Filed under: Value Investing, CEOs, Warren Buffett, This Built America
By Luciana Lopez and Jonathan Stempel
NEW YORK -- Warren Buffett, the billionaire chief executive of Berkshire Hathaway (BRK-A)(BRK-B), told investors on Saturday that the company had found his successor, and the company's vice chairman, Charlie Munger, identified two Berkshire executives as candidates.
In Berkshire's annual report to shareholders, Greg Abel, the head of Berkshire's energy companies, and Ajit Jain, a top insurance executive, were said by Munger to be "proven performers who would probably be under-described as 'world-class.'"
"'World-leading' would be the description I would choose," Munger said in a letter to Berkshire shareholders. "In some important ways, each is a better business executive than Buffett."
Buffett's son, Howard, would become non-executive chairman after the departure of his father, who is also Berkshire's chairman.
In his previous letters to shareholders, the 84-year-old Buffett has said Berkshire board had been fully aware of his chosen successor but that he was keeping his options open.
Investors have long speculated about who would, or could, succeed Buffett, particularly after he was diagnosed with, and then beat, prostate cancer in 2012.
Munger, whom Buffett describes as "my partner," is 91.
"Both the board and I believe we now have the right person to succeed me as CEO -- a successor ready to assume the job the day after I die or step down," Buffett said.
"In certain important respects, this person will do a better job than I am doing," Buffett added.
Berkshire on Saturday also reported a 17 percent drop in fourth-quarter net income, but a 2 percent increase in full-year profit. Operating profit rose in both periods.
Neither Buffett's nor Munger's letter on Saturday referred by name to Matthew Rose, executive chairman of the BNSF railroad unit, who has also been mentioned by investors as a possible successor.
Buffett said BNSF is, by far, Berkshire's most important non-insurance unit but "was not good in 2014, a year in which the railroad disappointed many of its customers," despite capital outlays far exceeding those of Union Pacific (UNP), its main rival.
Buffett's ABCs for New CEO
Buffett strongly suggested in his letter that his potential successor already works within Berkshire and laid out the challenges facing his successor as Berkshire grows ever larger.
He said Berkshire's earnings and capital resources will eventually reach a level where management will not be able to intelligently reinvest all of the company's earnings.
"At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both," Buffett said.
Buffett said his successor will also need to avoid the "debilitating forces" that decades ago befell companies such as General Motors (GM), IBM (IBM), Sears Roebuck and U.S. Steel (X).
"My successor will need one other particular strength: the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency," he said. "When these corporate cancers metastasize, even the strongest of companies can falter."
Buffett has run Berkshire since 1965, transforming it from a failing textile company into a conglomerate with a $363 billion market value and more than 80 operating businesses in such areas as insurance, railroads, energy, food and apparel.
The Omaha, Nebraska-based company also has more than $117 billion of equity investments.
Abel, Jain Top Contenders
Age will also be a factor, and Buffett said Berkshire may be best off if his successor stays on for at least a decade.
"Our directors also believe that an incoming CEO should be relatively young, so that he or she can have a long run in the job," Buffett wrote. "It's hard to teach a new dog old tricks. And they are not likely to retire at 65 either -- or have you noticed?"
Buffett also said Berkshire's directors believe future CEOs should be internal candidates they know well.
Abel, 52, leads Berkshire Hathaway Energy, and Jain, 63, has been Buffett's top insurance deputy for three decades.
In Saturday's letter, Buffett said: "Ajit's underwriting skills are unmatched. His mind, moreover, is an idea factory that is always looking for more lines of business he can add to his current assortment."
In last year's letter, Buffett called Abel an "extraordinary manager."
Bill Smead, who oversees $1.3 billion at Smead Capital Management in Seattle and invests $55 million in Berkshire, called Jain a "brilliant" insurance executive but said Abel could be a better fit as CEO.
"I think you want someone who is good at overseeing numerous stand-alone companies," he said. "That would be advantage Abel."
Because Berkshire Hathaway Energy is a "mini-conglomerate" itself, "you practice in the miniature and then ultimately that puts you in the position to be the one," Smead said.