“I think the top guy won’t be as smart as Warren. But it’s silly to complain: What kind of world is this that gives me Warren Buffett for 40 years and then some bastard comes along who’s worse?” — Charlie Munger, quoted at the 2004 Wesco Financial annual meeting
“He is so good at what he does, it’s almost insulting to think that he doesn’t have a reasonable succession plan. And I frankly don’t see why he should tell anyone.” — Bruce Berkowitz, quoted in January 2011
Alice Schroeder, author of The Snowball: Warren Buffett and the Business of Life, has written an op-ed article for The Financial Times ahead of Saturday’s release of Berkshire Hathaway’s annual report. In the article, Ms. Schroeder urges Warren Buffett to provide shareholders with more transparency regarding succession issues at Berkshire and cites the situation at Apple to bolster the case for additional disclosure. Additionally, she warns that a lack of more complete disclosure could result in the market punishing Berkshire’s stock price which may have already turned the “Buffett premium” into a “Buffett discount”.
We have previously addressed most of the concerns in the op-ed in an article published in late October after the Todd Combs appointment caused a great deal of concern regarding succession at Berkshire. As we stated at that time, while we do not currently know the names of the specific executives who will be in charge once Warren Buffett steps down, we do have significant visibility into both the structure of management and how the changes will impact Berkshire’s day to day operations.
No Set Date Makes it Difficult to Name Individuals
Mr. Buffett has historically been reluctant to name specific executives because he has no retirement date in mind. Instead, he intends to work until he either dies or cannot physically or mentally handle the job. The date of such events are obviously uncertain. As a result, while it is imperative to have names in place if succession were to occur immediately, the specific individuals will almost certainly change over a number of years. Mr. Buffett has stated that the most important topic at each board meeting is the succession question and there does not seem to be any justification to think that Berkshire’s seasoned group of board members have been kept out of the loop.
Comparison to Apple Unwarranted
Comparing Mr. Buffett’s handling of succession at Berkshire to the situation at Apple also seems unwarranted. We have been critical of Apple’s actions in the past and remain so today. The health status of the CEO is a material fact that should be disclosed to shareholders. Warren Buffett agreed with this sentiment in a June 2009 interview when the topic of Mr. Jobs’ earlier leave of absence came up. Furthermore, when Mr. Buffett himself had a medical issue in 2000 that required surgery, he disclosed the situation to shareholders ahead of time. There is no reason to believe that a future health issue would not be disclosed promptly as well.
Reading Between the Lines on the CEO Position
Reading between the lines, one can actually make solid guesses regarding the identity of the successors if they had to be named today. For the CEO position, the clear front runner appears to be David Sokol. No other Berkshire executive other than Charlie Munger, who is not a candidate due to his advanced age, has been as vocal as Mr. Sokol when speaking about matters that concern Berkshire as a whole. For example, in a recent Aviation Week interview, discussed here earlier this month, Mr. Sokol spoke broadly about Berkshire’s acquisition strategy and policies on “never walking away from a business”. Given the fact that overstepping in this manner could be career suicide, it seems unlikely that Mr. Sokol would speak on behalf of Berkshire without Mr. Buffett’s knowledge and approval.
Will Mr. Sokol end up as CEO? There is no way to know for sure. However, it seems like a welcome case of redundancy rather than a risk to know that the board has three additional names to choose from. The additional name that was added recently is almost certainly Burlington Northern Santa Fe CEO Matthew Rose who would not have been a candidate prior to Berkshire’s acquisition of the railroad.
Chairman: Howard Buffett or Bill Gates?
We know that Howard Buffett is likely to be the next Chairman and that he is being selected mainly to keep Berkshire’s unique culture in place. Bill Gates has also made a “lifetime commitment” to Berkshire’s board and could step into the role at some point in the future. Howard Buffett’s main role will be to keep Berkshire’s unique culture in place which must be a top priority. However, Mr. Gates knows Mr. Buffett so well by now that he might be equally capable of ensuring that Berkshire’s culture persists over the long term. Ms. Schroeder makes a compelling argument that shareholders may want to give Mr. Gates more serious consideration.
Strong Case for Disclosure in Investment Management
A desire for more disclosure on the investment management side has more merit and Mr. Buffett has indicated in the past that managers would be named over time. Todd Combs is likely to be the first of at least two or three investment managers to be named over the next few years. While the process has been slower than we would have liked, the fact that new investment managers are now being put in place and will be evaluated by Mr. Buffett himself is reassuring.
Overall, there is no way to know for certain whether the succession process will be smooth until it occurs. While we do not subscribe to the “trust me” school of management, it does seem reasonable to give Mr. Buffett the benefit of the doubt when it comes to this matter, particularly since he has directly stated that the question is addressed at each board meeting and board members are aware of the current front runners at all times.
After a nearly five decade tenure at Berkshire, Mr. Buffett must know that his ultimate legacy will depend on how well he passes the baton to his successors. It seems likely that if a vote of shares, excluding Mr. Buffett’s stake, were to be held at the next annual meeting, the majority of shareholders would be willing to give Mr. Buffett the benefit of the doubt on this important question.
Disclosure: Long Berkshire Hathaway