Warren Buffett, widely regarded as one of the most successful investors of all time, is well-known not only for his extraordinary financial acumen but also for his straightforward and insightful commentary on management practices. His observation that managers often discard performance metrics when results falter, rather than addressing managerial shortcomings, remains especially relevant in contemporary business and investment circles. Companies often push the boundary between hyping themselves up and remaining compliant with SEC regulations, but this can distort the actual reality of the business.
In his 1982 shareholders' letter, Buffett famously pointed out how the goal post can constantly shift depending on the performance of the business. Buffett explained this by saying, “Yardsticks seldom are discarded while yielding favorable readings. But when results deteriorate, most managers favor disposition of the yardstick rather than disposition of the manager.”
Some managers might focus on net income, while others focus on EBITA or even revenue growth. Buffett is saying that whichever metric managers choose to focus on often depends on which one is doing the best. He further clarified that point, saying, “Managers faced with deterioration often prefer a more flexible measurement system: just shoot the arrow of business performance into a blank canvas and then carefully draw the bullseye around the implanted arrow.”
Buffett, born in 1930 in Omaha, Nebraska, began his investment career early, famously purchasing his first stock at the age of 11. Over the decades, he transformed Berkshire Hathaway (BRK.B) (BRK.A) from a struggling textile manufacturer into a global conglomerate valued in the hundreds of billions of dollars, earning him the nickname "Oracle of Omaha." His disciplined investment strategy and ethical approach to management have solidified his authority on topics concerning corporate governance and managerial practices.
Buffett’s insight into managerial tendencies to change performance metrics resonates deeply because it reflects a common, yet problematic, practice within many companies. By altering or even discarding yardsticks of evaluation, managers might temporarily conceal performance deficiencies. However, Buffett argues that this action delays necessary managerial changes, allowing underlying issues to persist and ultimately impacting long-term organizational performance.
His perspective holds particular authority given his track record of transparency and accountability in corporate leadership. Buffett has consistently advocated for clear, consistent, and transparent reporting standards, which has earned him substantial credibility among investors and financial professionals worldwide. Berkshire Hathaway’s success under his leadership is frequently cited as evidence that confronting managerial problems directly, rather than adjusting standards to obscure them, is more beneficial in the long run.
Buffett’s caution about managers discarding yardsticks to avoid accountability applies broadly to current market dynamics. Today's rapidly changing economic environment, characterized by shifting global markets, technological disruptions, and evolving consumer behaviors, makes consistent and honest performance measurement increasingly vital. Companies that frequently adjust metrics risk obscuring genuine financial health, undermining investor confidence, and jeopardizing sustainable growth.
Recent decades have provided numerous examples where businesses have suffered significant setbacks or financial crises following periods of inconsistent or manipulated performance reporting. These cases reinforce Buffett’s caution, demonstrating the tangible risks associated with the behavior he calls out.
In essence, Buffett’s timeless insight draws attention to the importance of managerial integrity and the courage to face uncomfortable realities. His authoritative voice, grounded in decades of demonstrable success and ethical stewardship, serves as an ongoing reminder to investors, executives, and market analysts about the necessity of holding management accountable through stable and transparent performance evaluation practices.
