Effective Succession Planning for Berkshire Hathaway - Case Study Example

and No. (Succession Issue at Berkshire Hathaway) 13 December Introduction The main problem facinginvestor Perez today is whether to make his investments in Berkshire Hathaway. In particular, his dilemma is to make an honest assessment of investment risks considering that its founder, Mr. Warren Buffett, is about to retire and is ready to hand over the management of the investment company to a designated much younger successor. As Mr. Buffett is considered as a living investment legend, it is hard for anyone to succeed him. There are several issues associated with succession in an investment firm especially for a very big one like Berkshire Hathaway that handles several billions in its portfolio. This short paper looks at some of the important considerations before Mr. Perez can make up his mind. Discussion Although Mr. Buffett and his co-manager, which is Mr. Munger, have both agreed that Mr. Todd Combs fits their criteria for their successor, the market did not react very favorably. In fact, on the date of their announcement of an heir apparent, the stock price of the Berkshire Hathaway shares had slumped by 1.3% on the news (Ng, Pulliam & Zuckerman 1). Obviously the market is not as enthusiastic about Mr. Combs as both Mr. Buffett and Mr. Munger are. There are several important issues that must be resolved in full satisfaction for such an important matter as succession as a fund manager of several billions worth of investments. In particular, the markets did not share their confidence in Mr. Combs purported ability to make the same investment decisions as Mr. Buffett had made over the years to build his Berkshire Hathaway into a real giant in the investment world. A memorandum-letter that follows in the next pages details some of the crucial considerations to arrive at a sound risk assessment. FROM: (My office address here) Date December 13, 2010 TO: Investor Mr. Perez (Office address of Mr. Perez) Dear Investor Perez, Greetings and good day! It has come to our attention that you are interested to make an investment in Berkshire Hathaway but is concerned about the succession issue at the firm once Mr. Buffett retires soon. The firm had found a worthy successor in the person of a Mr. Todd Combs whom both Mr. Buffett and Mr. Munger had announced to a be a perfect fit. In this connection, here is our assessment of the investment risks involved once Mr. Combs will take over the entire management of Berkshire Hathaway’s investing activities. Investment Philosophy – perhaps this is the most crucial issue or aspect whenever the issue of succession is discussed in any organization, more especially in an investment firm. In this connection, Mr. Combs was found by Messrs. Buffett and Munger to fit exactly with the corporate culture of Berkshire Hathaway which Mr. Buffett had described as being “no fuss.” As most people know, Mr. Buffett had lived a very simple life despite earning several billions over the years he had been investing. He still lived in the same old house he bought several decades ago and drives the same old car bought a few years back. He also does not use much of the Internet or the e-mails which most executives today find very convenient. This means Mr. Buffett is a very simple and conservative man, in terms of his investment outlook and in terms of life philosophy. Mr. Buffett had said that Mr. Combs will fit exactly in their company culture because an ability to do so is important for a persons success especially when working together with other people. This means Mr. Combs should be a simple man and a team player. Mr. Buffett is obviously concerned that Mr. Combs will continue the same investment philosophy that has guided Berkshire Hathaway to tremendous success over the years. This is why Mr. Buffett had chosen Mr. Combs whom he thinks will not only follow the same culture at the company at present but will even continue and perpetuate it once Mr. Buffett himself is no longer around. In his own words, he wants a corporate culture at the firm to be embedded. Management experts term this preference for a particular successor as someone who has all its necessary elements called as competencies or the specific personal skills needs to do a job. In this case, the perceived competencies of Mr. Combs can be generic or in what Mr. Buffett has been looking for from interviewees (job applicants) is a culture-specific competency skills set (Rothwell 93). In short, what Mr. Buffett wants is continuity at the firm. With billions at stake plus his near mythical reputation, Mr. Buffett wants to make sure his legacy will live on. Not just any person will do who has not only the intelligence, the patience and business acumen in selecting someone but a person who fits into the companys cherished tradition and culture. The Right Temperament – Mr. Combs seems to have the right temperament or manner of thinking and behaving which mirrors that of Messrs. Buffett and Munger. It simply means Mr. Combs shares the same investments outlook, tolerance for risk, the required patience and the same skills as Mr. Buffett has. As everybody in the investing world already knows quite well, Mr. Buffett looks at investments in the long term. His investing style is that of the value investor which he had in turn learned from the great Prof. Benjamin Graham. In essence, what this concept entails is looking at a particular stock which has an unjustifiably low valuation in relation to its real or intrinsic value. This undervaluation can result from certain externalities in a free market in which not all information is available to investors. In other words, value investing is seeing value in what the market had undervalued for the time being but which is expected to rise in the future once the market sees its mistake and corrects the price higher. Analytical Skills – the skills set Mr. Combs apparently seems to have at the moment, but unofficially at Berkshire Hathaway, he still is considered to be under probation and needs to prove his worth as an investment manager. He had proven while still at business school for his having chosen a contrarian approach to their professors challenge by shorting “leveraged energy-related stock” and came out ahead in his graduate school class. However, there are a few serious questions about his entire investment approach because Mr. Combs tends to seek out how to minimize his downside risks rather than focusing on the next big huge gainers. An approach like this will not maximize his fund at all, he is more risk averse than risk tolerant. It is a sharp contrast to the value-investing principles of Mr. Buffett which are to look at the firm potentials of a certain company in its chosen industry. In the long run, Mr. Combs preference to work alone and develop his own ideas may work against him because he will not be aware or exposed to the investment ideas of other investment managers like him. He has effectively isolated himself from the investment community and this is a minus factor for him. Conclusion Mr. Todd Combs is still a work in progress and his present investment record is not at all that exceptional. His fund managed less than the overall markets return last year and this year has already lost about 4% although cumulatively, the fund earned some 34% since its launch. This is not a very impressive performance compared to other similar funds or when compared to the record of either Warren Buffett or George Soros. In this regard, I can maybe recommend a half investment (whatever amount is being contemplated to be invested) at this time and see how things will turn out for the next 12 months and review things again by then. Sincerely yours, (Your name here) Works Cited Ng, Serena, Pulliam, Susan and Gregory Zuckerman. “Buffett, Combs is a 100% Fit.” The Wall Stree Journal. 26 Oct. 2010. Web. 10 Dec. 2010. Rothwell, William J. Effective Succession Planning, Ensuring Leadership Continuity and Building Talent from Within. New York, NY, USA, AMACOM, 2010. Print. Read More