Legendary investor Warren Buffett is best known for stocks he has bought over the years and his gains for Berkshire Hathaway Inc (NYSE:BRK)(NYSE:BRK) investors. He’s also known for quotes that can be applied to investing and life.
Here’s a look back at Buffett’s take on the importance of reputation.
What Happened: Buffett has many highlights during his lengthy career leading Berkshire Hathaway, but one of the lower moments almost occurred due to an investment in investment bank Salomon Brothers.
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Berkshire bought a 12% stake in the company in the 1980s and a scandal at the firm over treasury bonds almost took the company under and led to Buffett stepping in as interim chairman and CEO of the company.
In September 1991, Buffett testified before the House Commerce subcommittee in Washington D.C. and shared that he asked every Salomon Brothers employee to be their own compliance officer.
He also asked for two key demands from employees with the first one being that they obey all rules and ask themselves if they’re willing to appear on the front page of the newspaper and have their work accomplishments read by their spouses and kids.
If they followed this rule, Buffett was pretty confident they could ignore his second demand.
“Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless,” Buffett said in the hearing.
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Salomon Brothers was later acquired by Travelers Group, netting a profit for Berkshire Hathaway and showing how Buffett helped saved the company.
Why It’s Important: Buffett has used the Salomon Brothers case as an important learning lesson over the years when discussing the newspaper test and the value of reputation.
Salomon Brothers knew one of their employees was a bad actor and didn’t report and kept trying to shove the story away, before coming within inches of destroying the company, Buffett once said.
Buffett said all the company had to do was pick up the phone and report the trading activity but instead former Salomon CEO John Gutfreund, who was once called the “King of Wall Street,” destroyed his career.
