Warren Buffett sometimes makes important announcements at his shareholder meetings. Today might be the day he names the person most likely to succeed him as CEO.
Picture Buffett, after a month of controversy surrounding the resignation of Berkshire executive and fellow Omahan David Sokol, introducing the next CEO to Berkshire Hathaway Inc.'s shareholders at the Qwest Center Omaha.
Years of speculation over. Now on to the next thing.
Or Buffett simply repeats his long-standing plan: the corporation's board of directors has a secret list of CEO-qualified people (four, in the latest official filing on the matter) who already work for the company or are readily available to step in if needed, and the board knows his first choice.
The board members, who will choose the next CEO, talk regularly about the issue, are fully informed and believe the plan is good, Buffett says.
But this spring, the picture changed.
Sokol, considered by many to be the front-runner to succeed Buffett as CEO, resigned under the cloud of a stock transaction that netted him a $3 million profit. A Berkshire committee report Wednesday said he violated company policy, and Buffett is expected to face shareholder questions about the issue at today's meeting.
Sokol's departure has prompted some longtime shareholders and other observers to say, among other things, that Buffett should end the speculation and name a successor-in-waiting.
It's also raised questions about what's at stake for Omaha, the headquarters city, without an Omahan on the list.
Even the agencies that rate Berskhire's financial strength as AAA said Sokol's resignation raises questions about the company's succession plan, with Standard & Poor's pointing out “the lack of a more traditional corporate infrastructure” and Moody's Investors Service pointing out “governance challenges at Berkshire.”
Berkshire Vice Chairman Charlie Munger says that if you think Buffett has done a good job building Berkshire into a great company, you shouldn't doubt that he would set up a plan that would continue that success.
The message so far from Buffett and Munger: Just relax and things will happen properly in due time and, meanwhile, Warren loves his job and feels terrific.
Author Robert Miles, who met many of the managers of Berkshire divisions while writing “The Warren Buffett CEO,” said Buffett modeled his succession plan after Jack Welch's plan at General Electric: Make a list and update it as needed so that the top candidates would be able to hold the job for 20 or more years.
Miles noted that within a day after Sokol resigned, Buffett had picked new chairmen of the three divisions Sokol had headed, illustrating how smoothly executive transitions work at Berkshire. “I think that should comfort the shareholders, not put them through all this turmoil,” Miles said.
Buffett's list is in “pencil, not in pen,” Miles said, partly because candidates are crossed off once they reach their late 50s or 60s. One-time favorites like GEICO CEO Tony Nicely have “aged out” because the job wasn't vacant when they were young enough, Miles said.
California money manager Li Lu, once considered a candidate to be an investment manger for Berkshire, withdrew because he wants to continue running his own investment fund. Berkshire reinsurance chief Ajit Jain likewise seems a less likely candidate than he did 10 year ago because he is, of course, 10 years older.
So the list keeps changing. Even though he's 80, Buffett is in good health and shows no signs of retiring. Remember, although his father died of cancer at age 60, his mother lived to be 92 and one of his idols is Rose Blumkin, who started a new business to compete with Buffett when she was 95 and who lived to be 104.
Buffett has calculated his own life expectancy as 88, actuarially speaking, and says his family members have the duty to tell him if he should retire before he dies. He hasn't had serious health problems, except for successful surgery in 2000 to remove a section of his colon that contained benign polyps. He occasionally mentions that his health is good, except that his hearing isn't perfect.
Buffett has said that when he's no longer around, his executive position would be split in two, with one person as CEO and one or more people handling investments. The CEO's job would be to keep the managers of the 70 or so Buffett divisions happy and handle acquisitions and other deals.
The CEO would clearly be the No. 1 person, not sharing the ultimate decision-making with one or more investment managers — the first one being Todd Combs, hired last year to succeed Lou Simpson, who retired.
“When Charlie and I are no longer around, our investment manager(s) will have responsibility for the entire portfolio in a manner then set by the CEO and board of directors,” Buffett wrote in this year's letter to shareholders.” Those investment managers would be consulted, he said, but would not have a vote on acquisitions.
That means the next CEO will have great influence over Berkshire's future.
Although Buffett praises the performance of his 21-person corporate staff, Berkshire could be run from anywhere. Its 70-plus operating companies have locations across the country and operations in more than a dozen foreign countries.
Omaha enjoys important status as the home office of Berkshire — one of the 10 most valuable corporations in the world and one of Omaha's five Fortune 500 companies — as well as the tens of millions of dollars spent here in the days surrounding the company's annual shareholders meeting.
“The home office is important in terms of economic impact on a city,” said Creighton University economist Ernie Goss.
Moving to Omaha might be a qualification for the job, although it will be up to the board of directors to set the new CEO's terms. The directors themselves have only loose Omaha ties, with nine of the 11 living elsewhere. Only longtime resident Walter Scott Jr. is a true Omaha resident. Buffett's son Howard, who is expected to be the next chairman, has a house here but spends much more of his time at home in Decatur, Ill., or on the road in his foundation work.
Maintaining Berkshire's “culture” is a clear goal for the company's directors, and Omaha is a big part of that. Warren Buffett started his investment partnership in Omaha in the 1950s, moving from New York City, and often says the location removes distractions.
“There are no circumstances in which I can imagine the headquarters being moved from Omaha. It is something my father would feel strongly about and something I would protect,” Howard Buffett said this week.
Whether that means the next CEO makes Omaha home remains to be seen, but it seems likely that he or she would live here at least part of the time.
Once there's a new CEO, shareholders will expect to see the company's value grow and keep an eye on the stock price.
But Miles said Buffett told him that the next CEO shouldn't be graded on Berkshire's profits but rather on whether, after 10 or 15 years, the new CEO has never lost a top executive of a Berkshire company to a competitor. Buffett said it's never happened to him and, with the top managers in place to do what they do best, the Berkshire divisions grow and produce more profit.
Before the Sokol matter arose, Buffett biographer Alice Schroeder, who now writes for Bloomberg News, said Buffett made it clear that the next CEO will have authority beyond just managing the managers of the Berkshire companies, a broader authority than he had indicated a few years ago.
“He's giving the CEO overall responsibility for capital, including who gets how much to manage, how it fits into the capital requirements of the individual businesses and how much cash flow to take out versus investing,” she said. “He's strengthened the role of the next CEO.”
Whatever is said or not said today, this is certain: Someday, Berkshire Hathaway will have a next CEO.
Business reporter Ross Boettcher will be providing live online coverage of the Berkshire Hathaway shareholders meeting on Saturday. Follow along and ask him questions as Warren Buffett leads the annual shareholders summit at Qwest Center Omaha.
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