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J&J: A Lesson for Berkshire on Succession

April 09, 2012 | About:
The Science of Hitting

The Science of Hitting

231 followers
The fight to get Berkshire Hathaway (BRK.A)(BRK.B) to name Warren Buffett’s successor continues, with the AFL-CIO coming out last and asking that the company begin to update shareholders annually on the status of Buffett’s future replacement (that would be quite an exercise without revealing who it is, unless the update was simply “he/she still works here”). My contention would be that anything beyond what has currently been revealed (Berkshire already has said they’ve identified four executives capable of being CEO, which has generated plenty of speculation about who the successor is) would all but guarantee that the successor’s name is revealed, which creates a bigger issue: Buffett isn’t leaving today; for all anybody knows he might be running Berkshire in 2020.

Which brings us to today’s news story that shows what happens when the CEO’s successor is announced: Alex Gorsky, the former chairman for medical devices Johnson & Johnson (JNJ), was named as outgoing CEO William Weldon’s successor in late February of this year (article here). This morning, less than two months after the succession plan was announced, JNJ felt its first reaction to the decision:

Sheri McCoy, who has been with J&J for 30 years, including a position as worldwide chairman of the Pharmaceuticals division for the past three years, announced her resignation; for those who don’t know, it was common knowledge that Mr. Gorsky and Mrs. McCoy were the two contenders for the top spot at Johnson & Johnson after both were named company vice chairman in January 2011. As a result of her resignation, Mrs. McCoy has joined Avon, the leading global beauty company ($11B in sales), and will become CEO effective April 23rd. Mrs. McCoy had this to say:

"I am extremely honored and excited to join Avon--a great company with an iconic brand and so much clear potential. Avon has an unparalleled global direct selling sales force of over six million Representatives and an enviable geographic footprint. I look forward to working with the team to develop and execute a roadmap to achieve the next phase of growth for the company."

Announcing a successor for the world to know WITHOUT ANY IDEA OF THE CURRENT CEO’S DEPARTURE DATE is an overreaching task that isn’t pursued by a single company that I can think of; the likely reason is that it all but invites a rash of insider disappointment (lots of people want to be the top dog) that results in departures, generally in a similar industry to a close competitor. In my mind, Berkshire would do best to stick with their current plan and wait to make an announcement until such a decision is required.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.0/5 (12 votes)

Comments

pravchaw
Pravchaw premium member - 2 years ago
This is a tricky area. In J&J's case both the contenders knew that they were in the running. If you don't tell potential sucessors that they are contenders then you risk losing them anyway. If you tell them, at least you can delay their departure. Buffet is taking a pragmatic view point - he has probably told the contenders that they are in the running. This will prevent departure to a lesser company. However competitors do not know who these contenders are - so they are less of a target. Ambiguity is the best foot forward here and its obvious Buffet has thought this through.

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