While many questions were answered during Berkshire Hathaway's (BRK.A,BRK.B) annual gathering this past weekend, there were plenty that were left unanswered (and many that we feel shareholders will want to have answered sooner rather than later).
As we had expected, the David Sokol affair was front and center, with Warren Buffett seemingly deflecting the first question that he was asked about the resignation of his top lieutenant by walking through the timeline of what he knew and when he knew it (information that was already revealed in the press release Berkshire's board posted late last week).
He took it one step further, though, when he noted that he was disappointed by Sokol's inexcusable and inexplicable behavior, which not only violated Berkshire's insider-trading rules but the principles that he lays out for his managers every couple of years.
As for why he did not act "ruthlessly" in his response to Sokol's transgression, Buffett noted that Berkshire uncovered a lot of details about Sokol's activity that has been shared with the public and with the SEC. While the initial press release (announcing Sokol's departure) has been criticised heavily, Buffett noted that he was trying to balance a lot of the good that Sokol had done for the firm during his years with Berkshire against the events that ultimately led to his departure. In the end, Buffett noted that he would let Charlie Munger write the press release next time.
What both Buffett and Munger failed to do, though, was lay to rest the concerns that have emerged over the last decade about succession planning. Shareholders continue to be worried about who will replace Buffett, and those concerns just seem to grow larger and larger with each year that passes. Much as they have in the past, both Buffett and Munger spent a little bit of time talking about how they envision the roles Buffett holds--chairman, chief executive officer, and chief investment officer--being handled upon his departure. There was really nothing new there, other than the fact that Sokol is no longer a candidate for the CEO job. Buffett continues to believe that the firm will be best served longer term if someone with a vested interest in the company, like his son Howard Buffett, takes the role of nonexecutive chairman. He feels that this would act to counter-balance whoever ends up in the CEO role, which, ironically, is one of the main precepts of Morningstar's stewardship ratings (that is, that the role of chairman and CEO should be separated) and has been lacking at Berkshire for years.
While all of the speculation about who would fill the nonexecutive chairman role has fallen on Howard Buffett, we believe that a strong case could be made for Bill Gates taking the role, given the breadth of his business knowledge and experience, and the fact that the Bill & Melinda Gates Foundation has a vested interest in seeing Berkshire transition as smoothly as it can into a post-Warren Buffett era.
There was also some discussion about the hiring of Todd Combs, who joined Berkshire late last year as one of several investment managers that Buffett expects to hire to handle the vast investment portfolio at the firm. Buffett noted that he would be satisfied if Berkshire ended up with two or three investment managers by the time he departed. He was less forthcoming, though, about his choice for CEO. Prior to the Sokol resignation, Buffett had noted that the board had four candidates for the top job at Berkshire (one of which was David Sokol). Having believed for quite some time that Sokol was the heir apparent at Berkshire, his sudden departure has opened the door for at least five internal candidates--Tony Nicely (chairman, president and CEO of GEICO), Ajit Jain (chairman and CEO of Berkshire Reinsurance), Tad Montross (chairman and CEO of General Re), Matt Rose (chairman, president and CEO of Burlington Northern), and Greg Abel (president and CEO of MidAmerican Energy)--to succeed Buffett. Of these, Jain was the only one that Buffett talked about at length during the meeting, noting that he never saw Jain do anything that he thought he could do better. But singling Jain out for praise does not lead us any closer to determining whether or not he is a legitimate candidate for the top job, given that he has publicly said on several occasions that he is not interested in being Berkshire's next CEO.
What Buffett did tell us, though, during the press conference held on the Sunday after the annual meeting, was that it was highly unlikely that the next CEO at Berkshire would come from outside the firm. He also noted that it would not be necessary for the current collection of candidates to have experience across Berkshire's different business lines to be successful.
What he is looking for in a CEO is someone who understands business and can work with the wide array of operations and managers that Berkshire has under its umbrella. Both he and Munger do not believe that Berkshire needs to have a management system like the U.S. Army or ExxonMobil (XOM) has, where managers are rotated around and learn the different operations, with the goal of eventually running the entire organisation. They firmly believe that this would be disruptive for the firm, as well as for the individual businesses that would see their top managers switching every couple of years.
While Warren does not expect to be around when the job changes hands, he is confident that the board will ultimately put the best person in the role. Given the legacy that he has created, we hope that he is right. It is encouraging to note, though, especially given the hit that Berkshire's reputation has taken as a result of the Sokol affair, that Buffett continues to describe the current leading candidate for the CEO job as being "straight as an arrow."
See more from on our pre-, during and post-meeting commentary.
