The executive succession plan at Berkshire Hathaway Inc. doesn’t change much as a result of CEO Warren Buffett’s decision to promote insurance chief Ajit Jain and energy chief Greg Abel to vice chairmen.
But Abel’s job and Buffett’s job both change a lot.
Jain has been overseeing and building up Berkshire’s insurance divisions almost since he came to Berkshire in 1985, and Buffett said on CNBC last week that will continue.
It was logical for Jain to have the same level of leadership at Berkshire as Abel because the insurance division makes up about half the company’s earnings, Buffett said. Naming him vice chairman also recognizes his status as a possible successor and will give him direct experience as a Berkshire director.
Abel’s duties, on the other hand, expand significantly from overseeing the important energy division. And Buffett gets considerable relief from the work he has created for himself by acquiring dozens of big businesses over the years.
For example, Buffett regularly asks the managers of Berkshire businesses to send him the names of their potential successors, and no doubt Buffett wants to get to know these people — more than 100 of them. If there’s a problem, Buffett might have to step in. When the manager retires, Buffett has to OK successors.
He decided their compensation every year — no small task when you’re dealing with the leaders of billion-dollar businesses.
As the new non-insurance chief, Abel takes on all those day-to-day duties. Buffett can focus on his main job, which is “pushing money around,” as he has described the CEO’s job of allocating capital.
That’s not so tough when all you have is a college fund, a retirement account, a mortgage and household expenses. But it’s not easy when you’re looking for the best use for $1 billion or more each month in new cash, not to mention making sure the money Berkshire already has invested is still in the right place.
In the CNBC interview, Buffett was at times almost giddy at the prospect of giving up management duties. Putting Abel in charge of Berkshire’s non-insurance businesses gives Buffett something he says is the only thing he wants that he can’t buy: time.
A question of age
Back in 2011, I took a lighthearted stab at handicapping potential successors to Buffett, and of course Abel and Jain were on the 13-person list.
My likelihood-of-becoming-CEO rating for Abel was $$$$½, one of the highest, and my rating for Jain was $$.
The main factor in rating Jain lower was his age, now 66, while Abel is 55. (Lest I be accused of ageism, let it be known that I’m older than either one of them.)
Jain also has said that he loves his insurance job and, it seems, wouldn’t necessarily enjoy the responsibility of being CEO. Beyond Jain’s world of insurance, Berkshire’s businesses are a hodgepodge of industrial and consumer producers and sellers in a wide range of industries, and finding new uses for Berkshire’s cash is a skill different from calculating insurance risks.
Buffett, of course, repeated last week that he has no plans to step down. He also said his health is good and, although he laughed about it, said his doctors keep extending his five-year window of fitness for the job.
Age has been a consistent factor in considering the next Berkshire CEO. Longtime Vice Chairman Charlie Munger was the heir apparent at one time but “aged out” years ago and is now 94. (His running one-liner is that as long as he’s on the job, Buffett, 87, has at least seven more good years.) Other top executives are now retired.
Buffett has said he hopes the next Berkshire CEO has a “long run,” and someone who is 66 or even 56 has a shorter shelf life than someone in his or her 40s or even 30s.
A 20 percent raise
Although the new federal tax law affects every American business, it can be hard to understand exactly how it benefits them.
On CNBC, Buffett cleared that up: It’s like every tax-paying business gets a 20 percent raise this year.
If you bought Union Pacific Railroad last year, he said, you would own 100 percent of the company, but the U.S. government gets 35 percent of the profit, the former top corporate tax rate.
The new law means that this year, the government gets only 21 percent, so your share of future profits goes from 65 percent to 79 percent, without paying a penny, he said. That also makes ownership of the company more valuable, at least until the tax rates are increased again.
The lower tax rate is “a huge, huge reduction,” Buffett said. “That’s more than a 20 percent increase in the earning power.”
Last year Berkshire earned $24.1 billion, so a 20 percent increase would raise that to $29 billion, giving Buffett $5 billion more to use to expand the company.
“It’s a big deal,” Buffett said.
Berkshire’s Texas auto connection came up in a Texas Tribune story about Victor Vandergriff, a former car dealer and now a Texas Department of Transportation commissioner. The story says he collected state reimbursement for trips during which he performed duties as a commissioner but also lobbied for Berkshire Hathaway Automotive, among other clients.
Vandergriff acknowledged he did non-government work during trips to Austin paid by state funds and said he would reimburse the Department of Transportation for some of the expenses and update his financial disclosure statement.
He said he considered private work at the Texas capital “incidental” to his commission duties on the same trips and not a conflict of interest. He said the department had reviewed its payments and determined they were appropriate because of his work for the agency during the trips.
He had billed the agency about $200 in mileage per trip and between $225 and $275 a day for lodging, meals, parking and taxes while staying overnight, the Tribune reported. The commissioners are paid $16,000 a year to serve on the state’s transportation board.
The Disney deal
It was 1966 when Buffett went to see Walt Disney, a story recounted in Glen Arnold’s new book, “The Deals of Warren Buffett” (JVG Books, $35, 259 pages).
“We sat down and he told me the whole plan for the company — he couldn’t have been a nicer guy,” Buffett says. The book by Arnold, a former finance professor and money manager from rural Leicestershire, England, compiles the details of Buffett’s first $100 million in deals and promises future volumes, too.
Buffett figured Disney was worth $300 million or $400 million, far above the market value of about $80 million at the time. Most investors, Buffett said, “ignored it because it was so familiar. But that happens periodically on Wall Street.”
Disney’s “Mary Poppins” movie had been a big success, but Wall Street didn’t see anything else in the pipeline and worried that the stock price might decline. Buffett realized that even if there were no new Disney movies, “Poppins” could be re-released and make even more money in the future.
“The film library alone was worth the purchase price,” Arnold wrote, and Disney had more cash than debt.
So Buffett invested $4 million for about 5 percent of Disney and sold it the next year at a profit of $2.2 million, later criticizing himself for selling too soon.
By 1975, Disney’s stock price had gone up 138 times, which would have made Berkshire’s investment worth about a half-billion.
The Omaha World-Herald is owned by Berkshire Hathaway Inc.