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13th May 2022

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Berkshire after Buffett: ‘Greg will keep the culture’

It was a pause just long enough for the astute Berkshire Hathaway investor to notice. Charlie Munger and Warren Buffett were sparring over whether Berkshire — the $631bn conglomerate they oversee — could ever be too large to manage.

“Greg will keep the culture,” Munger, the 97-year-old vice chair, said in their back and forth. It was an observation that made Buffett very briefly miss a beat.

Greg Abel is Berkshire’s 58-year-old vice chair who shepherds the company’s non-insurance investments. These include the Burlington Northern Railroad, wide-ranging manufacturing businesses and the utilities that he once ran as chief executive. He is also one of the two men most frequently tipped to one day take over from Buffett.

The good news with Greg was he had the answers on his tongue. There was no question or ambiguity in his responses

While a succession plan has been drawn up by the board, the heir apparent has been kept from the wider world. It is a secret that has captivated Berkshire shareholders for at least a decade and is among the big questions that plague the company given Munger and Buffett’s ages. Buffett will celebrate his 91st birthday this August.

On Saturday, investors were given their closest look yet at Buffett’s two top lieutenants: Abel and his colleague Ajit Jain.

On stage, the pair sat side-by-side with Buffett and Munger at the year’s annual meeting, taking questions and defending their strategies. Abel spent much of his time making the case for Berkshire’s renewable energy investments and why the company did not need to adopt a shareholder proposal that would require it to report on measures its companies are taking on climate change.

Ed Walczak, a portfolio manager at Vontobel, was among the investors who noticed the comment by Munger, which came late in the day’s three-and-a-half hours of questions. He said it was interesting that the response surfaced when neither Munger nor Buffett had been asked directly about who would take over.

“The good news with Greg was he had the answers on his tongue. There was no question or ambiguity in his responses,” he said. “Let’s hope Charlie is right that the culture can be replicated.”

Abel played a more high-profile role on Saturday, after a rather subdued showing the previous year when he joined Buffett at a sombre annual meeting and played a supporting role to his boss. This year he offered his thoughts on the inflation pressures affecting Berkshire, the takeover battle for rival rail operator Kansas City Southern, as well as how he spends his days at work.

Greg Abel is one of the two men most frequently tipped to take over from nonagenarian Warren Buffett © Bloomberg

“I’m trying to understand what our competitors are doing, what’s the fundamental risks around those businesses, how they’re going to get disrupted,” he said. “It always comes back to are we allocating our capital properly in those businesses relative to the risk?”

James Shanahan, an analyst at Edward Jones, said Abel came across as a “very capable” executive and that the meeting benefited from both his and Jain’s presence. The pair offered insight into one area where investors have complained they are slightly starved of information: how the company’s underlying operating businesses are performing.

Given the “Berkshire playbook, which does not have an active investor relations function, Greg’s sharing of information and transparency was a welcome change”, said Cathy Seifert, an analyst who covers the company at CFRA Research.

Abel and Jain were promoted in 2018 to vice chairs of the company, cementing their status as frontrunners for the chief executive role and making them among the most visible Berkshire executives alongside Todd Combs and Ted Weschler, who help manage Berkshire’s investment portfolio. Buffett said at the time that the promotions were “part of a movement towards succession”.

But Buffett’s succession plan has drawn fire from some big shareholders. BlackRock this year voted against Walter Scott, head of the board’s governance committee, citing “limited disclosure on succession planning,” among other things. Buffett’s outsized leadership role at Berkshire makes the succession risk even greater, BlackRock said.

“There is this parlour game about succession,” Seifert said. “From Berkshire’s perspective the succession issue has been resolved and to paraphrase . . . they’ve got Greg.”

Abel or one of his contemporaries will face challenges when they inherit Berkshire, even if the company is not immediately in flux. Buffett plans to donate the vast majority of his wealth, which is primarily held in shares of Berkshire Hathaway’s class-A stock. As those shares are converted to class-B and sold on to new investors, the group may face more pressure from its shareholders and potentially draw scrutiny from an activist, Seifert said.

Buffett himself has conceded this point. In 2019 he said “there are no perpetuities” and Berkshire “needs to deserve to be continued in its present form”.

Pressure is already building. Investors this year have increasingly voiced frustration with Berkshire’s efforts on climate change. A shareholder proposal on climate change disclosures garnered about 25 per cent of the votes cast, a figure that belies the widespread investor support for Berkshire to adopt the measures. Buffett’s class-A stock has 10,000 times the voting power of the class-B common stock that is more widely held by the general public.

Big holders of that class-B stock, including BlackRock and Norges Bank, voted in favour of the proposal.

“Remaining shareholders that voted in support of the resolution sent the company a strong message about the importance of acknowledging climate risk,” said Dan Bakal, a director at Ceres, a sustainable investor network.

Shanahan added that Buffett’s stake distorted the outcome of the vote, but that over time the shift by the shareholder base would leave a mark on the company. “I think that he kicked the can down the road, but it’s inevitable that investors and other stakeholders will demand disclosure about progress.”

Buffett spent part of Saturday defending how he had steered the company through the crisis and justifying why the Berkshire board advised stockholders to vote against two shareholder proposals. In characteristic fashion, he also joked about the two nonagenarians at the top.

“People talk about the ageing management at Berkshire,” he said. “I always assume they’re talking about Charlie, when they say that. But I would like to point out that in three more years [when Munger turns 100], Charlie will be ageing at 1 per cent a year. No one is ageing less than Charlie.”

Additional reporting by Patrick Temple-West

2021-05-03 00:00:00

#Berkshire #Buffett #Greg #culture

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