On the succession question Warren Buffett expanded previous comments to say: “To further ensure continuation of our culture, I have suggested that my son, Howard, succeed me as a non- executive Chairman. My only reason for this wish is to make change easier if the wrong CEO should ever be employed and there occurs a need for the Chairman to move forcefully.”
"I can assure you that this problem has a very low probability of arising at Berkshire – likely as low as at any public company. In my service on the boards of nineteen public companies, however, I’ve seen how hard it is to replace a mediocre CEO if that person is also Chairman. (The deed usually gets done, but almost always very late.)
"If elected, Howard will receive no pay and will spend no time at the job other than that required of all directors. He will simply be a safety valve to whom any director can go if he or she has concerns about the CEO and wishes to learn if other directors are expressing doubts as well.
"Should multiple directors be apprehensive, Howard’s chairmanship will allow the matter to be promptly and properly addressed.
"Choosing the right CEO is all-important and is a subject that commands much time at Berkshire board meetings. Managing Berkshire is primarily a job of capital allocation, coupled with the selection and retention of outstanding managers to captain our operating subsidiaries.
"Obviously, the job also requires the replacement of a subsidiary’s CEO when that is called for.
"These duties require Berkshire’s CEO to be a rational, calm and decisive individual who has a broad understanding of business and good insights into human behavior. It’s important as well that he knows his limits.
"Character is crucial: A Berkshire CEO must be “all in” for the company, not for himself. (I’m using male pronouns to avoid awkward wording, but gender should never decide who becomes CEO.)
"He can’t help but earn money far in excess of any possible need for it. But it’s important that neither ego nor avarice motivate him to reach for pay matching his most lavishly-compensated peers, even if his achievements far exceed theirs.
"A CEO’s behavior has a huge impact on managers down the line: If it’s clear to them that shareholders’ interests are paramount to him, they will, with few exceptions, also embrace that way of thinking.
"In an operating sense, Berkshire is not a giant company but rather a collection of large companies. At headquarters, we have never had a committee nor have we ever required our subsidiaries to submit budgets (though many use them as an important internal tool). We don’t have a legal office nor departments that other companies take for granted: human relations, public relations, investor relations, strategy, acquisitions, you name it.
"We do, of course, have an active audit function; no sense being a dammed fool. To an unusual degree, however, we trust our managers to run their operations with a keen sense of stewardship.
"After all, they were doing exactly that before we acquired their businesses. With only occasional exceptions, furthermore, our trust produces better results than would be achieved by streams of directives, endless reviews and layers of bureaucracy.
"Our directors believe that our future CEOs should come from internal candidates whom the Berkshire board has grown to know well. 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.
"Berkshire will operate best if its CEOs average well over ten years at the helm. (It’s hard to teach a new dog old tricks.) And they are not likely to retire at 65 either (or have you noticed?).
"In both Berkshire’s business acquisitions and large, tailored investment moves, it is important that our counterparties be both familiar with and feel comfortable with Berkshire’s CEO. Developing confidence of that sort and cementing relationships takes time. The payoff, though, can be huge.
"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. In certain important respects, this person will do a better job than I am doing.
"Investments will always be of great importance to Berkshire and will be handled by several specialists. They will report to the CEO because their investment decisions, in a broad way, will need to be coordinated with Berkshire’s operating and acquisition programs.
"Overall, though, our investment managers will enjoy great autonomy. In this area, too, we are in fine shape for decades to come. Todd Combs and Ted Weschler, each of whom has spent several years on Berkshire’s investment team, are first- rate in all respects and can be of particular help to the CEO in evaluating acquisitions.
"All told, Berkshire is ideally positioned for life after Charlie and I leave the scene. We have the right people in place – the right directors, managers and prospective successors to those managers. Our culture, furthermore, is embedded throughout their ranks.
"Our system is also regenerative. To a large degree, both good and bad cultures self-select to perpetuate themselves. For very good reasons, business owners and operating managers with values similar to ours will continue to be attracted to Berkshire as a one-of-a-kind and permanent home.
"My successor will need one other particular strength: the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency. When these corporate cancers metastasize, even the strongest of companies can falter.
"The examples available to prove the point are legion, but to maintain friendships I will exhume only cases from the distant past.
"In their glory days, General Motors, IBM, Sears Roebuck and U.S. Steel sat atop huge industries. Their strengths seemed unassailable. But the destructive behavior I deplored above eventually led each of them to fall to depths that their CEOs and directors had not long before thought impossible.
"Their one-time financial strength and their historical earning power proved no defense,“ Buffett wrote.
It should be noted he has bought back into GM after it was rescued and revamped by the US government, doesn’t hold shares in US Steel or Sears Roebuck (which is close to collapse). But he has built a huge stake in IBM, despite its problems in the past three years of shrinking sales (still solid profits) and pressure from newer technologies.
At the end of 2014, Berkshire Hathaway had just on 77 million IBM shares (&.8% of IBM’s capital), worth $US12.5 billion, which was below cost of around $US13.1 billion.
(And if anyone should worry about that, the BH report reveals that it has the right to spend $US5 billion on 700 million shares in Bank America by September 2021. At year’s end those 700 million Bank of America shares were worth $US12.5 billion, which in effect is the company’s 4th largest equity holding.
