Focus on PRACTICE
Berkshire Hathaway—Can Buffett Be Replaced?
In early 1980, investors could buy one share of Berkshire Hathaway Class A common stock (stock symbol: BRKA)for$285. That may have seemed expensive at the time, but by September 2010 the price of just one share hadclimbed to $125,000. The wizard behind such phenomenal growth in shareholder value is the chairman ofBerkshire Hathaway, Warren Buffett, nicknamed the Oracle of Omaha.
With his partner, Vice-Chairman Charlie Munger, Buffett runs a large conglomerate of dozens of subsidiaries with 222,000 employees and more than $112 billion in annual revenues. He makes it look easy. In his words, “I’ve taken the easy route, just sitting back and working through great managers who run their own shows. My only tasks are to cheer them on, sculpt and harden our corporate culture, and make major capital-allocation decisions. Our managers have returned this trust by working hard and effectively.” Buffett’s style of corporate leadership seems rather laid back, but behind that “aw-shucks” manner is one of the best analytical minds in business. He believes in aligning managerial incentives with performance. Berkshire employs many different incentive arrangements, with their terms depending on such elements as the economic potential or capital intensity of a CEO’s business. Whatever the compensation arrangement, Buffett tries to keep it both simple and fair. Buffett himself receives an annual salary of $100,000—not much in this age of supersized CEO compensation packages. Listed for many years among the world’s wealthiest people, Buffett has donated most of his Berkshire stock to the Bill and Melinda Gates Foundation.
Berkshire’s annual report is a mustread for many investors due to the popularity of Buffett’s annual letter to shareholders with his homespun take on such topics as investing, corporate governance, and corporate leadership. Shareholder meetings in Omaha, Nebraska, have turned into cultlike gatherings, with thousands traveling to listen to Buffett answer questions from shareholders. One question that has been firmly answered is the question of Mr. Buffett’s ability to create shareholder value. The next question that needs tobe answered is whether Berkshire Hathaway can successfully replace Buffett (age 80) and Munger (age 86).In October 2010, Berkshire hired hedge fund manager Todd Combs tohandle a significant portion of the firm’s investments. Berkshire shareholders hope that Buffett’s special wisdom applies as well to identifying new managerial talent as it does to making strategic investment decisions.
The share price of BRKA has never been split. Why might the company refuse to split its shares to make them more affordable to average investors?