Why Businesses Need To Think More Like Buffett

In a corporate world seemingly obsessed with the short-term, there are still champions of the long view.

“If you aren’t willing to own a stock for ten years,” said Warren Buffett in his 1996 Chairman’s letter to Berkshire Hathaway shareholders, “don't even think about owning it for ten minutes.”

More recently, Larry Fink – the world’s most powerful investment manager – wrote to every company in the S&P 500 to warn of the financial health risks posed by chronic short-termism.

“It concerns us,” he said, “that, in the wake of the financial crisis, many companies have shied away from investing in future growth.”

Boards and institutional investors would do well to adopt a more Buffett- or Fink-like approach to decision-making. Instead, they prefer, as Fink put it, to “cut capital expenditure and even increase debt to boost dividends and increase share buybacks.” Keynes’ animal spirits seem dimmed.

Globally, firms are sitting on an estimated cash pile of US$7 trillion. The FTSE 100 alone has US$85.5 billion of untapped reserves.

It is not hard to see why we have become so risk-averse, so unwilling to commit capital to long-term projects with long-term payback.

Low inflation or no inflation for 20 or more years, and little or no pricing power as a result, has been compounded by slower global GDP growth, certainly compared to before the financial crisis.

If pre-crash confidence blurred into irrational exuberance, post-crash insecurity has produced an excess of caution. Six years on, corporates still bear the scars of the collapse of Lehman Brothers and the chaos that followed.

At the same time, activist investors and hedge fund managers are pushing boards ever harder to deliver short-term results. New corporate models such as 3G Capital in fast-moving consumer goods and Valeant in pharmaceuticals add to the pressure.

Activists are even trying to align themselves with leading socially-focused institutions to boost their influence, while adding to their funds for deployment.

In this environment the finance, information technology and procurement departments have gained the upper hand over those functions that generally drive a company’s top-line growth, such as marketing and product development.

The result is a focus on cost-cutting over investment and incremental change over fundamental innovation (which is what has happened in Japan since the 1980s, according to the influential Harvard Business School Professor Clay Christensen).

The trend for companies to reach goals by minimising costs rather than maximising revenues looks set to continue through 2015 and beyond, as confidence in the global recovery remains soft.

Although there is a great deal of uncertainty about the UK’s long-term prosperity (uncertainty that will increase further if we have an inconclusive General Election in May) advertising forecasts for 2015 offer a ray of sunshine.

Revenues from marketing services closely track GDP, making them a fairly reliable proxy for the performance of a mature economy.

GroupM, the parent company for WPP’s agencies that invest in media space for brands, predicts a healthy increase in spending on media across the UK in 2015.

Add in wider marketing services and the total will comfortably exceed £20 billion, with digital media outdistancing traditional media for the first time in the UK (one of the first economies to reach such a watershed).

With forecast growth in ad spend of 6.3% in 2014 and 5.7% in 2015, the UK leads the major mature consumer markets.

For WPP itself, Britain has been a star performer, showing like-for-like revenue growth of more than 10% in our most recent results. Our domestic success means we now employ 16,500 people in the UK, an increase of 40% in the last five years at a time when employment opportunities have been in short supply.

Some of the credit clearly must go to the government and its chief financial officer George Osborne.

Although government borrowing remains at dizzying and unsustainable heights, and there is precious little confidence in the plan to check the deficit, the UK’s recovery has exceeded expectations and left many European rivals trailing.

The UK’s relative strength notwithstanding, global economic woes and geopolitical issues (in particular the weakness of Western Continental Europe) have left us with a world increasingly dominated by the “G2” of the United States and China.

WPP has been a bull on China for more than 25 years. It’s our third largest market behind the US and UK, with revenues of US$1.5 billion and 15,000 people.

Many Chinese believe that the last 200 years have been a historical blip, and that modern China is simply returning to its rightful place as one of the world’s great powers.

The West has been slow to wake up to China’s resurgence. True, tech companies like Alibaba, Xiaomi, Tencent and Baidu now feature in the Western financial press on a daily basis, but – with the possible exception of Alibaba after its blockbuster flotation, which made it already the sixth most valuable company on the planet – they have yet to establish themselves in the general public consciousness.

This is largely because, with such a vast home market, Chinese companies have often rightly judged that they don’t need to look outside China for growth.

Chinese business does, however, appear to be developing a taste for international expansion. A growing number of firms derive a significant proportion of their turnover from non-Chinese markets. Lenovo, ZTE, Air China, PetroChina, TCL, China Eastern Airlines, Hisense and Sinopec all generate more than 25% of their revenues overseas.

Xiaomi is the low-cost smartphone-maker that has taken on and beaten Samsung and Apple in China. The literal translation of Xiaomi is “little rice” but there’s no longer anything little about it.

The company is now the third largest smartphone manufacturer in the world, its latest funding round valuation could exceed US$40 billion and, if press rumours are to be believed, it’s planning a major statement of its global ambition by launching the Mi5 handset at January’s Consumer Electronics Show (CES) in Las Vegas.

With so many leaders of consumer firms converging at CES to see the latest gadgets, the event is also a chance to gauge business confidence in the worldwide recovery. I expect American CEOs to be a little more cheerful than most.

Buoyed by energy self-sufficiency through shale gas and by high-value manufacturing (driven by sophisticated capital-intensive techniques such as robotics and 3D printing), America’s prospects are good.

Its own deficit-wrangling aside, the US has been enjoying positive economic news. Production is on the up, as are employment figures and retail sales.

Less tangibly, but just as importantly, the allure of Brand USA is as strong as ever. That Xiaomi is even considering putting on a show in Vegas proves the continued potency of the old notion that you haven’t made it until you make it in America.

Speaking to clients as they plan for the year ahead, the power of the world’s two largest economies is a constant theme. Where expansion is forecast, it seems likely to be focused in the US and China.

In a world of uncertainty, there’s a high probability that – for global business at least – 2015 will be the year of the G2.

A version of this article was first published in The Times
Photo: Getty Images