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Technical Lessons

By Mel Duvall  |  Posted 2003-08-01 Print this article Print

Shareholders nearly deify Warren Buffett for the way he manages his diverse holding company, Berkshire Hathaway of Omaha.

Technical Lessons

Many people look to Buffett for investment wisdom and management guidance. But those CEOs who recognize they aren't divine in their oracular ability to see who is and who isn't honest to the core will have to supplement those ideas with technology—if they want to comply with new laws and avoid accounting trouble. For every Buffett management lesson, there generally is a technology backup.

Here is a look at some of the Buffett's management principles and whether information systems provide safeguards:

  • Good seeds turn bad. Buffett believes preventing corporate fraud has more to do with removing the pressures and temptations that can make executives compromise their integrity. However, that does not remove a latent motivation for economic crimes: greed. For that, fraud detection software and a skeptical auditor are required.

  • Business intelligence resides in individual brains. Buffett has demonstrated that he can manage a $42 billion empire with little more than a phone and fax machine. However,software that can analyze patterns, find impending risks and bring potential problems to the attention of decision-makers can spur faster action, as the General Re case demonstrates.

  • Technology is a tool, not an answer. Buffett says setting a good example is a better way to ensure legal compliance than is a sophisticated reporting system. Perhaps, but the recent record of financial fraud is leading to a regulatory and accounting environment where electronic records and tamper-proof audit trails are basic requirements.

    No one is scandal-proof. In 1991, Buffett was dragged into a mess at brokerage firm Salomon Brothers, where a rogue trader attempted to corner the market in Treasury bills. The trader violated rules barring one firm from bidding for more than 35% of the securities offered at auction. Today, computer programming could have enforced the rules. But when Buffett agreed to become Salomon's CEO, he went before Congress, apologized for the employee's actions and issued this dictum to other Salomon staff: "Lose money for the firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless."

    Buffett's forthrightness was credited with saving the company. Therein lies Buffett's greatest lesson: Information systems may be able to detect fraud, once perpetrated, and help track down the culprits.

    But management's actions in a crisis will ultimately determine if the company stays in business.

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    Contributing Editor
    Mel Duvall is a veteran business and technology journalist, having written for a variety of daily newspapers and magazines for 17 years. Most recently he was the Business Commerce Editor for Interactive Week, and previously served as a senior business writer for The Financial Post.

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