The personality of a CEO affects the work of any company, especially, if it is a leader that takes the position for many years. The aim of this paper is to analyze changes in leadership and CEO succession in Berkshire Hathaway. The current leader of the company is Warren Buffet. His golden touch allowed him to make wise and profitable investment decisions. Thus, Buffet has earned about $40 billion. Nevertheless, he is over eighty years old now, so he will have to leave Berkshire Hathaway soon. Therefore, it is time for the company to prepare a succession plan. There are different ideas of how it should look like. For example, some experts say that Buffet’s leadership style and decision-making processes have to be kept after appointing a new CEO but there opinions that Warren Buffet could not be replaced by somebody else. The following paper will have two parts. The first part is a discussion of preparation for succession; particularly it will analyze whether Berkshire Hathaway has done enough to prepare for new CEO nominating or preparation processes had to be started much earlier. The second part of the paper is researching what succession plan is the most efficient for the company.
The Analysis of the Preparation for Succession
Most boards spend significant time on succession planning but Berkshire invested less time in this, which has raised criticism from the side of experts. On the other hand, specialists admitted that the succession plan of Berkshire includes other aspects than traditional plans. In particular, most boards concentrate on the process of succession too narrowly, whereas Berkshire’s board has created the plan with multiple directions for further company’s leadership. Therefore, in this aspect, the top management of Berkshire Hathaway has done enough to prepare for succession. In addition, the company has sixty subsidiaries and many of them have a positive experience of succession. Moreover, many businesses significantly evolved due to multiple successions. For example, this happened in such family dynasties as Clayton Homes, Jordan’s Furniture, Justin Brands, the Marmon Group, McLane and RC Willey. All this demonstrates that despite spending insignificant time on preparation for succession, the company’s board has done enough to keep the leading position of Berkshire Hathaway after changes in leadership.
The Most Efficient Variants of Succession Plan
There are different variants of a succession plan for Berkshire. Particularly, the company’s board could put Buffet’s son in charge, choose someone of the top executives from the Berkshire Hathaway, search a qualified CEO from some other company or sell off its subsidiaries to other companies. The last option has many supportive arguments because even a well-developed succession plan may not protect Berkshire’s board from continuous debates, especially, if Warren Buffet is replaced by his son, and board of directors includes such determined executives as Bill Gates. In fact, it is common for companies to have a loss in their revenues after leaving of “long-serving star boss” like Buffet even in case of a well-chosen successor. Experts give similar negative predictions about Berkshire, too. Therefore, Warren Buffet could use the experience of James Hanson from Hanson Trust and Henry Singleton from Teledyne. These two men founded their conglomerates, which operated on the market from the 1960s to 1980s. In the end, despite stellar careers, Hanson and Singleton decided to sell off parts of their empires to other companies. They explained their decision by the fact that “an orderly sale” would bring them more money than the long decline of their empires. As for Berkshire Hathaway, it has enough subsidiaries that could operate on their own, so they can be easily sold. Smaller businesses could be strengthened before a sale or auctioned off to competitors or private-equity companies. The buffet is not supposed to start selling off his subsidiaries now but he could inform shareholders that such action will be his recommendation for the next chief executive. Overall, this policy looks quite reasonable due to reducing the company’s revenues recently. Changing CEO will definitely lead to further decline. In addition, now Berkshire Hathaway has fewer opportunities for growth. All these factors demonstrate that it would be too difficult for a new CEO to lead the company. Dividing into smaller businesses would increase the efficiency of the organization because it is much easier to manage small enterprise than a large one, especially without relevant experience. As experts admit, it is quite difficult to find a CEO with skills that correspond with Buffet’s capabilities.
Another option is dividing the responsibilities of Buffet between two executives. In fact, this has been already included in Berkshire’s succession plan. Such policy has demonstrated its efficiency in the previous decades. Thus, earlier Lou Simpson was responsible for managing investments and Charlie Munger, Buffet’s number two, performed an executive function. Both managers realized and shared Berkshire’s values and culture, so they had a positive impact on the company. However, now they are too old to replace the Buffet, so new figures are necessary.
Nowadays, the company’s succession plan presupposes that few portfolio managers, including Todd Coombs and Ted Weschler, run investments. On the executive side, somebody from Berkshire’s subsidiaries will replace Warren Buffet. The list of potential candidates includes Greg Abel from Berkshire Hathaway Energy and Ajit Jain from Berkshire Reinsurance that holds positions of top managers in their subsidiaries.
However, critics ignore one more important question that can significantly affect the company after Buffet’s leaving. Thus, many experts forget about the role of Mr. Munger, who has been the vice chairperson of the company for about forty years and has brought billions of dollars during this period. In many cases, he works as a screen for Warren Buffet. If Munger advises not to take some action, Buffet agrees with the recommendation of his partner. Therefore, it would be important to find a qualified candidate not only for Buffet’s position but also for his no.2. These two candidates should be able to work as a team and the experience of Buffet and Munger demonstrates that such pair work is able to produce significant results.
Until Buffet’s successor thinks about a candidate for no.2, Berkshire’s succession plan has a part where Buffet offers dividing roles of CEO and board chairperson. He also recommends giving his son Howard a position of chairperson, so his main responsibility will be to say “no” to all unreasonable acquisitions. Now, Mr. Munger executes this function, so it means that Howard Buffett will not have to perform his father’s tasks. The following approach is very positive for him because it will help to avoid comparison between son and father.
I think the best succession plan for Berkshire is to sell some of their subsidiaries and make Buffet’s son a chairperson while finding him a reliable companion. On the one hand, it will be easier for him to lead a smaller company for the first time. On the other hand, it would be a great chance for him to show his potential to develop and expand his father’s empire. In a positive scenario, the company will be even larger and more successful than previously. In a negative one, Berkshire Hathaway will not lose so much as the company will be much smaller.
In conclusion, the significant age of Warren Buffet and his partner Mr. Munger makes Berkshire Hathaway’s top management think about other executives that could replace them. To make the process smoother, the board of directors has prepared a succession plan. Despite spending insignificant time on its creation, the preparation work was performed qualitatively because many aspects of succession were analyzed. In addition, Berkshire Hathaway is a large empire that includes about sixty subsidiaries and many of them have a successful experience of successions. As for variants of succession, experts determine few ideas. First, there are supporters of selling off some subsidiaries. It is believed that orderly sale could bring more value than slow decline and this theory looks reasonable because leaving of Buffet will definitely lead to reducing of the company’s revenues. Apart from that, leadership responsibilities could be divided between two people. One of them could be Buffet’s son. Another leading position is planned to be given to somebody from top Berkshire’s top management or some CEO from another company.