Stay up to date with notifications from The Independent

Notifications can be managed in browser preferences.

Warren Buffett and his search for a new superstar

The resignation of one of Warren Buffett's senior lieutenants has thrown open the race to succeed him, says Stephen Foley

Saturday 02 April 2011 00:00 BST
Comments

David Sokol said he never wanted the job in any case. The man most Berkshire Hathaway shareholders assumed would step into the enormous shoes of WarrenBuffett, as the company's next chief executive, is out. His resignation this week, along with revelations about a questionable purchase of shares in a company Berkshire ended up acquiring, has shaken confidence in anorderly transfer of power at the top, should the 80-year-old Mr Buffett have to hand over the reins.

Inadvertently, Mr Sokol has opened up not just the question of who might now step up to take over, but whether it could ever be business as usual in a post-Buffett era.

First off, it has to be noted that Mr Sokol was only ever the assumed successor. There's a metaphorical sealed envelope at Berkshire with the names of those who will be asked to step up, ready for ripping open in an emergency. Mr Buffett drops hints from time to time, but he has never named names.

Mr Sokol, who has run several of Berkshire's most important divisions, said this week the succession remains a secret even to executives.

"I don't know what names are in the envelope. It has never been discussed with me. I've never had a conversation with Warren or any board member about it – and to be honest, I think that's the way it should be. I think until the board makes its decision, anybody knowing is a mistake."

The air of mystery will only intensify with Mr Buffett's advancing age and the growing importance of Berkshire to the US equity market, where it is now one of the five biggest companies in the land.

What began as a small Massachusetts textile firm which Mr Buffett acquired in the Sixties grew, via a ragbag of businesses in insurance and retail and stakes in staples such as Coca-Cola and McDonald's, into today's giant conglomerate. Now it is one of the world's largest reinsurers, owns the largest US rail business, and is hunting for even bigger acquisitions in the developing world.

The informality of the Berkshire culture – the very thing that attracts such loyal shareholders, who flock to its annual meeting in Omaha,Nebraska, each year – has been called into question this week, amid questions over why Mr Sokol thought it was acceptable to buy stock in the chemicals company Lubrizol the day after deciding to recommend that Berkshire acquire the company.

What we do know is that Mr Buffett's responsibilities will be split three ways. Howard Buffett, his son, will become chairman, to oversee the family stake. Oversight of the existing businesses will fall to a chief executive, for which post Mr Sokol was assumed to be the favoured candidate and for which the company recently said there were four qualified internal candidates. And finally, there will be a new post of chief investment officer, effectively the ideas man, who will vet new acquisitions and oversee the Berkshire share portfolio. It is possible, Mr Buffett has said, that the chiefinvestment officer role could be split between two or more people.

So who are the runners and riders for the positions now? The executive whom Mr Buffett praises perhaps more than he does anyone else at Berkshire is Ajit Jain, the 59-year-old boss of the company's reinsurance business. Less than two weeks ago, Mr Buffett said Mr Jain had "probably made a lot more money for Berkshire than I have", and joked the board loved Mr Jain so much they would fire him (Mr Buffet) and give Mr Jain the top job if he wanted it.

The other two names believed to be on the Berkshire board's list of four suitable candidates – which, one assumes is down to three after Mr Sokol's exit – are Matthew Rose, of its Burlington Northern subsidiary, and either Greg Abel, of MidAmerican Energy, or Olza "Tony" Nicely. Mr Nicely is the fiercely loyal chief executive of Geico, Berkshire's insurance arm, who joined that company aged 18 – almost 50 years ago – and finally agreed to sell the company to Mr Buffett in 1996. At 67, he may be too old to take the reins by the time Mr Buffett moves out of the way.

Unlike Mr Sokol, who came to Berkshire with the acquisition ofMidAmerican and most recently ran the NetJets private aircraft hire business, none of the other candidates have experience beyond their original business.

But shareholders at least know and respect these men's achievements, says Andy Kilpatrick, author of Of Permanent Value: The Story of Warren Buffett. "David Sokol is a terrible loss, but on the other hand Berkshire has a deep bench," he said. "The focus turns to Ajit Jain, for whom Mr Buffett's enthusiasm knows no bounds and who has 100 per cent character and integrity. The board will get to it right away, and the Berkshire culture will go on."

Speculation over the chief investment officer post rose last October when Berkshire unveiled to an astonished world the appointment of an obscure Connecticut hedge fund manager called Todd Combs to run part of its portfolio. For the previous five years Mr Combs ran Castle Point Capital, which withstood thefinancial crisis despite investing almost solely in financial companies.

Quite whether this 40-year-old is the heir to Mr Buffett's informal role dispensing folksy investment wisdom to shareholders remains to be seen. Berkshire has been quietly trying out other potential investment managers for several years, apparently with mixed results. In 2010, Mr Buffett's vice-chairman, Charlie Munger, caused a stir by saying it was a "foregone conclusion" that Li Lu, a student protester during the Tiananmen Square massacre in China in 1989 and now a US hedge fund manager, would also have a role – though he appears to have ruled himself out.

The bottom line is no one person will adequately fill Mr Buffett's shoes – and no one may want to try. Mr Sokol said he had always planned to quit Berkshire to strike out on his own and create a "mini-Berkshire" whose shares he controlled, something that would be more rewarding both financially and personally.

As he told CNBC: "Nobody is going to do it as well as Warren does, and there's going to be a lot of change that comes with that."

Three who might be king

Ajit Jain, 59

Jain came to Berkshire in 1996 to head the small team with a big responsibility; his job was to manage the company's reinsurance business, which takes on the risk of catastrophes such as earthquakes and floods. Mr Buffett once wrote: "I did the logical thing. I wrote to his parents in New Delhi and asked if they had another one like him at home."

Greg Abel, 48

Abel was promoted on Wednesday. The Canadian-educated accountant has been the day-to-day operations man at MidAmerican, Berkshire's energy company, and will now take David Sokol's place as chairman. He has been building a profile in the community in Iowa, where MidAmerican is based, where he helps run the Boy Scouts and football coaches' association.

Matthew Rose, 51

Rose is the newest addition to the Berkshire family, having joined when the company made its largest acquisition, the $44bn purchase in 2009 of Burlington Northern. The US railways giant "has the additional virtue of being run by Matt Rose", Mr Buffett said at the time, and his hands-off management style is similar to Mr Buffett's.

Join our commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in