Understanding Succession at Berkshire Hathaway After Buffett

Shareholders care about C.E.O. succession, especially at companies led by iconic figures. At Berkshire Hathaway, for instance, it has become a parlor game to predict who will succeed Warren E. Buffett at the conglomerate’s helm.

Most boards invest considerable time in succession planning, though Berkshire’s is criticized for spending too little. In fact, however, many boards focus too narrowly on the notion of succession while Berkshire’s board has developed a multiple-pronged plan for Berkshire’s future leadership.

Berkshire’s succession plan has always called for dividing Mr. Buffett’s role in two. In earlier decades, investments were to be managed by Lou Simpson, the savvy portfolio manager at Geico, the company’s prosperous car insurance subsidiary. The executive function was to be handled by Charlie Munger, Mr. Buffett’s long-time No. 2. Both men share Mr. Buffett’s values and understand Berkshire culture. But that succession plan stopped making sense as all three men aged: Mr. Simpson retired and Mr. Munger is ninety-one.

Today, Berkshire’s succession plan envisions investments run by several portfolio managers, likely including two hired in recent years, Todd Coombs and Ted Weschler. On the executive side, Mr. Buffett’s replacement is to come from among top managers of Berkshire’s many subsidiaries. Berkshire followers speculate on succession at the top, with several names mentioned often—especially Greg Abel of Berkshire Hathaway Energy and Ajit Jain of Berkshire Reinsurance—and another dozen capable candidates, making for a deep bench of chief executives.

But a question often overlooked by outsiders is who will assume Mr. Munger’s role. Having been vice chairman for nearly forty years, Mr. Buffett says Munger’s presence has contributed enormous value—multiple billions worth—over the years. Mr. Buffett’s intellectual partner and confidant, Mr. Munger provides a screen: if he sees reason not to take a proposed action, Berkshire refrains. So, how will that role be filled at Berkshire after both men depart?

Fortunately, what’s true at Berkshire the parent is also often true at its sixty main subsidiaries: their chief executives tend to have No. 2’s groomed for succession. In fact, many Berkshire subsidiaries evolved through multiple successions where successors took the company to heights undreamt of by predecessors. Pronounced examples recur in family dynasties, including Clayton Homes, Jordan’s Furniture, Justin Brands, the Marmon Group, McLane and RC Willey.

One of Mr. Buffett’s few directives to Berkshire unit chief executives is to nominate a successor in writing, and assess their strengths and weaknesses. Berkshire’s subsidiary succession planning has generally worked. In an emergency situation in 2011, David Sokol resigned from what was then MidAmerican Energy, succeeded by Mr. Abel, a savvy company veteran and part-owner whose team is growing and rebranding the formidable firm now called Berkshire Hathaway Energy.

A decade ago, when John Justin Jr., namesake of the legendary boot maker, passed away, the baton went to his hand-picked No. 2, Randy Watson—whose deft managerial and entrepreneurial triumphs eerily resemble those of his mentor. During the past decade and a half, similarly successful transitions occurred at a dozen other Berkshire subsidiaries, such as Dairy Queen, first from its long-term leader John Mooty to his son Chuck and from him to veteran company executive John Gainor.

Successions are not always smooth. Two successive chief executives recently struggled at Benjamin Moore. The paint company sells through a network of local independent distributors, to whom Mr. Buffett pledged Berkshire’s continued support. That pits the company against the fierce competition of big box retailers. When previous executives prepared to renege on Berkshire’s promise and sell through those giants, Mr. Buffett let them go, a reminder that promise-keeping is more important than profit margins.

Joint belief in values like promise-keeping is one facet of the Buffett-Munger relationship that makes it unusual. The other is possessing complementary talents of temperament, attitude, and vision. And despite unique aspects to their relationship, such superlative business teams are more common than you think. The lengthy list would include pairs like Mark Zuckerberg and Sheryl Sandberg at Facebook and trios like Jorge Lemann and partners Marcel Telles and Beto Sicupira at 3G.

The many pairs of great leaders across Berkshire’s subsidiaries does not mean that Mr. Buffett’s successor as chief executive will bring that company’s No. 2 to headquarters. That would undermine the point of subsidiary succession planning. Rather, it reflects that Berkshire’s bench for the second-in-command is just as deep as that for C.E.O. The parallel depth in the top spots explains how easy it was for Mr. Buffett to predict, at Berkshire’s 2014 annual meeting, that his successor will develop a No. 2. The successor will have the luxury of choosing from among several dozen fellow Berkshire unit chief executives plus an equally sized group of their deputies.

Until Mr. Buffett’s successor makes his or her choice, however, the final part of Berkshire’s succession plan will help. It calls for splitting the roles of chief executive and board chairman, with Mr. Buffett suggesting his son Howard as chairman. While it is tempting to see the split as dividing Warren Buffett’s role yet a third way, besides chief executive and chief investment officer, it may be more appropriate to see it as dividing Mr. Munger’s role a second way.

After all, one of Mr. Munger’s most important roles has been to say no and that will be one of Howard’s most important roles too. But the kinds of things to say no to will shift.

Mr. Munger’s veto power has tended to add a filter to Berkshire’s acquisitions to quash improvident deals. In building Berkshire, that was vital, to establish its culture. Howard Buffett’s role, in contrast, will stress maintaining culture, not building it. His need to say no will be less in vetoing acquisition ideas than on reminding the forgetful of the values that made Berkshire special, such as promise-keeping, permanence, and autonomy. In extreme circumstances, Howard’s role will mean firing a wayward Berkshire chief executive.

Howard Buffett’sprimary task is thus one his father never had to perform and his job will entail none of the tasks for which his father became famous. The approach deftly escapes a trap that so often ensnares sons of legends. Those who assume the same roles as parents are measured by their parent’s standards, and often found wanting. True, some observers may misunderstand Howard’s role and measure him against the impossible standard of his father, unfair as that it is. In time, however, the relevant role will be clear and, given Howard’s first-hand knowledge of Berkshire culture and passion for Warren’s creation, he’ll most likely measure up.

In his book, “Working Together,” Michael Eisner, the former chief executive of the Walt Disney Company, described his experience working with his esteemed deputy, Frank Wells, as teaching that “1 + 1 = 3.”

Berkshire and its subsidiaries have long known about the power of partnership and the elaborate succession plan is a reflection. Involving splitting both Mr. Buffett’s and Mr. Munger’s jobs in two, the Eisner formula at Berkshire has been “1 + 1 = 4.” While critics complain that Berkshire’s succession plan is skimpy compared with other companies, the reverse is more accurate.