Talk About a Hard Act to Follow
Buffett turns to filling his multiple roles at Berkshire
When a CEO gets to be of a certain age, should you buy, sell, or hold the company's shares? It's a tough question for any investor. But seldom is a company so defined by its chief executive officer as Berkshire Hathaway, the corporate avatar of its boss, Warren Buffett, who turns 77 this summer. And while Buffett has reported no health problems and his mind seems as sharp as ever, he's definitely not one of those hyperfit execs who live on caesar salads and spring water. Buffett has an admitted fondness for Dairy Queen burgers and prefers to take his Cherry Cokes full strength.
Complicating things is the weird, hybrid nature of Berkshire. A downtrodden textile manufacturer when Buffett took charge in 1965, the company today is a $128 billion conglomerate that is stock fund (Coca-Cola, Burlington Northern Santa Fe, PetroChina), insurer (General Re, GEICO), and diverse holding company (Benjamin Moore, Fruit of the Loom, the Pampered Chef) all in one. Filling Buffett's shoes when he dies or retires would require a multitasker extraordinaire.
But Buffett seems to realize that they're not making any more of him and has taken that into account in his succession plans. When he leaves the scene, his role will be split in two: a new CEO for Berkshire Hathaway and several new chief investment officers. In his 2006 chairman's letter, Buffett said, "I have told you that Berkshire has three outstanding candidates to replace me as CEO and that the board knows exactly who should take over if I should die tonight."
The investment side of the businessthe side where Buffett applies the special mojo he alone seemingly possessesis another story entirely. At one point, GEICO President Lou Simpson, six years younger than Buffett, seemed a logical replacement. But instead of a simple baton pass, Buffett has opted for an investment challenge match: Several younger candidates will be hired and given real money to manage. May the best stock picker win. "Buffett's expectation is that the new CIO should be able to exceed the return of the S&P 500 index by 2 percent per year," says Jordan Smyth, managing director of Edgemoor Capital Management, who last May attended the annual "Woodstock for capitalists" that is the Berkshire Hathaway shareholders meeting. Only 15 percent of U.S. stock funds have consistently beaten the S&P by 2 percentage points over the past 20 years, according to Morningstar.
In addition, Buffett says he is looking for candidates who possess the gifts of "independent thinking, emotional stability, and a keen understanding of both human and institutional behavior," and a willingness to stay with Berkshire long term. (Once you can list Berkshire Hathaway on your résumé, Buffett apparently fears, more lucrative investing opportunities might find you.) "We...need someone genetically programmed to recognize and avoid serious risks, including those never before encountered," Buffett says.
Big shoes. Yet even if Buffett finds just the right candidate to replace himself, a Buffettless Berkshire is sure to be a big adjustment for company shareholders. "Let's face it, no matter who it is, it's going to be extremely hard to fill Buffett's shoes. Buffett is unique," says Edwin Walczak, portfolio manager for Vontobel's U.S. Value fund. "No matter what, I'm sure investors will be nonplused by who is chosen on the investment side."
Indeed, many investors have speculated that the succession question is already holding back Berkshire stock. Although Walczak has recently cut back the percentage of his investments in Berkshire Hathaway, he plans to stick with it unless the stock price becomes overvalued: "He delegates so much responsibility that [Berkshire's various holdings] will still be good businesses in three to five years." The succession issue is also no biggie to David Carr, comanager of the Oak Value fund and a big Berkshire investor. "[Berkshire] is never going to give the kind of growth it has in the past," Carr says. "But it's the kind of company where you can sleep at night."
So relax. If you can afford a few shares, priced at about $110,000 each for class A and typically around $3,600 for class B, perhaps you really can, as singer Jimmy Buffett (no relation) said at this year's shareholders meeting, waste away in Berkshire Hathaway-ville.
This story appears in the August 6, 2007 print edition of U.S. News & World Report.