Berkshire Hathaway and Microsoft and Management Succession

warren buffett

A recent article (CEOs to Face Berkshire-Loyalty Test) in the Wall Street Journal focused on management succession issues at Berkshire Hathaway, headed by legendary investor Warren Buffett.

The article raises the issue that the generally aging CEOs (and other senior executives) of Berkshire Hathaway’s portfolio of companies might not be as loyal to the company after Mr. Buffett’s inevitable departure. The article also provides a glimpse into differences in management succession planning at Berkshire Hathaway relative to the recent announcement of Steve Ballmer’s pending retirement at Microsoft.

Berkshire CEO Loyalty

The article and a related video in effect ask the question: “How loyal will Berkshire Hathaway’s senior executives, the ones running its portfolio companies, be to the company when Mr. Buffett inevitably retires?”  For example:

Mr. Buffett, who turned 83 in August, has outlined Berkshire’s plan of succession at the top, although he has stopped short of naming his replacement as CEO. But some investors and analysts are beginning to think about whether Berkshire will remain such a desirable place to work for senior executives after Buffett turns over the reins.

Mr. Buffett is known for his hands-off approach to management which has apparently generated loyalty and stability among the managements of Berkshire Hathaway’s more than 70 portfolio companies. Mr. Buffett and his long-time partner, Berkshire Vice Chairman Charles Munger (89), often say that in describing their management style that they “delegate almost to the point of abdication.”

The article notes that there has been “churn” at a bit above average levels in Berkshire’s senior management of portfolio companies. The related video above states that the average age of CEOs of S&P 500 companies is 56.7 years of age, while the average age of the Berkshire Hathaway portfolio companies CEOs is 59 years. All of those companies have their own management succession issues.

Succession When Mr. Buffett Retires

Mr. Buffett believes that Berkshire’s managers are loyal to the company and not to him. However he does acknowledge that things will change in the future when he is no longer in charge. The article notes that significant management transition efforts have already occurred.

At the May annual meeting, Mr. Buffett said he expected his successor to reorganize the company “modestly,” such as grouping the smaller businesses together. However, he added that the CEOs of the largest subsidiaries would likely continue operating their businesses as they do now.  Mr. Buffett has said his job will be divided into three when he leaves. The role of nonexecutive chairman will go to his son Howard Buffett , and his role as chief stock picker for Berkshire will be shared by two investment managers, Ted Weschler and Todd Combs, hired a couple of years ago. A third person will take the CEO mantle. Mr. Buffett has said Berkshire’s board picked a candidate, but the name hasn’t been revealed.

Whether you think this management succession plan is perfect or not, or whether you think that anyone or three or ten people can replace Mr. Buffett’s unique management style and investment acumen, he and the Berkshire board are working on the issue.

And Berkshire has at least preliminary plans in place for succession at its various subsidiaries.

Mr. Buffett has long held that letting managers run their businesses for the long term rather than switching out CEOs every few years is key to creating institutional values and preserving them.

Part of that long-term planning has involved the Omaha native asking for regular succession plan updates from his managers. In 2010, he disclosed a memo he sends to his “all stars” every two years, asking for their “recommendation as who should take over tomorrow if you should become incapacitated overnight.”

Berkshire Hathaway appears to be a company that is focused on the importance of management succession.

Comparing Berkshire to Microsoft

On August 23, 2013 Microsoft made a surprise announcement that CEO Steve Ballmer would be retiring within the next twelve months.  I wrote about that announcement in this post.  The post quoted an article:  Wall Street Journal Weekend Edition (August 24, 2013):

Microsoft said it would look both inside and outside the company for a replacement as Mr. Ballmer remains CEO for up to 12 months.  The surprise announcement suggests that there was no planned succession, coming only about six weeks after Mr. Ballmer shuffled his entire executive suite without naming a clear No. 2.

And I commented:

No planned succession for Microsoft, one of the leading companies in the world with a market capitalization of nearly $300 billion? What kind of example is that for the boards of other public companies or for the boards of closely held and family businesses?

The contrast with Berkshire Hathaway and Microsoft is stark. Microsoft had no plan. One wonders why Mr. Ballmer would shake Microsoft’s senior management up just six weeks before his retirement announcement and have no successor in place. Whether you agree with the Berkshire plan or not, there apparently is a plan. That plan likely has some reasonable probability of success because everyone, Berkshire’s management and board, employees and investors know about it and will expect it to be implemented at the appropriate time.

As of the writing of this post, going on two months following the Microsoft announcement, there is only speculation regarding what will happen at Microsoft.

Parting Thoughts

When it comes to succession planning, are you and your company a Microsoft, with no plan at all, or are you a Berkshire Hathaway, with an announced plan in place?

Management succession is inevitable. All CEOs will be succeeded, if only at the moment of their deaths. Companies need to be managed over the long haul. Managements need to be in place to assure their long-term survival and success.

The longer you wait to begin planning for, talking about and implementing management succession, the greater the risk you and your employees, management, and owners will face.

If you are facing management and ownership transition issues, find someone to talk to so you can get yourself moving first, and then, the things and people who will be necessarily involved in successful transitions.

As always, comments and related stories are welcomed.

And, as always, if you would like to talk about any of these issues with me, give me a call (901) 685-2120 or email to have a conversation in complete confidence.

Until next time,

Chris

Please note: I reserve the right to delete comments that are offensive or off-topic.

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