Opinion

Felix Salmon

Will Warren Buffett step down as Berkshire CEO?

By Felix Salmon
September 15, 2011

Alice Schroeder, Buffettologist exraordinaire, notes the careful form of words in the press release announcing the hiring of Ted Weschler as an heir to Buffett’s investing throne:

The press release contains another tantalizing hint. Twice, it refers to the period “after Mr. Buffett no longer serves as CEO.” These cues are subtle — way too subtle to mean anything definitive. But it makes me wonder whether, at some point, Buffett is going to appoint a CEO while retaining the nonexecutive-chairman role.

That would be a move the business world has definitely not been expecting. It’s also one that may make sense, for Buffett as well as Berkshire. He would remain the company’s most valuable asset — making the phone calls that get those lucrative deals done, playing the world’s economic statesman, and flattering business owners into selling their companies to Berkshire. Meanwhile, Weschler and Combs would have the primary responsibility for investing Berkshire’s $10 billion a year of cash flow and constantly compounding pool of assets.

Schroeder’s point is that Weschler has serious CEO chops.

He does, in fact, cover all the bases: finding acquisitions, financing them, overseeing management of acquired companies, designing their compensation, allocating capital of the entity that owns the businesses, and understanding lending and credit markets from a bank’s perspective. He also knows how to finance acquisitions in special situations such as bankruptcies; manage long-tailed risks like his former employer W.R. Grace & Co.’s asbestos liability; and control equity- portfolio risk in a volatile market using positioning, derivatives and moderate leverage.

Meanwhile, Buffett himself has always been a better investor than CEO. He basically does three things: he speculates in stocks; he buy insurance companies and invests the enormous amounts of cash they have on hand; and he buys companies which throw off cash which he can then use to invest. Essentially, he’s an investor. By contrast, if you give him a company and ask him to grow it, he’s much less good. Look at Berkshire holdings like Dairy Queen or See’s Candies or NetJets or that furniture store in Omaha: none of them have seen particularly notable growth or breakout success under Buffett’s watch.

So it makes sense to me that Buffett semi-retire to an elder-statesman-and-CIO role much like that of Bill Gross at Pimco, and hand over the reins as CEO to Weschler. Or possibly Ajit Jain. And this could happen any time: Buffett is 81, and really doesn’t need the boring managerial hassles of being a CEO. So long as he’s Warren Buffett, and has the “chairman” title (which will be as long as he’s alive, most likely”), Buffett won’t lose any of his Oracle status — he’ll be in the happy position of getting credit when things go well for Berkshire, while not getting all or even most of the blame if things go badly. As Schroeder says:

It’s significant that Buffett has begun the transition to a new investing team, whether he remains CEO in the years ahead or not. Buffett is taking his hands off the reins of the portfolio. Hiring a manager of Weschler’s caliber is an important signal. The transfer of power won’t happen overnight, but its magnitude is something to ponder for those who are interested in the markets. Meanwhile, we get to watch a new story, featuring new players, unfolding at Berkshire Hathaway.

Comments
3 comments so far | RSS Comments RSS

Felix, I think you may be confused…

“Growth” of a business is only desirable if the marginal returns are better than what you could have achieved by investing the cash from that business elsewhere. Most attempts at growth are like shoveling money into a furnace, in the hope that a few dollars will float up the chimney unburnt.

Buffett’s goal isn’t to turn a small highly profitable business into a large marginally profitable business. Any idiot can do that! His goal is to KEEP those small businesses highly profitable, while putting the cash they generate to good use elsewhere.

I always prefer companies that return cash to the shareholders rather than paying a 50% premium over market value for acquisitions with questionable synergies. Give me the money and I’ll buy those businesses WITHOUT the 50% premium attached.

Posted by TFF | Report as abusive
 

@ TFF ” always prefer companies that return cash to the shareholders rather than paying a 50% premium over market value for acquisitions with questionable synergies. Give me the money and I’ll buy those businesses WITHOUT the 50% premium attached.”

Oh to be able to write as well as you do! My god are those words perfect!

Posted by y2kurtus | Report as abusive
 

Thanks, y2kurtus. This is a difficulty with comparing stocks and bonds by “earnings yield”. In some businesses, a fraction of the earnings must be reinvested simply to avoid shrinking.

Posted by TFF | Report as abusive
 

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