BERKSHIRE AFTER BUFFETT?

By Ruma Dubey

On 30^th August 16, one of the greatest investors of our times, Warren Buffett turned 86. A stark reminder that age is catching up and no one, not even Buffett is free from mortality. 

The question vexes one and all as Buffett ages – who will succeed him?  If this has been India, there would have no inkling of a doubt; of course the son or the daughter would have headed the company!  Here, a doctor’s son becomes a doctor, even an actor’s son demands his right as an actor; ditto for a minister where his children think it is their birthright to become CM because their father was. Thus for many of us to understand this hunt for a CEO for Berkshire when he has children could be baffling.  

And that is where Buffett is path breaking, setting new standards when it comes to managing a company “professionally”.  His son, Howard is a farmer. Though he owns a billion-dollar stake in Berkshire, his primary occupation is to operate three grain farms in Midwestern USA. He works hard to spread knowledge about sustainable farming techniques through developing world to reduce hunger.

He is as far away from the work which his famous dad does. It is Buffett’s main responsibility to make investments, allocate capital and carve out a company which stands for distinctive value. Once he retires or passes on, his job, as has been spelled out by him, would be handled by a small group of portfolio managers – this group is already in place. What Berkshire is looking for is the CEO, who will be chosen from among the managers now running Buffett’s various subsidiaries. The CEO will decide on capital allocation and that’s a huge responsibility for a company like Berkshire.

Two names have been doing the rounds – 64 years old Ajit Jain and 53 year old Greg Abel. Both have spent decades working with Buffett.

Why Jain? He is the President of Berkshire Hathway Insurance group. Buffett has himself once said, “ Ajit has probably made a lot more money for Berkshire than I have.” And he also once said that if Jain were contending for his job, the Board would probably put him there in a minute! Buffett praised Jain stating, “his mind is an idea factory that is always looking for more lines of business he can add to his current assortment.” Spearheading Buffett’s insurance business, no one knows risk management better than Jain. By the way, Ajit Jain’s cousin is Anshu Jain, the ex-Co-CEO of Deutsche Bank.

On the other hand, Abel is CEO of Berkshire Hathaway Energy, the Des Moines-based holdings company. Last year, it reported $1.9 billion earnings for Berkshire. The hand of faith of Buffett emerges from the fact that he asked Abel to sit on the new Kraft Heinz Co. board, guiding the $49 billion mega-merger of Kraft Foods and AJ Heinz.  And Abel has more than proved his mettle by making active acquisitions for Berkshire Hathaway Energy, investing $20 billion to $30 billion in corporate purchases.

Right now the jury is out; no one knows who will succeed Buffett.  But one thing which Buffett has requested,  to ensure the values which Berkshire stands for never gets diluted – he wants his son Howard to be appointed as non-executive Chairman at Berkshire.

He said in his 2014 Berkshire Hathway annual letter, "To further ensure continuation of our culture, I have suggested that my son, Howard, succeed me as a non-executive chairman. My only reason for this wish is to make change easier if the wrong CEO should ever be employed and there occurs a need for the chairman to move forcefully. I can assure you that this problem has a very low probability of arising at Berkshire—likely as low as at any public company. In my service on the boards of 19 public companies, however, I've seen how hard it is to replace a mediocre CEO if that person is also chairman. (The deed usually gets done, but almost always very late). If elected, Howard will receive no pay and will spend no time at the job other than that required of all directors."

Those in the company say that Berkshire will not collapse and fold once there is no Buffett and Charlie Munger who is 92 years old. His company is already running like an institution or a bank, the exit of the CEO does not down the shutters. As such, it is his two investment managers who do the stock picking – Todd Combs and Ted Weschler, with each managing portfolio’s over $10 billion.  They both are extremely independent and do not veto their ideas even with each other or Buffett. But with Buffett or Munger no longer there, the advantages of having them or for what Berkshire is known for will be lost forever.

Yes, not having Buffett will change how we look at Berkshire forever; that is something which no CEO not even his son can help.