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Posted March 2011

 

“The extraordinary business does not require good management” says investor Warren Buffett

 

Over-paid managers will throw themselves on their swords. Warren Buffett, the billionaire investor, said he rates businesses on their ability to raise prices and sometimes doesn’t even consider the people in charge. His cynical view on corporate suits and flunkies clashes with Carlos Brito’s, the CEO of the world’s number one brewer. He likes to hammer home the message that the success of a corporation hinges on its managerial elites. ”Great companies are formed by great people,” not by popular products, cash flow or assets, Mr Brito told Stanford University graduates in November 2010.

Who’s right? Mr Buffett or Mr Brito?

When interviewed by the Financial Crisis Inquiry Commission, which had been set up by the U.S. Congress to examine the causes of the current economic and financial crises, Mr Buffett reportedly said: “The single most important decision in evaluating a business is pricing power.”

In the interview, which was released by the panel in early February 2011, Mr Buffett explained: “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

Mr Buffett, 80, accumulated the world’s third-largest personal fortune through a career of stock picks and takeovers. He has bought companies such as railroads and electricity producers, whose pricing power stems from a lack of competitors.

In other words, if you have a monopoly or near-monopoly, your pricing power is quite high - as consumers will know who have a nervous breakdown each time they receive their utilities bill. Moreover, as long-suffering travelers on let’s say state-owned European airlines or trains they will have first-hand experience of how badly these companies are run since they enjoy almost no competition.

In contrast to Mr Buffett, the head of the world’s largest beer marketer, Carlos Brito of AB-InBev sounds like a luvvy-hugging and kissie-blowing philanthropist. He said that the success of a corporation hinges on hiring high-performing individuals, who bring passion and commitment to the job, and on building a company culture that keeps them.

So – is Mr Buffett a contemptuous old misanthrope and Mr Brito a touchy-feely type of guy?

The answer is: Mr Buffett is just more honest than Mr Brito.

It’s a fact that businesses the world over love market dominance. Unlike Mr Buffett, though, they don’t often say it out loud.

In its annual reports, AB-InBev boasts of its leading positions (number one preferably) in the markets it operates in. Once you enjoy this sort of power, as AB-InBev indisputably does, its managers have to screw up big time to have a measurable negative effect.

Besides, what are we to make of AB-InBev’s claim that the world’s number one brewer is a great company formed by great people? Where are its top-managers, who helped pull off the USD 52 billion takeover of U.S. brewer Anheuser-Busch in 2008 and were granted 28.4 million stock options during the takeover, currently representing a EUR 850 million (USD 1.2 billion) windfall?

Beer Insights, a U.S. trade publication, recently wrote that about half a dozen of the original 40 granted those options have already left the company and so aren’t eligible for them.

Have these guys decided to vote with their feet against Mr Brito’s much praised corporate culture at AB-InBev?

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