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The Buck Stops Where?

Bloomberg has a great piece this morning on Mark Donegan, CEO of Precision Castparts, which was bought by Berkshire Hathaway last year.

Donegan sounds like a demanding CEO with no room for BS. The culture at Precision is described as "In-your-face, full-body contact ... People would walk out of reviews with their armpits sweating."

One thing Donegan has no appetite for are factory managers making excuses for not hitting their numbers.

Bloomberg writes (emphasis mine):

Every factory was required to produce the same set of 26 charts that highlighted things like productivity, earnings, market share and fixed costs per employee. Donegan usually didn't receive copies of the presentation beforehand. But his knowledge of the business was deep enough that he could quickly spot what had gone wrong or any missed opportunity. He often found something.

He especially hated when a plant fell short on a metric and the presenter tried to say he wasn't responsible. Donegan could be funny, these people say. But, mostly, he was intimidating, showing little restraint with his words. His yelling could be so loud that sometimes staff would avoid that portion of the office during reviews, they say.

All successful companies have some degree of this. Winning is hard and you have to demand the best.

But here's what I didn't like. Later in article describes a period when Precision missed profit expectations several quarters in a row. Here's what happened:

Donegan told analysts that customers were "destocking," or drawing down Precision parts in inventory. The company also had expanded to supply the energy industry, and as oil prices plunged, that business slumped.

Huh.

Donegan has no room for employees not taking responsibility for meeting their numbers. But when it comes to numbers he's responsible for, there's an explanation for underperofrmance, some trend that he had no control over.

I looked at conference call transcripts to see exactly what Donegan said about weak quarters.

Here he is in Oct. 2014 talking about flat sales in a business unit:

Large commercial overall was flat, but a key driver in that was destocking, primarily by a single engine customer.The value of that in the quarter negatively impacted Forged Products' growth overall by 2.5 percentage points. So the destocking that went on from that single customer was a large number.

Here's Donegan in Jan. 2015, discussing weak results:

If I look at the key drivers in Forged Products, overall, our aerospace sales were up by 1%, but this segment got hit squarely with the majority of the year-over-year change in demand from the destocking. This negatively impacted the growth rate of this segment by roughly 6 percentage points.

We fell short of our targets, but ... but ... but. It seems like the same explanation he won't let his own managers use.

I'm not a tenured CEO of an extremely successful parts company. But I can smell injustice from a mile away. And if a middle manager gets chewed out by a CEO for saying outside forces caused him to miss his numbers, only to have that CEO use the same tactic with his own investors, something ain't right.

Precision Castparts is monstrously successful under Donegan's watch. He needs none of my advice. But two business practices seem self-evident:

Set an example. There's a difference between hard-charging accountability and being scared of your boss. And the difference is whether that boss can follow his own standards.  

Accept that capitalism doesn't move in straight lines. Donegan's conference call explanations for missing numbers seem legitimate. No one can nail every quarter because things like customers drawing down inventory pull results in the other direction. It's OK. Capitalism isn't supposed to be smooth. The important part is realizing that this reality extends to all employees, all business units, and all investors. Anyone who thinks they can hit their numbers every quarter is almost certainty engaging in behavior that will either explode, or come at the expense of long-term returns. 

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Morgan Housel owns shares of Berkshire Hathaway. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), and has a disclosure policy.