Warren Buffet’s Management and Leadership Theories

Introduction

Leadership-related studies have attracted the attention of both academic researchers and practitioners such as organizational managers for a long time. There are many definitions as to what leadership exactly entails. Some of these definitions take the perspective of describing the purpose or the requirements of the person regarded as the leader while others have taken the perspective of the nature of the position considered as a leadership position. For instance, Yukl (2010, p.26) defines leaders as people in positions of authority in societies/organisations.

Trait Theories

Trait theory draws much on virtuous character traits as key indicators that a person can be a leader. People regard this approach to leadership to have originated from the earlier Great Man Theory. The theory, as revealed from those in favor of it, claims that there are evident identifiable characteristics that determine potential successful leaders. Critical traits associated with successful leadership came in handy during the process of identifying and recruiting people into positions of leadership. (Yukl 2010, p.32) cites that some people recruited according to these traits were not effective while some who did not have them were effective. This implies that the traits varied with circumstances. The major problem with this theory is the absence of definite traits that people can universally accept as indicators of leadership.

Behaviorist Theories

Behaviorists observe and categorize different behavioral patterns as ‘leadership styles’. After the publication of the book The Human Side of Enterprise by Douglas McGregor in 1960, people shifted attention to the behavioral theory of leadership. As a result, McGregor’s view on leadership influences all the behavioral theorists. This theory puts emphasis on focusing on relationships in the work place Vis a Vis performance and overall productivity. The theory of leadership portrayed in McGregor’s book (1960) has a lot of influence to the present day managers. Publicized the most is his concept that strategies mostly used by leaders emanate from such leaders’ assumption of the human nature.

Blake and Mouton

Under the inspiration of McGregor, Blake and Mouton came up with a managerial grid that focuses more on the task (production) and workers (people) orientations of organizational managers. It highlights the concerns raised by the two extremes. The grid, which plots the concern for production on the horizontal axis and that of people on the vertical, plots the five essential leadership techniques.

The Blake Mouton Managerial Grid
Source: The Blake Mouton Managerial Grid

Behavioral theories may help people in positions of leadership to develop important leadership behaviors by they are inadequate considering that they give little guidance as to what should be the ideal leadership behavior in different situations. According to most of the researchers in the field such as Conger (2006, p 52), no one leadership behavior can stand on its own and be effective in every circumstance.

Situational or contingency leadership theory

In this school of thought, people argue that a leadership style should be contingent upon the prevailing situations such as the context, the people, and the task worth handling, the nature of the organization among other variables. A number of theories contribute to this school of thought. According to such theorists, every situation has a definite leadership behavior that is best suited to it.

Fielder’s contingency Theory

This theory postulates that there is no one defined way of leadership that managers can adopt in all situations. It holds the claim that different situations create the best leadership style that managers can adopt at that particular moment. Therefore, it is important to note that the best solution for a problem that occurs at a given context is always contingent on the factors that lead to the situation.

For instance, in a highly mechanized organization whereby the nature of the workers’ responsibilities is repetitive, a directive style of leadership may bear the best fruits (Katzenback, & Smith 1993, p 20). In another situation where the work environment is more dynamic, a more flexible and interactive system of leadership proves to be the best in encouraging productivity. According to Conger (2006, p 90), there are three situations that when considered could be used to define the condition of a managerial situation.

The Hersey- Blanchard Model of Leadership

Hersey- Blanchard model argues that the levels of development of a leader’s subordinates are responsible for the leadership style that the leader opts to adopt. This theory is majorly concerned with the directive and the emotional support that a leader is supposed to provide in a given level of maturity of the followers. It relies on these three variables: Task behavior (the directive), Relationship behavior (socio-emotional support) and Maturity of the subjects. According to this theory therefore, it is important to consider a given situation to determine the most appropriate leadership style to be effected.

Tannenbaum and Schmidt’s leadership Continuum

These two contingency theorists opposed the extremism portrayed by the other theorists in their school of thought. They as a result came up with the argument that leadership behavior varied along a continuum. They as a result argued that the democratic extreme represented a kind of leadership that was not effective in formalized organizations. The four major leadership styles of the other theorists could then secure a place in a continuum. These styles are Autocratic, democratic, persuasive and consultative.

Continuum of Leadership behavior
Source: Tannenbaum and Schmidt (1973) Harvard Business Review

Adair’s Action- Centered Leadership model

Another theorist in this school of thought is John Adair. Adair’s famed three-circle diagram presents a simplified variation of the human interaction in the organization. According to Adair, situational and contingent issues call for varying responses from the leader. The size of the circles can therefore be bigger or lesser depending on the variety of the situations. This means that the leader’s emphasis on the functional-oriented behaviors is depended on the actual situation. This proves to be a challenge on the part of the leader to make sure that the all the sectors represented in the circle are managed effectively.

Adair’s Action- Centered Leadership model
Source: Adair’s Action- Centered Leadership model

Transactional and transformational Leadership

A certain leader qualifies as transactional when he rewards the follower for meeting some agreements and punishes the follower for not doing what is supposed of him. In this case, the follower feels that he/she has been denied the sense of self-worth. Transformational leaders on the other hand uphold the self- worth of their followers (Bass, 2008, p. 618). Transformational leaders motivate their followers to the extent of performing beyond what they thought they could manage to do.

Pardey (2007, p 67) argues that transformational leaders are expected to cope better with adversity. Spiritual leaders such as Jesus, Mohammed and Buddha were transforming. This made them to shape values and use transcendental metaphors that empowered change. After reading with concern the biographies of President J.F Kennedy and Roosevelt, James Macgregor Burns cleared way for a wide impetus into the discussions that contrasted and compared between transactional and transformational leadership. According to Bass (2008, p. 620), transformational and transactional leadership, however, have a positive correlation in that transformational leadership added to transactional leadership to make it conclusive.

An evaluation of the behavior of selected leaders in your organization, or in an organization (or organizations) of your choice, in relation to a range of models and theories

Scholars in different fields of study have also written numerous articles, reports as well as books in the topic. This explains the variance in diction when it comes to defining the term Leadership. For the purposes of making an elaborate evaluation, this study evaluates the leadership behaviors of Al Gore who is a politician and an environmental activist in comparison to those of Warren Buffet who is a force to reckon with in the investment world.

Warren Buffet

One can only effectively evaluate the style of leadership that Warren Buffet employs by considering the different roles that he plays in his organization as the overall leader and chairperson. These responsibilities include appointing top management of his companies, inspiring his followers to achieve optimized results, the entire management strategies as well as rewarding those who greatly contribute to the success of the organization. This study examines the activities that Warren Buffet does in his capacity as the leader and critically analyzes them in relation with the developed leadership theories and models with an effort of trying to define the actual leadership behavior that Buffet employs in the management of Berkshire Hathaway.

Appointments

In the style of management that Warren Buffet uses, he appoints the members of the top managerial team for Berkshire Hathaway and affiliate companies only. Other appointments in the mother company or the affiliates take place internally with him being directly involved in any way. Based on the trait theory, Buffet uses a given set criteria to come up with the names of the appointees. There are certain traits that are important indicators that a person is capable of holding a managerial position according to Pardey (2007, p 90). In this case, Buffet is considered a trait theorist considering that he uses the criteria such as the efficiency of the potential appointee, his individual performance as informed through his portfolio as well as the level of competency. Trait theorists hold the argument that a leader can be identified using such traits.Based on these traits, Warren Buffet comes up with the top management of his giant company.

Inspirational leadership

Warren Buffet keeps inspiring his subjects constantly through the newsletters that he releases annually for the workers and shareholders of Berkshire Hathaway. Through these newsletters, buffet manages to inspire success in his employees by giving them business hints and inspirational stories about him or other successful businesspersons. However, indirectly, taking such an initiative to motivate the workers is such an important aspect of a leader according to the transformational leadership theorists such as Conger (2006, p 34). By taking such an initiative, Warren Buffet becomes a source of transformation for the workers who in exchange work towards being successful as himself. The “ability to understand and to relate to others is widely seen as being important for leaders” (Yukl & Lepsinger, 2004, p.25)

Indirect management

Warren Buffet manages his businesses indirectly therefore giving ample time to the leaders he has entrusted with the management job. He is not involved in the details of running the business and therefore he only gives advice to the management. The situational theorists argue this behavior as a borrowed idea from their school of thought. Warren Buffet in this case only takes the responsibility of advising his followers when there are problems that need his immediate action or intervention. At other times he entrust the decision making to the management.

There are however other times when he has to issue instructions basing on his experience in the matter. This dynamism in the system of management stands out as situational leadership. The instructions that he issues are dependent on the level of maturity that the recipients who are members of the managerial team portray. Situational theorists argue that a leadership behavior relies on the circumstances of the problem that is in hand.

Motivational/ rewarding

Giving rewards or accreditation to followers after they have successfully attained the objectives of a given agreement is transactional. In this case, the leader assigns a given task to the follower or even obtains an agreement from the follower on what is worth doing in a particular task. According to the transactional theorists such as Bass (2008, p.619), when a leader promises either psychological rewards or material rewards to the follower for successfully handling a task, this stands out as Contingent Reward (CR).

Occasionally, Warren Buffet organizes events in his companies to reward the most successful people in making investments. During these times, the employees who have contributed to the success of given projects are recognized and awarded accordingly. On the other hand, the departments that did not perform well are in a way punished psychologically through not being recognized. In this manner, Warren Buffet qualifies as a transactional leader. The aim of the whole thing is to motivate productivity and innovation in the employees.

Al Gore

Leadership style in relation to Leadership theories and models

As a politician and a climate change activist, Al Gore stands out as a charismatic transformational leader. In most cases, the interests of the leader and those of the followers are not clear in this leadership style. This means that the achievement of the objectives of a given venture results in a win-win situation between the leader and the followers. The position of the leader is in this case therefore not above the followers. By considering his activities and the manner in which he assumes the responsibilities of the position, Al Gore can fit in this category of leaders. This study aims at evaluating Al Gore’s mannerisms in his leadership with relation to the characteristics of transformational leadership behavior.

Servant leadership

The struggle against humanitarian dangers such as global warming means that if one can meet the objectives of the struggle, it will be a win-win situation for both the leader and the followers. Goleman et al. (2002, p.91) compared what they referred to as servant leadership with transformational leadership and concluded that while the transitional leader aligns his interests with those of the followers, the servant leader places the interests of the followers before his.

There is however the undeniable fact that both behaviors of leadership emphasize on personal development and the empowerment of the followers (Rollinson 2005, p62). In other words, the two styles aim at facilitating the achievement of the followers. As a climate change activist, Al Gore passes for a servant leader in that he even sacrifices his personal interests for the benefit of his followers. As claimed by Gill (2011, p.43), “the capacity to understand oneself, to have an effective working model of oneself – including one’s own desires, fears, and capacities – and to use such information effectively in regulating one’s own life’ is of great use for a servant leader”.

Directive and participative leadership

By often giving their leaders direction out of problems and crises, transformational leaders are in this way considered directive. People regard charismatic leaders as participative when they tend to give messages of hope to their followers, which aim at inspiring them to take initiatives and rescue themselves from their problems. As a charismatic transformational leader, Al Gore repeatedly takes the initiative of providing direction to his followers as well as preaching hope messages to them to arouse self-initiative.

Other ways that a transformational leader can be termed as participative is when they are involved directly in the solving the problems of their followers. Al Gore thinks that if people do not take the problem of global warming seriously, and major world polluters such as the United States fail to take the initiative, the repercussions of such problems will be mostly evident in the innocent people. In this case, he takes the initiative to bring together the people to and actively participate in the fight for their well-being.

Social competence

The ability to inject humor into serious debates, as found by Goleman et al., (2002, p31), correlates with the transformational behavior of most civil activists, managers and politicians. In this case, eloquence lays among the most important competencies that transformational leaders exhibit. Persuasiveness and social sensitivity form another great combination that correlates with transformational leadership. For one to be socially competent, it is very crucial that the person be a good listener and eloquent. Al Gore manages to win the hearts of the crowds when he addresses them in political and climate change conferences through his social competence. It is by considering this attributes that he considered a charismatic public speaker and leader. As posited by Goleman et al. (2002, p.62), a key role of leaders is to manage the emotions of the groups they lead. Emotional intelligence as portrayed by Al Gore amounts to social competence.

Envisioning

According to Bass and Riggio (2006, p.624), the transformational leader holds a vision that he tries to make a reality to his followers. It is this vision that guides his behavior as a leader. The leader then concretizes the vision, which makes the followers view it as worthy a thing that raises their concern and efforts in trying to achieve it. It does not matter to the leader if the arousal of the follower’s concern is immediate or takes some time before its realization.

The transformational leader does not fear defeat and is often willing to repackage his strategies and re -peach his vision again to his followers (Mullins 2010, p156). “Al Gore, as it is evident in his speech on the acceptance of the Nobel Peace prize in 2007, said that they have a purpose, they are many. For this purpose, they will rise, and they will act” (Conger, 2006, p79). In these words, it is clear that he aimed at making the followers feel that they share his achievements and that their struggle is heading in the right direction.

An analysis of how two leaders perceive their roles, and what has helped them develop as leaders

A comparison of Al Gore and Warren Buffet’s leadership styles

Executive Summary

This part of the report compares the leadership styles that have been adopted by two proclaimed leaders namely Al Gore; who is a politician, an environmental activist famed for his struggle against global warming and the great investor, billionaire chairman of Berkshire Hathaway and philanthropist Warren Buffet. For the purpose of coming up with a good comparison in this report, we are only going to focus on Al Gore leadership as an environmental activist and as a politician.

The theories evaluated in this study are the charismatic transformational leadership and democratic leadership. As a charismatic transformational leader, Al Gore seeks to persuade and convince his followers into adopting a particular mindset that he represents while on the other hand Warren Buffet as a democratic leader seeks to motivate his subjects by giving them all the space and resources they need to exhaust their potentials.

Considering their achievements in the different portfolios that they hold, it is will be unfair for anyone not to consider the two men as successful leaders. Al Gore, who happens to be the forty- fifth vice president of the United States of America, is a Democratic politician, an environmental activist and a writer. In addition, al Gore is a renowned businessperson being the cofounder and chairperson of a number of organizations. Al Gore efforts to curb global warming made him acknowledged and awarded the prestigious Nobel Prize in 2007.

Warren Buffet is a famous American Billionaire and philanthropist. From a tender age in his life, Buffet had a thing for investment and business. Buffet is the chair and owner of Berkshire Hathaway, which is a conglomerate of companies headquartered in Omaha. Buffet is a philanthropist considering his declaration to leave 99% of his wealth of about 50 billion dollars to a worthy course under that Gates Foundation. Warren buffet was in 2008 named by the Forbes magazine, as the world’s richest. Buffet owes this success to his style of leadership as chairperson of his corporation.

Discussion and Analysis

Warren Buffet and democratic leadership style

In his style of management, Warren Buffet has adopted a style that discourages his active influence in the management of his company. As a result, Buffet has entrusted the top executives of Berkshire Hathaway with the responsibilities of independently managing the organization. This style of leadership stands out as democratic in that it encourages a sense of competition among the various heads of independent companies. This in turn works to the benefit of the leader as the followers struggle to work to the maximum to achieve recognition and being rewarded (Pardey 2007, p23).

Although Buffet’s leadership style is less interactive compared to other leaders, it works in a big way since the subjects struggle for the motivation that they end up receiving at the end of the day. This style encourages accountability and responsibility among the subjects considering that they do not experience constant disturbances from the owner (Conger, 2006, p.243). It is only until when ones evaluates the performance of the individual companies that Buffet comes in the process. The sense of freedom that he gives to his workers make them to feel as if they are working in their own businesses which adds to their accountability and honesty. Without conducting a background study, one might think that a particular CEO is the owner of an individual company. Buffet has inspired this system to work in ever part of his company, as there is effective delegation of duties with every responsible person being able to recognize their limits.

Al Gore’s Transformational leadership

As evidenced through his numerous speeches, Al Gore seeks to influence, motivate and call for the transformation of his followers to come together and confront an issue that threatens their well-being. For instance, in his Nobel Peace Prize acceptance speech in 2007, Al Gore reminded his followers that they had a mission that they ought to accomplish and that it was only when they rose up and act that the struggle will achieve the intended results (Northouse 2010, p.49). One of the quality that makes Al Gore stand out as an environmental activist is the desire he has to inspire the people and advocate for self-awareness. Al Gore aims at transforming his followers through serving as an example to be emulated.

Comparison

Despite the fact that the two leaders have adopted two distinct styles of leadership, they have succeeded in one way or the other in managing their followers and achieving their satisfaction. The method used by Warren Buffet might be termed as principled and that of Al Gore be said to be participative (Huczynsky & Buchanan 2007, p.102). One should note, however, that in their different ways the two leaders have proved the two style of leadership to work for both the leaders and the followers.

While Al Gore directly influences the performance of his followers by directly motivating them, Warren Buffet gives them the space they need which is essential for the development of a sense of responsibility and self worth. Warren Buffets style of leadership therefore is less involving on the part of the leader compared to that of Al Gore. However, there are certain instances upon incorporating the two styles to function as one in different situations. For instance, there are times when Buffet is involved in directly inspiring productivity from his subjects.

A summary of the learning you can take from this assignment for your own practice and development as a leader

From the above study, one can generate the following outcomes, which assist in the study of the essence of leadership. Firstly, no single leadership style can exist in isolation. Secondly, if there is a satisfactory address of both the objectives of the leader and those of the subjects, it does not matter the means as the end justifies it. As theorists from the contingency and situational leadership school of thought claim, different situations call for different styles of leadership.

For instance, the style of leadership employed in an academic setting should be more transforming and participatory than in a corporation (Kakabadse, & Kakabadse 2007, p.56). To this extend, I have to accept this from the onset as a foundation to defend my choice of the democratically principled leadership and managerial style that is employed by Warren Buffet as the most suitable in the banking industry. This study analyses the various benefits associated with this style of leadership (Kakabadse & Kakabadse 2007, p.89). These include accountability and trust building, responsibility and self-initiative, and delegation of duty/ risk taking.

Accountability and trust building

Warren Buffet entrusts his managerial team with the responsibility of making investments whenever they see the opportunity even without first seeking his consent. By entrusting them with these obligations, the managers therefore make sure that they research before seizing such opportunities to ensure that they make the right decision (Kotter, 1990, p.56). Accountability and trust building create a climate that encourages mutual performance monitoring, supportive behavior and adaptability (Yukl 2010, p.25).

Responsibility and self-initiative

The fact that Warren Buffet is only involved in the management of Berkshire Hathaway when he has to make a decision on whether to invest or not is genius since it instills a sense of responsibility to his team of top executives. A CEO of any of the companies affiliated to Berkshire Hathaway has to treat the company as an independent entity. Buffet does not interfere with the day-to-day running of the companies, which then gives space to the individual managers to take full responsibility of whatever decisions they make in the management process.

On the part of the followers, this style of leadership gives them the opportunity to mature in the positions they hold as they have the free will to do so (Conger, 2006, p.58). In the banking industry, the style used by Warren Buffet to manage his company is worth adopting to ensure that the workers get their due responsibilities and freedom to make decisions required by their capacities (Kotter, 1990, p.67). Warren’s method of management may lack the interaction that seems necessary for a leader.

Delegation of duty/ risk taking

One might view risk taking as a term that can people should never accept in the banking industry. This is however untrue considering that just like all other business ventures, taking risks with the hope of making profits is the order of the day. Warren Buffet, being an idol in the business world is no stranger to taking calculated risks (Kotter, 1990, p. 156). He does this not only in making investments but also in his delegation of duties to his management team. Buffet chooses exceptional people with outstanding portfolios as CEOs of his companies. Delegation of duty therefore, as evidenced by the success of Warren Buffet, is a necessary ingredient supplied by his democratic style of leadership. This ensures that individuals feel appreciated in the system.

Conclusion

Based on the expositions presented in the paper, Warren Buffet’s management system can be helpful for the banking industry to ensure smooth running of events and the formulation of easy decision-making models. The banking industry is one of the industries where time is a very important asset and where differences in opinions and any conflicts can convert to loses (Brooks, 2005, p.68). By adopting Warren Buffet’s style of leadership and management into its day-to-day operations, the banking industry can experience great returns by effectively managing time and the human resources (Belbin, 2010, p.45). Upon testing, the style has proven to work in any investment venture if Warren Buffet’s success in making investments is anything to go by (Bennis & Nanus, 2004, p.24).

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