What is the institutional imperative?

The institutional imperative refers to a pervasive force within organizations that often leads to irrational business decisions. This concept, frequently highlighted by Warren Buffett, can be broken down into several key behaviors:

1. Resistance to Change: Institutions tend to resist any deviation from their current direction, much like Newton's first law of motion.
2. Expansion of Projects: Corporate projects or acquisitions often materialize just to absorb available funds, similar to how work expands to fill the available time.
3. Peer Imitation: Companies tend to mindlessly imitate the behaviors of their peers, such as expanding, acquiring, or setting executive compensation based on what other firms are doing.
4. Indulgence of Executives' Cravings: Suboptimal projects may be pursued to satisfy the whims of senior executives, often backed by detailed, but ultimately flawed, studies.

Understanding and being aware of these dynamics is crucial for making rational business decisions and avoiding the pitfalls associated with the institutional imperative 1 2.