AROUND BUFFETT’S EIGHTIETH BIRTHDAY, the Economist wrote that Berkshire was “down to playing its last hand.”1 Steven Davidoff Salomon in the New York Times lamented that Buffett graced Berkshire with “an irreplaceable magic touch.”2 At Berkshire’s 2013 annual meeting, the investor Douglas Kass asserted his belief that Berkshire is no more likely to survive without Buffett than Teledyne Technologies was without Henry Singleton.
These criticisms assume that only Buffett holds Berkshire together, failing to consider the role that trust plays. Although Buffett’s departure will certainly be consequential, too many other people and cultural elements are implicated to predict such finality so casually. These serious questions require considering the complete succession plan, and the role of trust in Berkshire culture.
It was long a parlor game to predict who will succeed Buffett at the conglomerate’s helm. Most boards invest considerable time in succession planning, although Berkshire’s was criticized for spending too little. Many boards, however, focus too narrowly on the notion of CEO succession, whereas Berkshire’s board developed a multipronged plan for Berkshire’s future leadership.
Berkshire’s succession plan has always called for dividing Buffett’s role in two. In earlier decades, investments were to be managed by Lou Simpson, long-time savvy portfolio manager at GEICO, the car insurance subsidiary. The executive function was to be handled by Munger. Both men share Buffett’s values and understand Berkshire culture. But that succession plan stopped making sense as all three men aged: Simpson retired and Munger entered his eighties.
Today, Berkshire’s succession plan envisions investments run by several portfolio managers, likely including Todd Combs and Ted Weschler. On the executive side, Buffett’s replacement is to come from among top managers of Berkshire’s many subsidiaries. In 2018, Berkshire appointed Greg Abel and Ajit Jain to its board and designated them vice chairmen for noninsurance operations and insurance operations, respectively.
The final part of Berkshire’s succession plan calls for splitting the roles of CEO and board chairman, with Buffett suggesting his son Howard Buffett as chairman. While it is tempting to see the split as dividing Buffett’s role yet a third way, besides CEO and CIO, it may be more appropriate to see it as dividing Munger’s role a second way, besides being the CEO’s number two. After all, one of Munger’s most important roles has been to say no and that will be one of Howard’s most important roles, too. But the kinds of things to say no to will shift.
Munger’s veto power tended to add a filter to Berkshire’s acquisitions to quash improvident deals. In building Berkshire, that was vital to establish its culture. Howard’s role, in contrast, will stress maintaining culture, not building it. His need to say no will be less in vetoing acquisition ideas than on reminding the forgetful of the values that made Berkshire special, such as promise keeping, permanence, and autonomy. In extreme circumstances, Howard’s role will mean firing a wayward Berkshire chief executive.
Howard’s primary task is thus one his father never had to perform, and his job will entail none of the tasks for which his father became famous. The approach deftly escapes a trap that so often ensnares sons of legends. Those who assume the same roles as parents are measured by their parent’s standards and often are found wanting.
Some observers may misunderstand Howard’s role and measure him against the impossible standard of his father, unfair as that may be. In time, however, the relevant role will be clear and, given Howard’s firsthand knowledge of Berkshire culture and passion for Buffett’s creation, he’ll most likely measure up. But he cannot do it alone. He will need the continuing trust of Berkshire shareholders. Consider what Howard will be up against.
Powerful forces intensively criticize the conglomerate form; they will clamor to break them up. Such has been the fate at many venerable conglomerates in recent years, including such blue-chip stalwarts as DuPont and United Technologies.
Long before the era of the conglomerate, corporations were thought of as perpetual—enduring institutions, such as Berkshire. As the conglomerate era was eclipsed by the takeover era, corporations became more transient, in perception and fact.3
Transience remains a prevailing mind-set, sustained by those committed to pressuring corporations to deliver immediate shareholder results, whether activists or private equity.
Out of fashion, conglomerates attract hostility, requiring strong defenses. Although the best defense is solid sustained economic performance, another advantage is large loyal shareholdings.4 With Buffett firmly in control at Berkshire, no shareholder activist would dare challenge its business model.
But the calculus may differ after Buffett leaves the scene. After all, despite a market capitalization of nearly one-half trillion dollars, many analysts agree with Buffett that Berkshire is worth more. Berkshire’s value exceeds the sum of its parts because the structure creates considerable benefits, including optimal capital allocation, minimal enterprise risk, no insularity, low-cost funding, tax efficiencies, and minuscule overhead.
Citing criticisms of the business model, activists will urge Buffett’s successors to sell Berkshire’s struggling units, spin off the mediocre ones, and install new managers at some. In the process, activists will call for distributing cash to shareholders. They will explain how the net effect of such sales and distributions would increase immediate value for shareholders.
The counterargument will stress the long-term value for Berkshire shareholders, ironclad pledges to business sellers, a permanent home offering managerial autonomy, and an environment where vast amounts of capital is moved from one subsidiary to another without taxes or transaction fees.
The economic value of such commitments and flexibility is not necessarily reflected in Berkshire’s prevailing stock price or the valuations of individual subsidiaries. The premium may manifest only when Berkshire makes an acquisition and may be preserved only by sustaining the conglomerate.
It will be up to Berkshire’s shareholders to resolve the merits of such a debate. Assuming Buffett’s successors deliver superior economic performance over multiple years, Berkshire’s owners will have to decide whether or not to maintain trust in their leadership and the Berkshire model. Their choice will be a referendum on this trust-based culture. Our money is on trust.