Buffett’s “trust me” succession plan doesn’t fly

February 27, 2012

By Agnes Crane

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Warren Buffett says he has at last identified someone to replace him when he’s gone. Anointing a successor at Berkshire Hathaway is an important step in what will be one of the most significant corporate transitions since the torch was passed at Apple. Yet in his annual letter published on Saturday, Buffett demurred on saying exactly who. Given recent events, his “trust me” plan doesn’t fly.

Few industry titans want to be a lame duck. Buffett, even at 81, is no exception. Though he has hired two money managers, Todd Combs and Ted Weschler, to eventually take over the company’s $100 billion-plus investment portfolio, Buffett made clear neither man would be running Berkshire, saying they’d both report to the future mystery chief executive.

The Oracle of Omaha’s shortlist needed a redraft not long ago. David Sokol, who turned around Berkshire’s flailing corporate jet business, was considered by many Buffettologists to be next in line. But Sokol left amid scandal last year after he traded in shares of Lubrizol at the same time he was recommending his boss buy the company – which Buffett eventually did for nearly $10 billion. The episode cast doubt on Buffett’s character assessment skills, especially when he initially defended Sokol’s actions.

And though Buffett has built Berkshire into an investing powerhouse, he himself has struggled with the sprawling $200 billion conglomerate lately. He and partner Charlie Munger have failed to deliver the outsized returns that made them famous. In 2011, the company’s gain in book value per share – Buffett’s preferred performance measure – of 4.6 percent only narrowly exceeded that of the S&P500, in one of its weaker showings since 1965. Berkshire also lagged the broader market in 2009 and 2010. And Buffett conceded that a winning streak of 43 five-year periods is probably about to break.

Ajit Jain, who runs Berkshire’s reinsurance business, still looks to be a front-runner to succeed Buffett, though others like Tony Nicely of Geico could also fit the bill. Buffett’s mentor, Ben Graham, once said the essence of investment management is the management of risks. Buffett should help his own shareholders manage one of the biggest risks at Berkshire – and just tell them precisely who he has in mind to run the place.

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