Berkshire Hathaway Inc. Vice Chairman Charlie Munger delivered a scathing analysis of systems characterized by short-term incentives during a 2011 interview at the University of Michigan’s Ross School of Business.
His insights into the consequences of poorly designed systems were notably candid.
“Good people go bad because of the way the system is structured,” Munger said. “If you run a big chain of stores and you make it easy to steal by your own sloppiness, you will cause a lot of good people to go bad. You will have created an irresponsible system and a system with these irresponsible incentives of course is geared to cause trouble.”
Munger’s commentary is a warning about the cascading effects of poorly designed incentives. It’s not merely that these systems are ineffective; they can induce otherwise good people to make poor decisions and perpetuate a cycle of irresponsibility and short-term thinking.
Munger was not optimistic about the possibility of a systemic overhaul, yet he encouraged tackling the issues incrementally.
“Attack it piece by piece,” he said, noting that avoiding “perverse incentives” was a personal as well as a systemic obligation. He pointed to Berkshire Hathaway’s practices as a model, emphasizing its focus on long-term gains rather than the short-term rewards that pervade Wall Street.
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Munger criticized the standard corporate practice of awarding high salaries to directors, an action which, according to him, inevitably leads to inflated CEO compensation. He also expressed skepticism about the effectiveness of legislative fixes, like the Sarbanes-Oxley Act of 2002, in remedying these deeply ingrained problems.
His warning resonated throughout his discussion: that good people when subjected to flawed systems, can go astray.
Investing in startups offers a unique lens through which to examine Munger’s cautionary words. In the startup realm, the term “runway” often refers to the amount of time a new company has before it needs to become profitable or secure additional funding. This pressure to perform quickly, akin to the short-term incentives Munger criticizes, can distort the decision-making of otherwise ethical entrepreneurs.
It’s not uncommon to hear stories of startups compromising on product quality, overworking their employees or engaging in questionable business practices to meet investor expectations for rapid growth and quick returns.
But much like Berkshire Hathaway’s focus on the long game, some startups and their investors are bucking the trend, opting for strategies that prioritize sustainable growth over short-term profits.
The StartEngine platform offers the opportunity to align your financial decisions with your ethical and long-term goals. On StartEngine, you can discover cutting-edge startups raising capital and delve into their business models and market strategies. This isn’t just a chance to diversify your portfolio; it’s an opportunity to fund the future you want to see and back the entrepreneurs you believe should be running the big businesses of tomorrow.
Munger’s insights are a reminder for entrepreneurs and investors alike to carefully consider the structures they put in place lest they create a system that makes it “easy to steal by your own sloppiness,” both metaphorically and literally.
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This article Charlie Munger Points Finger At System Flaws Leading People To Make Poor Decisions: ‘You Make It Easy to Steal By Your Own Sloppiness, You Will Cause A Lot of Good People To Go Bad’ originally appeared on Benzinga.com
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