October 4, 2013

Twitter IPO Letter Fails Two Buffett Tests

Twitter’s Letter to Investors in the company’s October 3rd IPO filing failed two key Buffett tests of managerial stewardship. These principles, found in the Berkshire Hathaway Owner’s Manual, reveal the philosophy Buffett follows to fulfill the company’s fiduciary responsibilities.

  • Principle 1: Treat investors the way you would like to be treated if your positions were reversed.
  • Principle 12: Communicate all the relevant company information that you would want if you were the investor, not the CEO.

Twitter’s IPO Letter to Investors is clever and short. It featured a screenshot of the first tweet sent out by Twitter’s Chairman. Contrast this 122-word letter with the 1,615 words in Amazon’s post-IPO shareholder letterFacebook’s 1,225-word IPO letter and Google’s 4,303-word IPO letter (or approximately 155 tweets). In fact, Google’s founders’ letter was modeled on Berkshire Owner’s Manual.

An IPO letter can be a significant corporate communication. It’s where investors search for clues about the character of the company’s founder-managers. It can reveal the executive principles and beliefs that will drive corporate strategy and actions.

Here’s a comparative look at these IPO letters using a framework based on four core values reported in Facebook’s IPO letter:

  1. Focus on Impact: Facebook intends to have impact by solving “the most important problems.” But they failed to mention specific problems. The problem that Amazon‘s Bezos intends to solve in his 1997 letter is saving “customers money and precious time”. In doing so, he will build personal relationships with them. Google founders Brin and Page want Google to have a positive impact by improving “the lives of as many people as possible”. The Twitter letter had nothing to say about solving problems or impact.
  2. Move fast: Facebook wants the company to have a culture of urgency even as it grows larger. Their motto: “Move fast and break things.”Amazon described a different appreciation of time with Bezos writing “…we are working to build something important, something that matters to our customers, something that we can all tell our grandchildren about.” Google invited investors to align with them and support management in making long-term decisions. For example, investors could expect them to immediately release improvements in ad systems even if delaying them could smooth out short-term financials. The Twitter letter did not report on this.
  3. Be bold/take risks: Facebook offered a homily to support this value, “The riskiest thing is to take no risks.” In contrast, Bezos told investors to expect Amazon‘s to “make bold rather than timid investment decisions” as long as management saw “a sufficient probability of gaining market leadership advantages.” TheGoogle founders described the risks of a bold long-term growth strategy and even apologized to investors for not being able to more precisely measure the risk/reward trade-offs. Nevertheless, they reassured potential owners that the “vast majority of company resources” would be devoted to improving the search and advertising businesses.” The Twitter letter had nothing to say about this.
  4. Mission and Purpose: The Facebook IPO letter stated that “a more open world is a better world because people with more information can make better decisions and have a greater impact.” Amazon on the other hand was obsessed about giving customers “something they simply could not get any other way.” Starting with books, they would continuously improve customers’ shopping experience. In contrast,Google wanted its products to positively impact the world and would “significantly improve the lives of as many people as possible.”
    Twitter‘s 122-word letter focused on its global mission and purpose: “to give everyone the power to create and share ideas and information instantly without barriers. In pursuit of this mission, investors can expect that the business and revenue will always follow that mission in ways that improve–and do not detract from–a free and global conversation.”

In other words, Twitter is providing a powerful service. But why pass up the opportunity to make a business case for this service in the letter to prospective investors? Does this matter? I believe it does. Wealth is created by the intentions and personal commitments of management. CEO Candor research shows that executives who clearly and comprehensively report on their intentions, commitments and goals are more likely to achieve desired results.


Howard Homan Buffett

This brings us back to Buffett and a story about his father, Howard, who served in Congress during the 1950s. During his first term, Congress voted to raise their pay, but Howard refused the increase. Why? It was out of line with the agreement he had made with his constituents. They voted him in on a certain salary and that’s what he honored. Similarly, Warren Buffett writes his own letters to shareholders to fulfill the promises he made in his Owner’s Manual.

Now imagine the horseplay going on in D.C. today. To serve is an action, a verb. To provide a service is an intention, a noun. Today we need public servants and CEOs who not only intend to serve, but who do serve.