At this weekend's Berkshire Hathaway shareholders meeting, much of the buzz surrounded David Sokol's recent departure. But while visiting guests and the media hashed over the legal and ethical questions behind the former deputy's leaving, they missed a boldfaced question: Who would want to replace the Oracle of Omaha as the company's chief executive?
After speaking to shareholders, company executives and investment professionals attending the meeting, I've come to conclude: Not as many people as you'd think. Once one considers the pressure of being constantly compared to the world's most successful investor, the potential for a not-so competitive pay package, and that great Nebraska weather, the race to succeed Warren Buffett could be a new kind of reality show -- one where people would actually rather get voted off the island.
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Sokol resigned March 30 amid controversy over purchases he made of stock in chemical company Lubrizol, prior to Berkshire's announcement of its plans to purchase that company. At the time, Sokol had been widely viewed as the front-runner for Buffett's job. But at a press conference in Omaha this weekend, Buffett, 80, said he had never discussed the succession issue with Sokol. "I'm not a mind reader," said Buffett. "We never talked about it."
At the time of his resignation, Sokol said in a statement he was interested in investing his family's resources and pursuing philanthropy. While it's typical for people who resign under pressure to say things like this, Sokol seems to have meant it. Two portfolio managers at the conference told us that more than a year ago, Sokol confided to them that he wasn't interested in Buffett's job, calling it "no bed of roses" and adding that "the job you really want is to be the successor of the successor." Calls to Sokol's attorney were not returned. But assuming the remarks do reflect Sokol's feelings, "who is to say the next candidate will want the job either?" asks Frank Betz, principal of Carret/Zane Capital Management.
Though Buffett says he isn't planning on stepping down any time soon, Berkshire Hathaway figures filling his shoes will take at least two successors. One will be the chief executive who will allocate the many billions of dollars of investment capital Berkshire Hathaway produces annually and make sure all of the managers of the 78 portfolio companies have proper incentives. That is the job most believed Sokol was being groomed to assume. The other half of Buffett's job, involving investment duties, could be divided among several candidates.
Some investment names have already let Berkshire pass them by. Li Lu, a new York hedge fund manager, whose recruitment Charlie Munger, Buffett's long time partner, called "a foregone conclusion," turned down the investment position in 2010. Seth Klarman, who invests the $22 billion in assets of Boston-based Baupost Group, also turned down the job, according to an investment professional attending the conference who did not want to be identified. (Neither Berkshire Hathaway nor Klarman would comment on the issue.) Later in 2010, Tom Combs, a Greenwich, Conn., hedge fund manager who contacted Munger about an investment job was hired, but the seeds of uncertainty had been sown. "I think they may be perplexed that people don't want the investment job," notes Paul Lountzis, of Lountzis Asset Management, a Wyomissing, Pa., money management firm that owns Berkshire Hathaway stock.
At the Berkshire Hathaway annual meeting Saturday, Buffett described the ideal chief executive candidate as "someone who would consider Berkshire Hathaway more important than themselves." That may sound less appealing than Buffett thinks, notes Larry Oberman, of Chicago based Trigran Investments, a hedge fund that has a substantial Berkshire stake. "It has plenty of downside," says Oberman. "It was hard to appreciate before [Sokol's departure] the extent of how a successor's actions would be scrutinized and critiqued." A successor would have to suppress his or her ego, would give up potentially greater financial rewards at other companies, and would need to live in Omaha. "Any of those could be a challenge and collectively -- a big challenge," Oberman says.
When SmartMoney asked Buffett about these challenges at a press conference, he responded, "There won't be a problem finding candidates willing to manage a $200 billion company. Given the choice of taking over Berkshire versus a Dow Jones 30 company, I think the choice would be Berkshire Hathaway."
Other executive we buttonholed at the conference toed the Buffett line -- though not without reservations of their own. Edward Bridge, chief executive of Ben Bridge Jewelry, a Berkshire-owned company, is not one of the names frequently mentioned as possible successors, but we asked him about it anyway. "I'm too happy doing what I'm doing," Bridge said. He loved the jewelry business and living in Seattle. Still, he says he suspects plenty of candidates will eventually step up for the chance to make history, as happened after Sam Walton left Wal-Mart and after Jack Welch resigned from General Electric.
Berkshire director Tom Murphy, 85, who built a media empire that became Capital Cities/ABC, said he would have been unlikely to want the job as a younger man. "I spent my whole life in media," he says, adding that Buffett won't have any problem. "You might ask who would want to be president of the United States? But people do," says Murphy.
Clearly, the person who takes over the position at Berkshire Hathaway should be drawn to the job for reasons other than pay. Berkshire's institutional culture frowns on inflated paydays: "Somebody's got to be the exemplar of chief executive whose not grabbing at all they can get," Munger told applauding shareholders this weekend. Granted, Murphy says the board will pay the next CEO a higher salary than Buffett, referencing Buffett's famously modest $100,000 annual wage.
But it seems unlikely that motivated fortune builders could make the killing that Buffett made off of investment gains, given how large Berkshire Hathaway already is. Buffett himself disagrees: "The person who replaces me can get seriously rich," he told SmartMoney. Buffett said the salary would be a supplemented with an option plan that could kick in as a reward if Berkshire's shares performed better than a base average. That is laudable by corporate governance standards but not necessarily competitive with outsized option schemes of similarly large companies. That might also make the Berkshire job less desirable to the kind of talented mover and shaker who otherwise work in private equity where the sky's the limit.
"It's a different job going forward," reflects Tom Gayner, chief investment officer of Richmond, Va.'s Markel Corp., an insurance company whose structure many compare to Berkshire Hathaway. Gayner admits Buffett creates tough comparisons for any successor, enough to frighten some away. No one wanted to follow UCLA basketball coach John Wooden after he racked up 88 consecutive wins, says Gayner. A coach with a terrific record followed but didn't stay long, Gayner explains, finding the comparison "uncomfortable." It can't be about the money, says Gayner, but must be for some higher purpose. "Like physicians and teachers who work like dogs," he says. "It's always hard to find them, but they are there," he says.
Ajit Jain, 60, heads up several reinsurance businesses for Berkshire Hathaway; he has been mentioned as a successor to Buffett but has also clearly stated he had no interest outside of his present work. Jain is said to have been offered greater rewards for a job outside of the company, but has opted to stay. At the shareholder meeting, Buffett lavished praise on Jain for his selfless commitment: "To an extraordinary degree, he thinks about Berkshire first," gushed Buffett.
For some, moving to Omaha could be the deal killer. Buffett has been adamant that the company will remain headquartered there. But theoretically, its headquarters could be anywhere in the U.S. Buffett employs fewer than 30 people in an Omaha office building. There is no factory or mine. "Most financial people live in big cities, getting them to more to a smaller town may not be as easy as he thinks, " says Art Cohen, an investment adviser, of Chicago's Arthur M. Cohen & Associates, who's also a regular at Buffett's legendary shareholder's-weekend bridge games. That Sokol was from Omaha had been one more factor that made him seem like a good fit as successor.
But when we raised the Omaha factor, Buffett pooh-poohed us. "You could name any city and people probably wouldn't want to live there," he retorted. "Omaha is a great place to live." Granted, that's easy for Buffett, its most famous native son, to say. "No one will come close to having Buffett's love of Berkshire Hathaway and his willingness to give up everything," says Lountzis.
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