Billionaire Warren Buffett has a 'simple' test for making tough decisions—here's how it works

Achieving success and making tough decisions go hand in hand. So what's the best way to make ethical decisions during tough times?

That's a question one student asked Warren Buffett at a 2005 Q&A session with Microsoft co-founder Bill Gates at the University of Nebraska-Lincoln.

It all comes down to reputation, the billionaire told the audience. Integrity and ethics are essential for building a solid, positive reputation. They also indicate trust and adherence to high moral standards.

"We have all the money we need," Buffett said, referring to himself and Gates. "While we'd like to have more, we can afford to lose money. But we can't afford to lose reputation. Not a shred."

The 'newspaper test'

One would imagine that it's no easy task managing Berkshire Hathaway's 360,000 employees and making sure that all managers are making ethical decisions.

But Buffett has a smart strategy for this: "I ask the managers to judge every action they take — not just by legal standards, though obviously that's the first test — but also by what I call the 'newspaper test.'"

If a manager expresses uncertainty, Buffett says he asks them how they "would feel about any given action if they know it was to be written up the next day in their local newspaper."

He tells them that the article would be "written by a smart but pretty unfriendly reporter" and read by their family, friends and neighbors.

"It's pretty simple," he says. "If [the decision] passes that test, it's okay. If anything is too close to the lines, it's out."

And being the great leader that he is, Buffett says his managers can call him if they want to check on something. "But if they do, there's probably something wrong with them," he jokes.

The 'inner scorecard'

Reputation is important, but Buffett also emphasized another key lesson: While we want to be admired by our peers, we should never have to compromise our own standards.

"I got an awful lot of good advice from my dad. He taught me that it's more important in terms of what's in your inner scorecard than your outer scorecard," says Buffett. "Some people get into a position where they think all the time what the world is going to think of this or that, instead of what they themselves are going to think about it."

The inner scorecard refers to living through values that are important to you. The outer scorecard refers to what could be measured by those around you. Ultimately, he says, if you can find peace and comfort with your inner scorecard, "you're going to live a happy life. But people often subscribe to the outer scorecard."

Buffett certainly practices what he preaches. Guy Spier, an investor who won a charity lunch with Buffett, wrote about Buffett's sense of moral excellence in his book, "The Education of a Value Investor."

"One of Buffett's defining characteristics is that he so clearly lives by his own inner scorecard," he writes. "It isn't just that he does what's right, but that he does what's right for him."

As Spier observed during his lunch with Buffett, "There's nothing fake or forced about him. He sees no reason to compromise his standards or violate his beliefs."

Tom Popomaronis is a commerce expert and proud Baltimore native. Currently, he is the Senior Director of Product Innovation at the Hawkins Group. His work has been featured in Forbes, Fast Company and The Washington Post. In 2014, he was named a "40 Under 40" by the Baltimore Business Journal.

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