I believe the next CEO of Berkshire Hathaway is hiding in plain site. There is a person that is very obvious, but no one (as far as I have read) has mentioned him as a potential candidate. Tomorrow, I make my prediction. Today, I have fun thinking through the decision as a mini case study in the culture of Berkshire Hathaway.
Most of the time, we only know of a decision that Buffett faced after the fact. We can then analyze the decision, but it is sort of impossible to think in an unbiased way about whether we would have bought the Washington Post or See’s Candies or Burlington Northern because we know how the story unfolds. For the CEO decision, however, we all know that Buffett is thinking about it and we can make a prediction without the bias of knowing what happens. It is more fun to try and match our thinking with Buffett’s in this circumstance — it is the power of the case study.
As Buffett and the Berkshire board considers whom should be the next CEO, I think it is the ultimate statement about the culture of Berkshire Hathaway. Here are some things about the Berkshire culture that I think are particularly relevant to the decision:
- The culture is not one where the business unit managers aspire to Buffett’s CEO position, so looking at internal managers is looking in the wrong place. When asked about Berkshire’s history of retaining talented managers even when they are very wealthy or could easily gets jobs elsewhere, Buffett has often said that they are happiest in their current positions and furthermore, they are not looking to get the Berkshire corner office. It is my guess that this description fits Ajit Jain perfectly (I don’t know him and am just guessing) — probably the manager having the most similar mental outlook on allocating capital to Buffett. I don’t imagine that he would ever want the Berkshire CEO job. He has probably built his small team in Connecticut to be exactly how he wants it. He probably could have had his pick of a number of financial services positions throughout the years. The Berkshire CEO position would be much less fun and interesting for him. On the other hand, would Jain do it if the Berkshire Board asked him to? My guess is absolutely yes.
- Buffett likes best a situation where you can judge the track record of the company and of the management together. He knows that picking a great CEO for a particular business out of a list of great CEO’s is still a decision that is very difficult — better to assess someone with a track record in the same position. So, I would guess that Buffett would prefer to not pick a great manager of an existing Berkshire business (Jain, Tony Nicely, or Matt Rose) and place him in a new situation as Berkshire CEO. By the way, this is also why he is basically trying out Todd Combs and Ted Weschler as Berkshire money managers before giving them an even bigger portfolio of money. And, the David Sokol situation, in my opinion, turned out great for Berkshire because he was tested in the limelight of Berkshire for a couple of years before cracking (better that he stumbled now than later). So, how does he find someone with a track record running something similar to Berkshire? He can get close (find a CEO of a large conglomerate) and someone who knows Berkshire well, but this will be the most difficult characteristic for Buffett to find.
- The new CEO needs to understand the seriousness of Berkshire’s prior commitments to acquired companies not to re-sell, dipose, or “surprise” those companies — he needs someone strong enough to know this is non-negotiable. In the 1985 annual report, Buffett wrote “I have told [our managers] that there will be no surprises, and these agreements put Berkshire’s signature where my mouth is. That signature also means the managers have a corporate commitment and therefore need not worry if my personal participation in Berkshire’s affairs ends prematurely (a term I define as any age short of three digits).” Still, a new CEO may be tempted to sell some of the businesses if he didn’t know better.
- The culture of Berkshire is one with a “rather extreme delegation of operating authority to a number of key managers at the individual company or business unit level” as Buffett wrote in his 1979 annual letter. The new CEO will have to be very comfortable supporting his managers when needed, but basically leaving them alone to run their businesses. This will take an unusual degree of self-restraint for most normal people. To do it, it will take a person with a deep appreciation and understanding of the intelligence and effectiveness of this strategy for Berkshire. Although most of the Berkshire business managers are probably very stable individuals, they will be hyper-sensitive to any meddling or extra questions that signal more Berkshire corporate involvement in their affairs. Furthermore, this new CEO may also need the self-restraint to begin a dividend or stock repurchase program rather than try and match Buffett’s track record in allocating the mountains of capital that will be generated by Berkshire. This restraint will be easier for someone who doesn’t yet have to prove himself as a manager, an international CEO, or business thinker.
- Buffett’s ultimate statement is that the Berkshire business and culture thrive after he is gone and that Berkshire maintains its reputation as being better than a typical company on many fronts. Buffett does not want the public’s reaction to be a grudging or unremarkable acceptance of the new CEO — a possible risk if the new CEO were unknown or merely a manager of a Berkshire business unit (no offense intended to those talented individuals). I think Buffett will want us to be impressed with the quality and the unexpectedness of the selection — sort of how Buffett made the thoughtful decision to give his wealth to the Gates Foundation. It seemed totally novel (give your money to a different foundation) but makes imminent sense once we all thought about the decision.
- Buffett wants the earnings to continue, so he won’t disrupt the internal companies. To make that happen, he wants his business unit managers in placing and working.
- For Berkshire to succeed after the initial shock and stock price drop with Buffett’s departure, the person also needs to have enough business stature, character, and business intelligence for the broader community, the media, and potential new acquisitions to trust him.
So, where can we find someone who deeply understand the Berkshire culture, has a track record in a job big enough and similar enough to overseeing Berkshire’s collection of businesses, is confident enough to maintain the Berkshire culture of restraint and “extreme delegation”, and will not create a large management hole in one of the Berkshire operating companies? Stayed tuned tomorrow for my best guess . . . . . . .
Related Post: –Predict Stephen Burke as next Berkshire CEO May 3, 2012.