institutional-imperative

Institutional Imperative

The 'institutional imperative' is a term coined by Warren Buffet in a letter to shareholders that describes “the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.” Warren also discussed the following traps within a firm:

1. As if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction;
2. Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds;
3. Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and
4. The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.”

To avoid this fate, he gave advice mirroring the Texas Rangers credo: right is right even if nobody’s doing it, and wrong is wrong even if everybody’s doing it.

References

1. Berkshire Hathaway’s 1990 letter