Buffett Turns to Deputies to Help Find Successors for Unit CEOs

Buffett Turns to Deputies to Help Find Successors for Unit CEOs

Warren Buffett isn’t the only chief executive officer that Berkshire Hathaway Inc. (BRK/A) shareholders have to worry about replacing. Managing CEO turnover has become more demanding with the company’s expansion. Last week the Benjamin Moore paint unit named its third chief in two years, bringing in an executive who worked before with Ted Weschler, 52, one of Buffett’s investing deputies.As the company grows and managers get older, Buffett, 83, can’t always count on his preferred method of naming CEOs, which is to ask leaders of the more than 80 businesses to find their own successors. Benjamin Moore shows that Buffett is relying on newcomers like the paint maker’s chairman, Tracy Britt Cool, 29, and Weschler to help with the task.

“Occasionally, you’re going to find subsidiaries that just don’t have a second-in-command,” Robert Miles, author of “The Warren Buffett CEO: Secrets from the Berkshire Hathaway Managers” said by phone. “But I think the system works.”

Since 2007, there have been internal promotions to CEO at subsidiaries including ice cream seller Dairy Queen; Cort, a furniture-rental company; luxury-plane operator NetJets; and MidAmerican Energy Holdings Co., which runs electric utilities and gas pipelines. Omaha, Nebraska-based Berkshire used a different playbook at Benjamin Moore, one of four units that counts Cool as chairman.

The 130-year-old paint maker, which Buffett bought in 2001 for about $1 billion, has been pressured in recent years as more people shop at big-box stores. The subsidiary relies on sales through independent retailers, an approach Buffett has said he supports even though it has led to clashes with management.

‘Differing View’

Denis Abrams was replaced as Montvale, New Jersey-based Benjamin Moore CEO in 2012 because of a “differing view” about strategy, Buffett wrote in a letter to the departing executive that year. On Sept. 27, the company said Abrams’s replacement, Robert Merritt, had left.

The new Benjamin Moore CEO, Michael Searles, ran Wilsons The Leather Experts Inc. while Weschler was on the retailer’s board and was one of its largest investors. That connection shows the investment manager’s evolving role since being hired by Buffett in 2011, said James Armstrong, president of Henry H. Armstrong Associates, which oversees Berkshire shares.

In addition to picking stocks for Buffett, Weschler has bid for a bankrupt mortgage business and negotiated a transaction that pushed the company deeper into newspapers. Weschler and Todd Combs, 42, have been designated to take over Buffett’s investing duties after his eventual departure. The billionaire has said his son Howard could serve as non-executive chairman and that the board has picked the next CEO.

Insulation, Parties

Cool’s portfolio has been growing at Berkshire since she joined in 2009 as Buffett’s financial assistant. She already made decisions about management changes at two of the four companies she oversees, Buffett said in May at a Fortune magazine event.

In addition to Benjamin Moore, her duties include leading the boards of insulation maker Johns Manville, party supplier Oriental Trading and frame maker Larson-Juhl. Manville promoted Chief Financial Officer Mary Rhinehart to CEO in 2012.

Berkshire turned to an outsider in 2009 when it brought on Beryl Raff, formerly of J.C. Penney Co., to lead Helzberg Diamonds after sales declined across the industry. Buffett didn’t return a message seeking comment.

The billionaire asks unit CEOs to send him a letter saying who should take over if a replacement is needed immediately. In a 2010 memo requesting that information, he emphasized his hands-off approach, telling the executives they can report to him “as little or as much” as they see fit, outside of large capital expenditures, acquisitions and changes to post-retirement benefits.

‘Enormous Responsibility’

“We give an enormous responsibility to the managers of our businesses, probably more than any large company,” he said at the Fortune event. “We want them to feel like they have a sense of ownership.”

That arrangement allowed Berkshire to keep its headquarters staff to two dozen, even as the company expanded to employ more than a 280,000 people, he said.

Management turnover at some of the smaller units shouldn’t worry Berkshire investors, said Armstrong. The company’s profit comes primarily from a few businesses, such as railroad Burlington Northern Santa Fe and auto insurer Geico.

“They’ve had so much less turnover than any other company their size, and these smaller units are not going to move the needle,” said Armstrong. “What you really need is good leadership at the railroad; you need good leadership in insurance; you need good leadership in the electric power business. That’s really what generates most of the earnings.”

Miles said history is a good guide for how well Buffett’s system of managing turnover works. When David Sokol resigned in 2011 after disclosing he bought stock in a Berkshire acquisition target, Buffett was able to name replacements to fill his roles overnight, the author said.

The system has also bred loyalty. In all his years running Berkshire, Buffett “hasn’t lost one CEO to a competitor,” even though he’s had to fire a few, Miles said. “Who can say that?”

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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