Secrets And The Sage Of Omaha

28 February, 2012

Warren Buffett has earned his investors’ trust in decades spent building the cowboy boot to cargo train conglomerate he controls, Berkshire Hathaway. In his annual letter to shareholders this weekend he asked for it once again.

The 81-year-old said that the board had picked “an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire” to one day replace him as chief executive. But the so-called “Sage of Omaha” declined to offer a name.

When the time comes the transition will be “seamless”, said Mr Buffett, adding that of the 19 corporate boards he has served on, “Berkshire’s directors are at the top of the list in the time and diligence they have devoted to succession planning”. He said the company had “two superb back-up candidates as well”.

It may be a long time coming. Mr Buffett has longevity in his family, according to Berkshire shareholder Whitney Tilson, who thinks it likely Mr Buffett will be in charge for another five years.

But the question is central to Berkshire’s future because of Mr Buffett’s unique role. He gets offers no other chief executive would, such as last year’s invitation to buy preferred stock in Bank of America when the group needed both capital and an injection of confidence. Companies selling to Berkshire know he does not meddle with management, and rarely sells.

“Such a situation [selling a company] has happened only a couple of times in our 47-year history, and none of the businesses we now own is in straits requiring us to consider disposing of it,” said Mr Buffett in the letter.

Mr Tilson also supported Mr Buffett’s secrecy, as the successor could slip-up, or a superior candidate could yet emerge. “In either case, Buffett and the board will be able to switch their choice without the second-guessing and media circus that would occur if the successor had been named,” he said.

Speculation has concentrated on a few internal candidates since the previous frontrunner, David Sokol, resigned last year following the discovery that he had purchased stock in Lubrizol before the company was bought by Berkshire.

Ajit Jain, who runs Berkshire’s Reinsurance division is someone who Mr Buffett has repeatedly praised as a workaholic genius. “From a standing start in 1985, Ajit has created an insurance business with float of $34bn and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching,” said Saturday’s letter.

However the low profile Mr Jain, whose business employs relatively few staff, may not be the best deal-focused executive and experienced operator to take over from Mr Buffett.

“I’d be more concerned about replacement of Ajit,” said Vitaliy Katsenelson, a value investor and former investor in Berkshire. “Talent and discipline – Ajit has both – is a lot more important for the success of the reinsurance business”.

Mr Buffett’s role as chief investment officer will be filled by Todd Combs and Ted Weschler. “Each will be handling a few billion dollars in 2012, but they have the brains, judgment and character to manage our entire portfolio when Charlie [Munger] and I are no longer running Berkshire,” said Mr Buffett.

Attention has instead focused on Matt Rose, the 52-year-old head of Burlington Northern Santa Fe Railroad, Berkshire’s largest ever purchase, agreed in 2009. Enthusing about the acquisition in that year’s letter to shareholders, Mr Buffett said that the company had “the additional virtue of being run by Matt Rose, who we trust and admire”.

Mr Buffett has also heaped praise on Tony Nicely, the head of Geico for 18 years during which he has transformed the property and casualty insurance business into a powerhouse with almost a 10th of the US market. At 67, however, he may be too old for the top job.

Sage-watchers also note that straight after writing that he and Charlie Munger “continue to be in excellent health and love what we do”, in this year’s letter Mr Buffet then went on to praise James Hambrick, chief executive and chairman of Lubrizol. “James is a disciplined buyer and a superb operator. Charlie and I are eager to expand his managerial domain,” he said.

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Secrets And The Sage Of Omaha

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