate to a potential deal in which Russia, Saudi Arabia, Qatar, and Venezuela would jointly cut oil output. In the U.S., top shale producers including Harold Hamm‘s Continental Resources and Jim Volker‘s Rival Whiting Petroleum said that if oil rises above $40 a barrel, they would increase production. Orlando Sentinel

Chris Rock tackles Oscar race issue

The Academy Awards committee braced for a night of flogging from the comedian, and Rock didn’t disappoint. He tackled the racial controversy, triggered by a dearth of African-American and other minority nominees, throughout the night. Academy President Cheryl Boone Isaacs reiterated before the show that efforts to make the Oscars more inclusive can’t produce instant results, and she promised to continue working on the issue. USA Today

New EU privacy proposal hits U.S. companies hard

The text of the proposed EU Privacy Shield law was released over the weekend, and it includes several provisions that would affect U.S. companies and the federal  government. U.S. intelligence services would face limits on how they can use data from European citizens when companies such as Facebook and Google import private information to store on U.S. servers. Also, the U.S. State Department says it will create a system enabling Europeans to file complaints about privacy breaches, which have to be resolved in 45 days. EU justice chief Vera Jourová said the assurances from the U.S. makes the deal possible, but it still must pass a committee that includes representatives from the 28 EU countries.  Fortune

Building a Better Leader

How power can corrupt

When placed in positions of power, people tend to increase their self-focus. One result: more concern about one’s own needs, less about those of others. Harvard Business Review

Mompreneurs case studies

By recognizing an opportunity and setting clear lines between work and home, these entrepreneurs have launched businesses while taking care of young children. Fortune

The anonymous 360-degree review fails to achieve the goal… 

…of making people better at their jobs, says a management consultant. Instead, it becomes a forum for unhelpful criticism, which can attack peoples’ looks and bully the reviewee. NYT

Strong Statements

Investors await Barclay’s plan

On Tuesday, new Barclay’s CEO Jes Staley will outline his vision of the company’s future. The company will likely report weak 2015 earnings, and it faces deeper issues, including bureaucratic entanglements within the organization and the planned split of its retail and investment banking units by 2019. Staley could right the ship, but a perceived misstep could sink Barclays. WSJ

Buffett says politicians need to accentuate the positive   

Warren Buffett, in his annual letter to Berkshire Hathaway investors, targeted the pessimism that presidential candidates have pushed. He argued that productivity growth is an “all-powerful trend” that will continue to grow the economy and per-capita GDP. A Hillary Clinton supporter, he seemed to be targeting Bernie Sanders, Donald Trump, and the other GOP candidates who are stoking voter pessimism to attract support. Bloomberg

Delta Airlines to give away 1% of profits to charity 

The decision, announced by incoming CEO Ed Bastian, could mean a $37-million donation in its first year. For Bastian and Delta’s board, it’s a strong signal to employees and other constituents that the company is committed to the communities in which it operates.  Fortune

Fortune Reads and Videos

Amazon partners with William Morrisons…  

…to penetrate the UK grocery market. The alliance will give customers of Amazon’s Pantry service more options. Fortune

Three former Tepco execs indicted… 

…for the 2011 Fukushima nuclear disaster in Japan. The execs didn’t take proper steps to secure the nuclear facility, the charges claim. Fortune

Starbucks will try to enter the Italian market next year

But CEO Howard Schultz says the company will practice humility in doing so. Fortune

Here’s how Gawker tricked Donald Trump…

…into retweeting a quote from Italian fascist dictator Benito Mussolini. Fortune

Quote of the Day

As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong: The babies being born in America today are the luckiest crop in history.” –Warren Buffett, in his annual address to Berkshire Hathaway shareholders, commenting on America’s future and the pessimism offered by presidential candidates.  CNN Money

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Produced by Ryan Derousseau