Research shows that a good reputation is worth real money. Doubt that? In fact, some studies show that a good reputation can serve as a collateral at the bank! Surprised?
No one knows it better than Warren Buffett who is willing to pay more for companies he sees as having more integrity, and is also prepared to pay to maintain his own good reputation; both of which has given him an advantage in business. See how.
In 1972, Warren Buffett wanted to acquire a company called Wesco. At the time, Wesco was about to buy another company — at a price Buffett deemed too high. He convinced Wesco’s CEO to pull out of the merger, to pave the way for a takeover by Berkshire Hathaway.
What happened next was extraordinary. First, Wesco’s stock dropped to $11. At that price, Wesco was a great deal. Buffett, however, didn’t think it would be fair to buy at this price, because it was his intervention that had lowered the stock price of Wesco. So he ordered his brokers to acquire the stock at prices as high as $17, and subsequently made a formal tender offer at $15.
Buffett would spend a year explaining to sceptics and regulators that he paid a higher price to show integrity. He argued that paying this had economic value, because integrity is an advantage that others would consider in future dealings.
This was proven true when in 1995, a home furnishings company named RC Willey sold to Berkshire Hathaway for only $175 million, even though they had received several other offers for more than $200 million. It was their earlier show of integrity that enables Berkshire to acquire companies at lower prices than rival bidders.
In the early 1990s, the investment bank Salomon Brothers was in the midst of a scandal. Buffett was an investor in the company, and was asked to step in to clean house. In doing so, he said to the bankers:
Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.
But how does a company like Berkshire Hathaway, with over 316,000 employees, maintain this standard? They do this by incorporating an attitude of trust in the organisation. They also select very trustworthy people, whom they trust them a lot.