Thu, 28 Apr 2016
Berkshire will be 'just fine' with either of the top candidates as long as they stick to Buffett's approach to capital allocation and decentralization, says Morningstar's Gregg Warren.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We're getting ready for the Berkshire Hathaway annual meeting and I'm here today with Gregg Warren. He is our senior stock analyst who covers Berkshire Hathaway. We're going to look at what Berkshire is going to look like after Buffett.
Gregg, thanks for joining me.
Gregg Warren: Glad to be here.
Glaser: So, this is your third year being on the panel asking Warren Buffett or Charlie Munger questions, and one that is sure to come up (as it does every year) is on succession planning--who is going to take over the business. We actually have a little bit of more news on that, maybe more than we usually have before meetings. Can you talk to us a bit about that?
Warren: Yeah, we've had some interesting, more recent developments. As you know, Ajit Jain, who runs Berkshire Hathaway Reinsurance Group, and he has been running it for about 30 years now. It was announced that he was going to take over oversight of General Re, which is Berkshire's other reinsurance arm, at the end of this year when their CEO, Tad Montross, retires. It was bit of a surprise to us. We didn't really expect this to happen. But given sort of where the trends are in reinsurance right now from a pricing perspective and the need to run that business as profitably as possible, it makes sense to have one person sort of overseeing what's going on in either operation, see if there's ways for them to streamline things, see if there's ways for them to sort of improve the efficiencies of the business.
That said, we've always kind of looked at Ajit Jain as being the next CEO at Berkshire Hathaway or at least being the first name on the list that Buffett and the board have come up with to be the next CEO. Our take has always been that this person is going to basically be a capital allocator in chief; they are going to oversee the businesses that Berkshire runs through its subsidiaries, basically just being sort of a sounding board for the managers there, work closely with Ted Weschler or Todd Combs, who run the investment portfolio, and then really sort of help out from capital allocation overall and risk management as well, and we've always felt that Ajit was well-suited to sort of be that candidate to sort of fill Buffett's role.
We also have made the case that Greg Abel, who runs Berkshire Hathaway Energy, would be an excellent second candidate or sort of on the same peg with Ajit. Abel has a lot more operational experience. He has pretty much been running Berkshire Hathaway Energy for the last 20-some years. He has had his hands in just about every deal that they have done from acquisitions of publicly traded companies to vulture investments of distressed assets and he has also made a lot of capital investments over the years, solar power or wind power. So he has had his hands in a lot of different things. We always felt that if Ajit didn't the take job, which he has said on several occasions, he is not interested in doing that, that Greg Abel would be definitely a good candidate to sort of fill that role.
And as we look at the news that's come out this week, we have to wonder with Ajit taking on more and more responsibility on the insurance side of the business because he has actually been running or spearheading the Berkshire Hathaway specialty insurance business the last two, three years here, that's an excess and surplus line commercial business that they started up in June of 2013 with guys that they brought in from AIG and now also overseeing all of reinsurance, my preference would be to have him sort of stay in place. He is an insurance guy at heart, and he is probably the best insurance guy they've had historically. So, him staying put there on what is arguably a critical and important business for them and having Greg Abel step into sort of that CEO caretaker role, I think that would be the best of both worlds for Berkshire shareholders.
Glaser: So, we've talked in the past how Buffett has kind of raised the guardrails a little bit by trying to spend some cash, by separating the chairman, CEO, and investment roles. Do you think that means that it doesn't really matter that much for Berkshire shareholders who walks into that CEO [position] between the two of them? Should investors be concerned about the succession planning?
Warren: I think succession planning looks a lot better than it did maybe five years ago. I mean, I was still trying to sort of get my hands around who was really sort of the natural fit for that role. At that point, they still hadn't hired Todd and Ted. And based on what we've seen from those two guys the last few years, they've been doing more than just the investment portfolio. They've actually had their hands actively involved in the deals they've been doing with 3G, this Precision Castparts acquisition, some of the media businesses that they've picked up the last few years. So, they are a lot more involved than I had expected them to be at this point. So, a bigger comfort level with how that sort of succession planning is working through.
Again, as I said, by them splitting things up, I mean, Buffett insists that the chairman, who is going to take that role from him, is basically just going to be sort of the overseer of Berkshire's culture. Howard Buffett, his son, has always been sort of put forward as the name that probably is going to fill that role. We've always felt that if Howard wasn't going to take that job, that Bill Gates has a natural sort of need to kind of fill that role because he is going to be a big beneficiary, at least his foundation, the Bill & Melinda Gates Foundation, is going to be a big beneficiary of Berkshire's shares once Buffett passes on. So, it's in his best interest to see that the firm continues to run the way it has historically.
But the next CEO is ideally--I mean, they are going to be focused primarily on capital allocation and making sure that the subsidiaries are content with the idea that we're still going to run a decentralized business, these decisions are still yours to make for your businesses. I think Buffett has done a bit of a favor for the next guy anyways because he has pushed down a lot of capital allocation decisions much, much further downstream. It's no surprise that Berkshire Energy has not paid a dividend up to Buffett since they were acquired. This gives them a huge competitive advantage over their peers. They can invest that capital back into their own plant as well as doing acquisitions. So, from that perspective, I expect to see more and more of that as we move forward.
Glaser: So, you still feel pretty good about what the company is going to look like after Warren is gone, 10, 15 years down the road, do you think that culture can really sustain itself?
Warren: Yeah. I mean, that's been sort of the beauty of how it's been built and put together. The decentralized format first and foremost ensures that you don't have a whole lot of necessarily synergies built in or requirements where you're dealing with one part of the business, or the other part, or you're sharing services or whatnot. So, I think from that perspective, that's been kind of the beauty of it.
And Buffett has historically looked for like-minded managers when he is acquiring firms, whether it's people that own family-run businesses or people that are running organizations and I think that has helped them avoid some of the traps of disruptions within the organization because there is not a cultural fit. I mean, when we look at mergers and acquisitions historically, especially those within kind of financial services businesses or other businesses, culture is really, really important, and I think Buffett understood this early on and really sort of geared his acquisitions and his investments towards like-minded individuals. And as long as the next guys kind of carrying forward that torch and future acquisitions that they do also sort of follow that model, I think Berkshire Hathaway is going to be fine.
Glaser: Gregg, thanks for your thoughts on Berkshire after Buffett today.
Warren: No problem. Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.