It seems like every few months, a major financial publication rediscovers the fact that Warren Buffett is in his late 70s and has not publicly named his successor. The latest article examining the Berkshire Hathaway succession issue appeared in the Wall Street Journal today. I anticipate that this theme will continue as Mr. Buffett approaches his 80th birthday in 2010. For several reasons, the concern regarding the “uncertainty” associated with CEO succession at Berkshire appears to be unfounded.
The Berkshire Hathaway “Owner’s Manual” which is included in the company’s annual report each year contains a section regarding management succession. Mr. Buffett clearly explains plans for running Berkshire Hathaway in the future and tells shareholders that plans are in place if the management succession is needed immediately:
At my death, the Buffett family will not be involved in managing the business but, as very substantial shareholders, will help in picking and overseeing the managers who do. Just who those managers will be, of course, depends on the date of my death. But I can anticipate what the management structure will be: Essentially my job will be split into two parts. One executive will become CEO and responsible for operations. The responsibility for investments will be given to one or more executives. If the acquisition of new businesses is in prospect, these executives will cooperate in making the decisions needed, subject, of course, to board approval. We will continue to have an extraordinarily shareholder-minded board, one whose interests are solidly aligned with yours.
Were we to need the management structure I have just described on an immediate basis, our directors know my recommendations for both posts. All candidates currently work for or are available to Berkshire and are people in whom I have total confidence.
Those who remain concerned about succession usually fall into two camps. Many shareholders are simply concerned regarding the prospect of anyone other than Mr. Buffett running the company. With the human condition being what it is, there is nothing that can be done to alleviate this concern. The day will come when management succession will be needed and the new CEO and investment officer are virtually guaranteed to be less capable than Warren Buffett even though they will still be excellent managers.
There are other shareholders who lack full confidence in the succession planning process and will not be satisfied unless the names of the leading candidates are disclosed immediately and shareholders are kept informed of the list of candidates as they change over time.
The problem is that the demands of these shareholders can only be met in two ways and each will substantially harm Berkshire Hathaway’s future prospects. One option is for Mr. Buffett to name the CEO candidates in a public way immediately along with their respective ranking if a replacement is needed right away. However, since the timing of the actual succession is unknown, the list of candidates for both the CEO and CIO positions will change over time. Furthermore, internal candidates who are not on the list or rank lower on the list than they would like could choose to pursue CEO positions elsewhere. Berkshire would lose valuable management talent in exchange for no tangible benefits.
The other option that would create immediate certainty would be for Mr. Buffett to name a date when he will resign as CEO while remaining Chairman. The successor could then be named and certainty would be provided, but at the high cost of sidelining Mr. Buffett while he is still willing and able to manage the company.
The question boils down to whether shareholders are willing to accept some uncertainty in exchange for Mr. Buffett’s management skills even though his tenure is of unknown duration or if shareholders are willing to impose substantial tangible and intangible costs on the company by demanding a timetable for succession that would sideline the most successful investor of the past fifty years prematurely.
The choice seems obvious, even though it is a moot point given Mr. Buffett’s ability to control this decision through his ownership interest in the company.
Disclosure: The author owns shares of Berkshire Hathaway.