Berkshire's Future CEO Makes a Notable Trade

Berkshire Hathaway’s (BRK.A, Financial) (BRK.B, Financial) second-quarter figures have attracted a lot of attention this week, but the company also published a document that might have more relevance to its future.

The document in question is a proxy statement that was published on the same day as the company’s second-quarter figures. The statement revealed Berkshire acquired Vice Chairman Greg Abel’s common stock in Berkshire Hathaway Energy for $870 million in June (BHE itself actually acquired the holding, essentially conducting a share buyback).

A trade with important aspects

The trade is a notable development for a couple of reasons.

Abel has been named Warren Buffett (Trades, Portfolio)’s successor as CEO of Berkshire. However, at the time of the announcement, he owned 1% of BHE, a legacy position accounting for the majority of his net worth. This stands in stark contrast to Buffett, who owns 38% of Berkshire and has always had a controlling interest in the business. Abel owns just five Class A Berkshire shares and 2,363 Class B shares. Buffett owns 229,016 Class A shares. These numbers are based on the latest proxy statements and may change at any point.

The fact that Abel, as a future CEO, owned more of BHE, a subsidiary of the group, than he did of the conglomerate as a whole has caused some shareholders to ask tough questions. A shareholder raised the concern during the company’s annual meeting in April, asking if there was any plan to convert Abel’s holdings in the subsidiary into Berkshire stock.

At the meeting, Buffett’s right-hand man, Charlie Munger (Trades, Portfolio), responded, "I just don’t think it’s a big problem at all.”

“I see no behavior from Greg ever that isn’t in the best interests of Berkshire,” he went on to add.

Clearly, all parties have decided that the best course of action is for Abel to divest his stake. That shows Buffett is worried about what the outside world thinks about the future ownership structure. This is not out of character; he has spoken many times about how important it is for managers to respect their investors and have a high standard of corporate governance.

As of yet, we do not know if the future CEO has reinvested the proceeds back into Berkshire, but it would look good if he did. After all, the best managers tend to be those who are invested alongside their shareholders.

It seems to me that Abel might have instigated the sale himself. Buffett noted at this year’s meeting that he did not want to do anything with Abel's interest in BHE unless he wanted “to do it.” If Abel did initiate the trade, it is a strong sign that Buffett’s desire to do the right thing has rubbed off on his favored candidate. I should note that even after this trade, Berkshire still only owns 92% of BHE. The rest is owned by the estate of Walter Scott Jr., a former Berkshire board member who died last year.

The other major takeaway from the trade is the fact that it values BHE at $87 billion, up from $50 billion two years ago. This jump in value could have a significant impact on Berkshire’s intrinsic value.

The bottom line

While this development might just be a footnote in the company‘s quarterly report, I do not think investors should overlook the significance of the transaction. It shows the future CEO cares just as much about corporate governance standards as Buffett - he did not have to transfer the shares, but he has.

At the same time, the transaction illustrates just how much this Berkshire division is now worth and how quickly it is growing as the demand for energy and efficient energy systems in the U.S. expands.