Greg and the culture

Greg will keep the culture.

This memorable slip by Charlie Munger last year led to public confirmation of the succession plan. I have been trying to figure out what he meant by it because the skill sets of Warren Buffett and Greg Abel are different enough that it is not immediately obvious there would be that much natural continuity between them.

“Culture” is a relatively amorphous term in the context of a business. Here are four possible derivations in this case:

  1. Maintaining Berkshire’s reputation, largely transferred from Mr. Buffett himself, for integrity and honesty. I think this is what Mr. Munger was talking about. Aside from nepotism, it’s the only explanation for elevating Howard Buffett to the post of non-executive chairman in the name of preserving Berkshire’s culture.

  2. The supremacy of capital allocation. Berkshire’s magic formula has been the genius of Mr. Buffett in allocating the company’s cash flows and insurance float among equity investments in the public markets, buying entire businesses, and collecting cash until opportunities for one of the first two improve. Mr. Abel’s career to date is that of a business operator, not an investor, so it is hard to know whether he has the skill to maintain this aspect of Berkshire’s business culture. He has engineered the growth of BHE, but that’s the only industry he’s worked in. One potential complication is the fact somebody else — Messrs. Weschler and Combs or their successors — will be handling equity investments in the public markets. Presumably Mr. Abel will determine how much cash they get to invest. On the other hand, the CEO would presumably be responsible for acquisitions. This division of capital allocation duties currently performed by one person suggests a rather different dynamic following succession.

  3. “Delegation to the point of abdication,” in Mr. Munger’s famous phrase. Again, this is a reflection of the founder, who is an investor, not an operator. Will an operator as CEO behave differently?

  4. The celebration of capitalism at the AGM and history of wide-ranging, acerbic, humorous public discussion by two of the best investors in American history. This aspect of Berkshire culture seems the most likely to depart with Messrs. Buffett and Munger. Mr. Abel may have many strengths, but wide-ranging, acerbic, humorous public discussion does not appear to be one of them.

I appreciate that No. 1 may be foremost on the minds of Messrs. Buffett and Munger as a matter of legacy, but to the extent that any of Berkshire’s approximately 370,000 employees are deterred from bad acts by invocations on the subject, I suspect it is Mr. Buffett’s legendary reputation that gives them weight. Lots of corporate executives call for virtuous behavior in messaging to employees but it’s not clear they have much effect on those inclined to take shortcuts.

As a shareholder, I think No. 2 is the most significant aspect of Berkshire’s business culture. Here I’m more concerned about continuity. Mr. Abel has been an accountant, electric company executive and, quite recently, a vice-chairman of Berkshire with responsibility for the non-insurance subs. At a company run for its entire history by a master investor, he is set to become the chief capital allocator. The confidence of Messrs. Buffett and Munger counts for a lot, but I’d be interested in knowing whether some of the more knowledgeable Berkshire shareholders here are sanguine about this, and, if so, why.

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I’m a fairly long time Berkshire owner (over 20 years), but not really all that knowledgeable.

I think Abel will be OK as co-ceo, but obviously no WB or CM. My thoughts are that Berkshire will basically go into “don’t screw it up mode” after new management takes over, and hopefully the board will have final say over any large acquisitions.

I envision a dividend will be put into place to keep retained earnings from growing too large and putting too much pressure on new management to “do something” with all the cash.

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Why would there ever be a dividend issued when the company has not issued one in over 50 years. A dividend would be a tax nightmare for longterm investors who have relied on this holding to not impact their year-end taxes.

I hope the company never becomes this short-sighted.

SD

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“My thoughts are that Berkshire will basically go into “don’t screw it up mode” after new management takes over”

Yes, that’s exactly what Chris Davis (a board member at Berkshire) said recently in an interview (if I recall correctly, to Consuelo Mack). He said that after the new management takes over, he would not like it to make large acquisitions but to focus on the existing businesses and invest wisely in the public markets.

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Like it or not, dividends are coming. It is just a matter of when and not if.

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Mr. Abel may have many strengths, but wide-ranging, acerbic, humorous public discussion does not appear to be one of them.
What a lovely choice of phrasing. Kudos.

More seriously, I’m with you, capital allocation is the key point. Upon that hinges the future success or failure of the venture.

In one way, the rest of the guff is just the scaffolding to allow for great capital allocation over long time frames.
(if the firm and its management are honest and honourable and respected, it gets to do it longer)

Jim

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I feel very good about the succession plan. WEB has been asked about it and has had a thoughtful plan in place for at least 30 years and is always looking ahead decades. I trust his judgement on the skill set and integrity of Greg, Ajit and T&T and think their records and reputations have been quite impressive. The general success formula and culture which has worked so well have been made clear over the decades and will be maintained imo. I would be ok with more Board oversight and maybe a leaner Berkshire. Let’s hope for continued repurchases and No dividend, at least for a good while.

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On the day Greg takes over, he’ll be inheriting a company whose assets were essentially 100% built by Buffett and it will be a fairly long and slow transition to a new Berkshire built by Mr. Buffett’s successor(s). [Unless they liquidate and reallocate the equity portfolio right out of the gate]

3-5 years post-transition, Berkshire might be roughly 80% Buffett-built and 20% post-Buffett.

10 years post-transition, Berkshire might be closing in on 50% Buffett-built, 50% successor-built.

And perhaps not until years 20+ post-transition would you see a Berkshire Hathaway with successor-built assets greatly outnumbering Buffett-built assets.

So while the transition to new management could happen in an instant, the “ghost of Mr. Buffett” will likely continue driving intrinsic value growth for a surprisingly long time. Even if Greg, Ted, and Todd prove to be poor capital allocators, it will probably take quite a long time for them to really “slow down the train.”

As a result, longtime Berkshire shareholders should not feel rushed into making any hasty sell decisions post-transition. If the first few Greg years lead you to want to sell, there should be PLENTY of time to wait for an attractive exit valuation.

I have 50% of my portfolio in Berkshire and the transition to Greg does not cause me to lose ANY sleep at night.

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@Johncleven, I share your sentiments regarding the future of Berkshire; I too am deeply vested in Berkshire and sleep well.

At the annual meeting, I learned something that will level this discussion around Abel and Capital allocation. BHE has already committed to capital to the tune of $120 Billion in Transmission and Renewable assets in this decade alone.
I have not independently verified this in the BHE site.

Thought this tidbit could be helpful in this discussion.

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Warren in the past has talked about a business so strong a ham sandwich could run it.

This meeting he joked that even an Alzheimer’s patient couldn’t wreck one of the businesses. Felt in poor taste to me.

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At the annual meeting, I learned something that will level this discussion around Abel and Capital allocation. BHE has already committed to capital to the tune of $120 Billion in Transmission and Renewable assets in this decade alone.

My understanding is that capital for this will be funded by BHE earnings and debt for regulatory reasons. That keeps customer costs down. This was discussed at the last annual meeting.

Since this type growth is probably grass roots, it won’t involve acquisitions and thus cash from the Berkshire parent.

Just my understanding.

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This meeting he joked that even an Alzheimer’s patient couldn’t wreck one of the businesses. Felt in poor taste to me.

I had the same, instant, reaction. I suspect the many of us who have had families impacted by Alzheimer’s feel the same.

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This story has been told multiple times before about the manager who went straight from the office to a nursing home because of dementia. The point is that the culture was so ingrained that the office that the office continued to hum even though the manager suffered from dementia .

10 years post-transition, Berkshire might be closing in on 50% Buffett-built, 50% successor-built.

That’s assuming the successor wildly successful. What key can stand 10 year:

  • Insurance all its subsidiaries
  • BSNF, BHE, few of the multi billions “operating companies”
  • Core equity portfolio
  • I expect some rationalization, and divestitures of small business that have low ROE.

If the first 3 is 50%, then you are looking at at least another $500 B of assets created by the new management. I doubt it.

For foreseeable future, operating business profits will be deployed in maintenance/ growth cap-ex, share buybacks and dividend.

The funds from small businesses divestiture will go towards some tuck-in acquisitions.

I am not expecting Greg to do empire building or expanding the empire, rather run it well and let nurture natural/ organic growth.

Of course future is unknown, and Greg may be even greater capital allocator.

I suspect the many of us who have had families impacted by Alzheimer’s feel the same.

They probably do, because people have become so damn emotionally fragile. According to that standard, we should also stop talking about blind trusts, or turning a deaf ear, or fat profits, or butt-kicking contests with one-legged people, because it will hurt so many people’s feelings who are blind, deaf, fat or who have lost a leg in an accident.

But I hope Buffett decides to keep speaking naturally and not to follow the woke extreme of his party on this.

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Given the degree of horrible capital allocation in the “average” US publicly traded business, I think the hurdle is fairly low for Abel.

With the system and culture Buffett has spent a lifetime painting, Berkshire doesn’t need heroics from Abel to do very well long term. As long as he is 1) rational, 2) has control of his emotions, and 3) treats shareholders like silent partners, I see no reason this will not work out fine.

And let’s not forget, Abel has been allocating capital for a very large and growing business for decades (with wildly good success, I might add). That alone puts him far ahead of almost every other CEO of any publicly traded firms.

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But I hope Buffett decides to keep speaking naturally and not to follow the woke extreme of his party on this.

Also worth bearing in mind that Buffett himself has a history of Alzheimer’s in the immediate family so it is not as if he is unaware of the issue.

His sister Doris who died recently suffered from it as well as his mother.

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As long as he is 1) rational, 2) has control of his emotions, and 3) treats shareholders like silent partners, I see no reason this will not work out fine.

Agree in principle. But between now and then, my one wish is that he learn to eschew obfuscation.

–sutton
(unnecessary obfucation, I mean. If you can’t answer the question, politely dcline to answer and go on the the next one. But don’t blow smoke at me, Mister.)

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(unnecessary obfucation, I mean. If you can’t answer the question, politely dcline to answer and go on the the next one. But don’t blow smoke at me, Mister.)

I agree. Warren often dances around and does not answer direct questions without declining to answer so it shouldn’t be that different. I’d prefer he say I won’t answer that but here is a story I’d like to tell.

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