The recent talk about Warren Buffett (Trades, Portfolio)'s succession plan when he leaves Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) has ignited some discussion about whether or not the group will be too large to manage when the Oracle of Omaha steps down.
Personally, I think the business will have to deal with enormous challenges when its current CEO levels. This is primarily because Buffett is a fantastic capital allocator, and he has complete control.
When Greg Abel takes over, he won't have the same level of experience (Buffett is one of the founders and has been running Berkshire since the late 1960s). There is simply no way he will be able to have the same level of control. He'll have to share power with Ajit Jain, Todd Combs and Ted Weschler. Buffett is also the largest shareholder, another advantage that his successor will not have.
I think it's improbable that these four individuals will be able to work with the same level of harmony as Buffett and Charlie Munger (Trades, Portfolio). After all, adding extra layers of management has rarely been an excellent strategy for improving business outcomes.
Still, this is just my opinion, and I'm only speculating. I would be happy to be proven wrong. Indeed, Berkshire's unique structure lends itself perfectly well to functioning without Buffett at the head of the enterprise.
Berkshire's decentralized nature
At Berkshire's annual meeting this year, Munger made an interesting statement. When discussing the question of "could Berkshire become too large and complex," Munger replied:
"I don't think we're getting too big to manage because we're different from practically every other big corporation in the United States, in that we are so excessively decentralized. We have decentralized so much, and we have so much authority in the subsidiaries that we can keep doing it for a long, long time, as long as it keeps working. And I would say so far, that our decentralization has caused more benefits than defects, but nobody seems to copy us."
This is an often-overlooked point. It seems it's so overlooked for the reason Munger alluded to above. It's so rare. Buffett had delved into the structure a bit further earlier in the conversation:
"But we have a wonderful company in Fort Worth and we had a marvelous man running it and he died recently, but he ran it. He sold it to me 15 years ago and he just basically ran it. And I couldn't find my way to the company. We've got this terrific company that makes recreational vehicles, the Elkhart based in Indiana. And we bought it 15 years ago. I've never been there. Maybe there's some guy in a closet just making up numbers to send to me every month."
When considering this structure, Berkshire seems more like an index fund than it does a conglomerate. This is because it owns a collection of businesses, but all of these businesses run independently of the holding company.
So, in the same way a poorly performing stock in the S&P 500 does not overly affect the rest of the index, a bad period of performance for one company under the Berkshire umbrella will not sink the whole enterprise.
The glue that makes this approach so successful is culture. Buffett has spent decades cultivating a perfect culture. He has only ever acquired businesses owned by exceptional managers who care about their companies. As a result, they are not driven to take excessive risks by borrowing too much or making decisions that may damage their companies' reputation.
This culture will persist after Buffett, but for how long isn't easy to tell. It can only take one bad actor to start chipping away at the group's culture and reputation.
Buffett has managed to maintain the culture throughout his career. However, one has to wonder how long such a unique culture can persist when there are so many bad actors in the world that could enter the picture someday. It's food for thought, that's for sure.
Disclosure: The author owns no share mentioned.
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