Guest post by Lawrence A. Cunningham, author of the best-seller, The Essays of Warren Buffett: Lessons for Corporate America, and an upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values
Berkshire Hathaway’s Profound Succession Plan: B.E.R.K.S.H.I.R.E by Lawrence A. Cunningham
What will happen to Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) after Warren Buffett is no longer around? To that multi-billion dollar question many throw up their hands, often complaining that the company’s succession plan is opaque.
My upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values, addresses the question. I explain how Berkshire’s succession plan is clearer than many think and also more elaborate than that found elsewhere.
Berkshire is unique and its succession plan must be understood accordingly. At most companies, succession planning focuses on identifying and grooming a capable senior manager who can assume chief executive duties. Today you hear a lot about who should succeed Jamie Dimon at JPMorgan Chase & Co. (NYSE:JPM) and 15 years ago about who should succeed Jack Welch at General Electric Company (NYSE:GE).
At Berkshire it’s not as simple. Rather, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s succession plan has five parts, three concerning personnel and the others involving institutional ownership and corporate culture. The personnel matters are easier to grasp than the other two, and actually less important, though they get all the attention.
Buffett’s managerial positions will be divided into an executive function and an investment function. Warren and the board say they want the next CEO to be chosen from among existing Berkshire executives, probably a CEO of one of its 50 significant direct subsidiaries. This successor will get responsibility for Berkshire’s acquisitions, allocating capital, and consulting with and overseeing Berkshire’s remaining subsidiary CEOs.
In a survey for the book, I asked 500 Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) shareholders to list three people they would like to see as Berkshire’s next chief executive. A dozen names were identified scores of times and all are people Warren interacts with regularly and has great confidence in. That’s a testimony to Berkshire’s deep bench, making the typical part of succession planning at Berkshire relatively easy—although the job will be harder for anyone other than Warren since he was involved in building every bit of Berkshire.
The second function is handling investments. Berkshire hired two people in the past half-decade—Ted Weschler and Todd Combs—for that job. Both are successfully investing a small percentage—though a large dollar amount—of Berkshire’s portfolio now. They’ll face greater challenges when taking over the entire portfolio, including tough choices about when to sell some big stakes and what to do with the proceeds. While still important, the investment side of Berkshire has greatly declined in significance in recent years, now representing only about 20 percent of its value.
The third job is chairman of the board. Warren says he’d prefer to have a member of the Buffett family in this role. People think he’s referring to Howard, his eldest son. That job would be to sustain the cultural heritage and assure that the policies that have been put into place are maintained. In an interview for my book, Howard noted that Berkshire is his father’s life’s work, and sustaining the legacy is vital to him.
As important as the roles of CEO, CIO(s), and chairman are, what’s more important is the question of shareholder control. Buffett has been Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s largest shareholder since 1965, today owning 20.5 percent of the economic interest and holding 34.41 percent of the voting power. While many assume that after he departs, Berkshire will go from having a controlling shareholder to lacking one, that’s misleading.
As I detail in chapter 14 of the book, Warren has carefully planned for his shares to be distributed gradually over a period of up to twelve years to foundations, who will in turn sell the shares in steady annual liquidations. So for several years, Buffett’s estate, through its executors, will continue as Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s controlling shareholder. The estate won’t have the same force as Warren, but executors wield a powerful proxy in fulfilling his will, and the key point is a gradual transfer of control into the general market rather than an abrupt shift.
Even more important than ownership or personnel to Berkshire’s succession planning is its corporate culture, which is built on the assumption of permanence. Buffett cultivated a sense of the eternal time horizon: he tells Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) subsidiary CEOs to run their company as if it was their family’s sole asset that cannot be sold for fifty years. In turn, Berkshire Hathaway has not sold a subsidiary in forty years and foreswears doing so. Both practices enable focusing on long-term increases in economic value.
My book tells the stories of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s 50 significant direct subsidiaries, which define the company today, representing 80 percent of its value. As I examined each subsidiary, through archival research plus interviews and surveys, a pattern emerged: the same traits began to appear repeatedly, nine altogether, capped up with a sense of permanence. As with the eternal time horizon, these are intangible traits that the subsidiaries translate into financial gain. They also secure the company’s future, hence the book’s sub-title: The Enduring Value of Values.
Those nine values define the book’s central chapters, each chapter telling the stories of four or five subsidiaries that exemplify given values. The teacher in me found a way to form an acrostic from these values that spells out the company’s first name, as seen in the table below, which also captures the essence of each and notes an illustrative subsidiary. The book then weaves these stories and values together to reflect what amounts to a profound succession plan.
|Budget-mindedness||A penny saved is a nickel earned||GEICO|
|Earnestness||The value in promise keeping||Gen Re|
|Reputation||Results benefit from reputation||Clayton Homes|
|Kin-like||Wealth can last more than 3 generationswhen families value identity and legacy||Ben Bridge Jeweler|
|Self-starters||To the entrepreneur go the spoils||Dairy Queen|
|Hands-off||Delegate everything but reputation||Pampered Chef|
|Investor savvy||Price is paid, values are exchanged||BH Energy|
|Rudimentary||Impossible dreams are impossible,so stick to your knitting||Fruit of the Loom|
|Eternal||Berkshire as a permanent home,a Boys Town for the corporate homeless||Brooks Running Shoe|
Lawrence A. Cunningham, Henry St. George Tucker III Research Professor
George Washington University
Follow Me on Twitter: @CunninghamProf