An Interesting Take on Life After Buffett

[zarley]

A long time Berkshire owner and former Sequoia fund manager shares an interesting perspective on Berkshire and life after Buffett:

 

http://www.beyondproxy.com/berkshire-hathaway-without-warren-buffett/?utm_source=rss&utm_medium=rss&utm_campaign=berkshire-hathaway-without-warren-buffett&utm_source=beyondproxy&utm_medium=twitter

 

Let’s assume that Mr. Buffett is no longer the CEO. Several changes will be made over the ensuing year or so, with some immediately and others taking longer, but which will inevitably take place.

 

First, a new CEO will be appointed. I believe that will be Ajit Jain with two backup candidates. Second, the Board of Directors will be reconfigured over time. Third, several of the CEO’s of subsidiaries will retire. Fourth, new CEO’s and leaders will need to be chosen to replace the departing CEO’s. Fifth, a dividend will most likely be instituted to reduce the need to invest the prodigious cash flow coming into headquarters. Sixth, while historically, divisions were managed to generate excess free cash flow to send back to Omaha, going forward some of that free cash flow will be redirected toward building the enterprise via bolt-on acquisitions and internal growth. Seventh, the stock price will probably decline 10-20% or more, which, in my view, will present an extraordinary buying opportunity.

 

It's a good read and I tend to agree with it in broad strokes.  It may reflect a sort of conventional wisdom of long-term Berkshire owners. 

 

He does hit on one issue that is among my big concerns about Berkshire after Buffett.  Not succession at the CEO level, but succession at the one or two levels below that.

 

My biggest concern relates to the new generation of operating subsidiary management teams and keeping them in place. Many of the original managers that sold their companies to Berkshire Hathaway were in unique positions, very different from those the next generation of leaders will face. These original managers sold their firms to Berkshire Hathaway for many reasons: avoid going public, avoid private equity which would need a liquidity event in the years ahead (going public or sale), liquefying their wealth from the firm for cash to diversify and for estate tax planning purposes, maintaining autonomy, finding a permanent home, and being “knighted” by Mr. Buffett an enormous honor. These original managers love Mr. Buffett for these as well as other reasons. However, the new generation of managers will likely not feel the same loyalty or, frankly, love for the new CEO that their predecessors felt for Mr. Buffett. We are concerned as to whether the new management teams will remain as loyal to the new Berkshire Hathaway as the prior leadership.

 

Although I'm not sure he fully answers what this might mean for Berkshire going forward, it is certainly an issue, directly related to the importance of Buffett to the organisation.  He does lay out one vision of Berkshire, with Ajit as CEO that seems quite plausible and ruminates a little bit on the durability of the Berkshire culture and the history of conglomerates.  All in all a very good read.

[xo 1]

Good find.  Thanks for posting it.  With respect to the CEOs of the subsidiaries, I wonder if that potential problem is one of the reasons that BRK has moved some dramatically to acquisitions of larger private firms.  For the most part, over the past decade, after ISCAR, the smaller acquisitions have been tuck-ins and bolt-ons.  The only exceptions  I spotted are tiny: newspapers and Oriental Trading Company.  The big acquisitions have been taking public companies private, where the founder CEO issues don't arise.  Marmon had already worked through the death of the founder/CEO issues, I believe.  As have some of the longer term subsidiaries, such as See's.  In the scheme of BRK, those type of CEO sales are interesting narrative but increasingly less important.  Maybe that's cyclical and I don't think Buffett would reject a well priced terrific business from a CEO-owner to avoid the potential problem.  But in understanding BRK, the economics don't necessarily follow the narrative.

[Kiltacular]

Offhand, from recall, here are the CEO's of Berkshire subsidiaries that I can think of that are 'new' within the last 10 years:

 

BNSF; MidAmerican; Gen Re; Borsheims; Feckheimer; See's; Buffalo News; Benjamin Moore; Shaw Carpet; Johns Manville; Larson Juhl; NetJets; CORT; ...the list goes on.

 

My guess is that the majority of CEO's for Berkshire's subsidiaries are new within the last decade.  Even if not correct, the CEO's of 3 of the major subsidiaries are new pretty recently.  MidAmerican hasn't missed a beat without Sokol and I doubt BNSF will either.

 

Like everything else, we'll have to watch Berkshire to see what it actually does and how it performs.  It is not on auto-pilot but, as well, it is not going to see the mass exodus of CEO's that were only there "because they wanted to impress Buffett". 

 

A truly successful culture outlasts even the most charismatic leader.  Has Buffett built a successful culture.

[tiddman]

My guess is that the majority of CEO's for Berkshire's subsidiaries are new within the last decade

 

More importantly, a majority of the CEO's will probably be new over the next decade.  There is a lot of gray hair in the execs and most of them will retire or pass over the next 10 years.  This I think is the largest succession risk at Berkshire, not just Buffett but the 50 or so execs that they'll need to replace departing CEO's.

 

This could be an opportunity for a new generation of managers, Berkshire will need to be a place for the relatively young people to make their mark and build their wealth.  Or it could be a way for the company to morph into something less than it is.

[Ham Hockers]

I'd be shocked if BRK didn't sell/spin out some of its businesses during my lifetime.

[Guest longinvestor]

My guess is that the majority of CEO's for Berkshire's subsidiaries are new within the last decade

 

More importantly, a majority of the CEO's will probably be new over the next decade.  There is a lot of gray hair in the execs and most of them will retire or pass over the next 10 years.  This I think is the largest succession risk at Berkshire, not just Buffett but the 50 or so execs that they'll need to replace departing CEO's.

 

This could be an opportunity for a new generation of managers, Berkshire will need to be a place for the relatively young people to make their mark and build their wealth.  Or it could be a way for the company to morph into something less than it is.

The leadership transition question at BRK subs is probably the most important question to ask at the meeting. But this issue of greying leaders is not unique to Berkshire. The aging society is a particularly vexing problem for owner operating companies. Berkshire does things uniquely relative to the corporate world. I'd venture to say that the now-5 year long ongoing WEB transition to Todd, Ted and TBA CEO is something they will replicate in their subs. I would love to hear long term mentoring by the outgoing CEO is the modus operandi. And then Munger's oft repeated idea of proper incentives and how that is structured for the new chiefs. The one most intriguing comment WEB made on the CNBC interview was that Traci's work will be of great value to the incoming CEO.

Great questions to get answers in May.

[tiddman]

But this issue of greying leaders is not unique to Berkshire.

 

Well Berkshire's decentralized structure is fairly unique, certainly there are no other multi-hundred-billion dollar companies with a front office of 15 people.  Berkshire relies heavily on the CEO's at each of the nearly 100 subsidiaries to run those businesses.  I would say that most of those CEO's will change within the next 10 years and almost all of them over the next 20 years.  It is possible that Berkshire could restructure itself to report through a more conventional reporting chain, but this would be quite a big shift and potential change in culture and focus.

[CanadianMunger]

I'd be shocked if BRK didn't sell/spin out some of its businesses during my lifetime.

 

How long are you planning on sticking around?

 

-CM

[Ham Hockers]

I'd be shocked if BRK didn't sell/spin out some of its businesses during my lifetime.

 

How long are you planning on sticking around?

 

-CM

 

I think my actuarial life expectancy is another 45 years or so, but I'm planning on at least 70 more years :)

 

[Guest longinvestor]

But this issue of greying leaders is not unique to Berkshire.

 

Well Berkshire's decentralized structure is fairly unique, certainly there are no other multi-hundred-billion dollar companies with a front office of 15 people.  Berkshire relies heavily on the CEO's at each of the nearly 100 subsidiaries to run those businesses.  I would say that most of those CEO's will change within the next 10 years and almost all of them over the next 20 years.  It is possible that Berkshire could restructure itself to report through a more conventional reporting chain, but this would be quite a big shift and potential change in culture and focus.

 

Fairly unique: Yes, BRK bought those subs as a package deal leaving the leader in place. This is why the single best way for the leadership transition to happen at the subs is for the Old CEO to mentor the incoming CEO over 5 - 10 years, (just  like how WEB is doing at Omaha). But now that they are under the BRK fold, structure the right incentive for the next subs head to have near-100% ownership interest in BRK. Likely Munger/Buffett are all over this, creating the right incentive structure for their operating chiefs. I don't know what that is, would love for this question to be asked at the meeting.

Shift in culture to more conventional reporting: Not over WEB's (or Howard's as non-exec chairman) dead body is this cultural change going to happen. My actuarial tables tell me I'll be dead before something like this happens at BRK.

 

[jay21]

Isn't this supposed to be one of Tracy's jobs?  To make sure the smaller subs run smoothly after WEB is gone? Ajit was able to recruit some A+ talent as well.

 

I'm not too concerned right now.

[Guest longinvestor]

Isn't this supposed to be one of Tracy's jobs?  To make sure the smaller subs run smoothly after WEB is gone? Ajit was able to recruit some A+ talent as well.

 

I'm not too concerned right now.

 

Not sure exactly what her job is.  When you say "make sure subs run smoothly", surely, I don't believe that the heads of those subs report to her. If that were the case, its not the "hands off" management style often touted by WEB. WEB has already dispelled any notion that she is the next CEO. The media is captivated by the addition of youth to the octogenarian club and also this kind of role is commonly one of a corporate mole (at least the perception is), so the questions will continue to swirl until her role becomes clear over the years. The only comment we heard was on that CNBC interview, WEB said she "represents the BRK Shareholders at the (smaller) subs". That's good enough for me.