What Do Warren Buffett’s Succession Plans Mean For Investors?

What Do Warren Buffett’s Succession Plans Mean For Investors?

Over the weekend, it was revealed that Warren Buffett and his board of directors at Berkshire Hathaway had agreed that Greg Abel, Berkshire’s 58-year-old vice-chair, would take over as CEO if anything happened to the Oracle of Omaha.
Berkshire’s succession plan has always been closely guarded, but the conversation has become more important in recent years, considering Buffett’s age and the size of the conglomerate.

Buffett will celebrate his 91st birthday this August, and Berkshire manages around $870 billion of assets across its businesses.

Abel was appointed vice-chair several years ago along with Ajit Jain, the head of Berkshire’s insurance business. Abel heads the group’s non-insurance investments, including BNSF, manufacturing and Berkshire Hathaway Energy.

There are now four men in place who will take over from Buffett when he departs.

As well as Abel and Jain, who oversee the operating businesses, Todd Combs and Ted Weschler are Buffett’s stock-picking lieutenants. These managers will likely take over the group’s giant equity portfolio.

The big unknown is whether or not these managers will be able to maintain Buffett’s legacy.

Berkshire after Warren Buffett

Buffett’s right-hand man, Charlie Munger, proclaimed over the weekend that he believes “Greg will keep the culture,” and that’s the most important thing.

I believe not much will change at Berkshire immediately after Buffett departs.

However, I think that will change. It could be ten years or more before we start to see the impact, but I believe without Buffett at the helm, Berkshire will never be the same again.

I should note this is entirely speculation. These are my own views. They are not investment advice. These are just my thoughts on Berkshire’s future after Buffett.

The first challenge Berkshire will face after Buffett is a loss of control. Buffett plans to donate the vast majority of his wealth, which is primarily held in shares of Berkshire Hathaway’s class-A stock. This stock has 10,000 times the voting power of the class-B common stock.

The A-shares are not liquid, namely due to their high price. Whichever charity receives the shares may struggle to dispose of the holding, but they could convert them into the class-B common stock, which is far more liquid. These shares cannot be converted back into A shares.

Capital allocator

One of the reasons why Berkshire has been so successful is that Warren Buffett has been able to do what he wants because he has all of the voting power.

That will change almost straight away when he leaves, making the conglomerate more susceptible to shareholder demands. Abel might be the CEO, but he’ll still be answerable to investors.

I think we also need to consider that Buffett is one of the best capital allocators of all time. Berkshire’s success has been a direct result of his ability to move capital to where it needs to be. I’m not saying Able isn’t a great capital allocator, but with three other managers to work with, he’ll never have the same level of flexibility.

In the past, I’ve likened Berkshire to Teledyne, the defense contractor assembled by Henry Singleton. Under his stewardship, this sprawling business acquired more than 130 companies and a sizeable portfolio of public equities.

However, when Singleton stepped down in 1991, the remaining management didn’t have the vision or the ambition to carry on and decided to pull the business apart.

Teledyne wasn’t an identical copy of Berkshire. It was far smaller and was struggling when management decided to start selling off divisions. Therefore, the comparison isn’t entirely fair, but I think it illustrates the challenges managers face when losing a legendary and visionary CEO.

Buffett’s legacy

The announcement that Abel will succeed Warren Buffett this weekend is welcome news for Berkshire investors, but I don’t think it really tells us much about the future of the business.

Losing Buffett will be a massive setback for the enterprise, and it’s impossible to say if his successors will be able to keep the Berkshire culture alive and continue to allocate capital effectively.

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