“We can afford to lose money, even a lot of money. We cannot afford to lose reputation, even a shred of reputation. Let’s be sure that everything we do in business can be reported on the front page of a national newspaper, in an article written by an unfriendly but intelligent reporter,” Warren Buffett (Trades, Portfolio) wrote in a letter he sent to companies that are part of the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) empire.
For Buffett, the most celebrated value investor of our time, protecting reputation is paramount when making tough decisions. The “newspaper test” that he relies on ensures managers make ethical choices that uphold Berkshire Hathaway’s sterling reputation.
Buffett's success stems not just from his investing acumen, but his impeccable integrity. Reputation matters. For him, it is the bedrock on which his $757 billion empire is built.
The newspaper test: A simple lens for ethical decision-making
With over 360,000 employees under the Berkshire umbrella, Buffett cannot monitor every business decision across Berkshire Hathaway’s dozens of subsidiaries. So how does he ensure all managers align with the conglomerate's ethical principles?
Buffett’s solution is elegantly simple: the newspaper test.
Every two years or so, Buffett sends a short letter to his managers—just one or two pages long. It contains only one directive:
“Judge every action by how you would feel if it was written up in your local newspaper for all your family and neighbors to read.”
This gives managers a quick litmus test for making tough calls. If a decision would seem scandalous as a front-page story, it is best avoided. But if it meets the newspaper test, managers have the green light.
With this common-sense approach, Buffett does not need reams of corporate policies or ethical manuals. He distills responsible leadership into a simple heuristic: “Would I be comfortable if my community knew about this?”
Why reputation trumps profits
For most companies, nothing matters more than the bottom line. But for Buffett, profits do not trump reputation.
“We can afford to lose money, even a lot of money,” he said. “But we can’t afford to lose reputation.”
The Oracle of Omaha recognizes reputation as Berkshire’s most precious asset. It has taken decades to cultivate through ethical leadership, patient capital allocation and treating stakeholders fairly.
While money can be recouped, reputation can vanish instantly. Minor infractions may be forgiven, but serious lapses destroy trust. Once lost, a corporation's reputation rarely recovers.
Buffett understands this. That is why forgoing a quick buck to protect reputation is smart business. Dealings that could stain Berkshire’s name get nixed, regardless of profits.
As he said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
This contrasts with “fast money” corporate cultures obsessed with short-term gains. Buffett plays the long game, optimizing for lifetime value by building an ethical institution respected worldwide.
Berkshire’s revered brand opens doors, wins business, attracts top talent and enables advantageous capital deals. Competitive advantages flow from an esteemed reputation.
The newspaper test ensures Berkshire retains what money cannot buy: hard-earned trust, goodwill and prestige. Upholding these by avoiding scandal trumps marginal profits from ethically dubious dealings.
Leading by example
Critically, Buffett does not just preach the newspaper test, he lives it. His personal integrity provides the ethical true north for Berkshire’s moral compass.
Despite his fame, Buffett lives a low-key, midwestern lifestyle. He lives in Omaha, not on Wall Street. His pleasures are simple - cheeseburgers, Cherry Coke and bridge.
Further, he resides in the same modest house he bought in 1958 and drives an old Cadillac. He takes a $100,000 annual salary, laughably low for a billionaire CEO.
This down-to-earth authenticity earns immense respect. Buffett remains grounded by Midwestern values and dares to be ordinary despite legendary wealth.
His frugality also reflects the values he expects from Berkshire companies. Buffett loathes waste and inefficiency. He invests surplus capital shrewdly, not profligately. Thrift and prudence govern spending.
This exemplifies the fiscal discipline Buffett wants managers to exercise. He sets the tone at the top by leading modestly and spending wisely.
Most remarkably, Buffett practices what he preaches on transparency. He lays bare his salary, investments, political contributions - any information shareholders deserve to know. Such candidness is unmatched.
This openness reflects the newspaper test ethos. If Buffett would publish data publicly, it signals to managers: “Transparency is paramount, we’ve nothing to hide.”
The importance of culture
Ultimately, the newspaper test works because it aligns with Berkshire’s decentralized, high-trust culture.
Despite its size, the conglomerate has just 25 people at its headquarters. Its companies operate autonomously with little oversight. Buffett gives managers maximum autonomy.
This freedom requires responsible leadership. Buffett picks managers carefully, targeting leaders with integrity who will safeguard Berkshire’s reputation.
The newspaper test provides guiding principles for decision-making, not prescriptive rules. Buffett knows ethical choices require wisdom, not rote compliance. That is why the newspaper test assessing likely public reactions is the perfect heuristic. It taps human conscience and communal values, not legal technicalities.
Of course, legal compliance matters greatly. But what separates ethical leaders is going beyond what is merely lawful and doing what is right.
That is what the newspaper test aims for – ethical decisions that make managers proud – not defensive – if they are made public. Leadership through inner morality, not outer scorekeeping.
Practical advice on implementing the newspaper test
The newspaper test exemplifies Buffett’s common-sense approach to ethics. By putting reputation first over profits, it has cultivated a culture of responsibility that permeates Berkshire Hathaway. And it is a wise model for value-based decision-making that leaders can adopt. Here are some practical tips:
- Make it a regular practice to run difficult decisions through the “newspaper test” thought experiment. This quickly reveals potential reputational risks.
- Do not fixate on profits alone. Consider how actions could impact brand, culture and stakeholder trust. Weigh these intangible assets against short-term gains.
- Lead by example. Like Buffett, live your values transparently. Cultivate personal authenticity and integrity. These set the ethical tone.
- Hire and empower ethical managers, not just skilled ones. Give them discretion to lead, but clarity on your values and reputation expectations.
- Focus policies on setting principles, not rigid rules. Ethical choices require wisdom and nuance, not box-ticking compliance.
- Go beyond legal minimums. Fulfilling strict regulations is essential, but not enough. Also consider what meets your conscience and communal standards.
- Make values central to culture. Reputation should be cherished as your company's most precious asset. Make protecting it a priority.
- Communicate clearly on ethical expectations. Ensure every employee understands your standards and their role in upholding them.
- Discuss hypothetical dilemmas. Ask teams: “Would this pass the newspaper test?” This exercises ethical thinking.
The newspaper test may seem to be simple common sense. But common sense seems to have become quite uncommon in the current environment. In an era where reputation seems tarnished across business and politics, Buffett’s wisdom on ethics stands taller than ever.
