Changes in Leadership and CEO Succession - Essay Example

Changes in leadership and CEO succession Succession planning is integral for organizations, as it creates a favorable environment for a seamless transition from one leader to another. For most organizations, succession plans entail either grooming a senior executive or recruiting an exemplary leader from another organization to take up the mantle of leadership. This is far from the case in Berkshire Hathaway Inc. whereby the succession plan is more complex and elaborate. In order to understand Berkshire Hathaway’s plan, it is important to understand the organization’s background. Although currently specializing in investment banking and asset acquisition the company traces its roots to the textile industry. Founded in 1839 by Oliver Chace, the Valley Falls Company specialized in textile manufacturing. Its 1889 merger with Berkshire Cotton Manufacturing saw the company’s name change to Berkshire Fine Spinning Associates. The company’s final merger then followed this in 1955 with Hathaway Manufacturing Company, which resulted in its new name Berkshire Hathaway. Initially, the company had been successful expanding its operations across the US. However, after the World War I, a decline in the textile industry led the company shutting down several of its mills. This was when (1962) Warren Buffet began buying stock in the company. By 1964, Buffet had acknowledged that the waning textile industry would not lead to an improvement in the company’s finances; therefore, he agreed to sell his shares when he received an oral tender offer from Seabury Stanton (the company’s owner). Stanton’s failure to uphold his end of the bargain rendered the deal void, which motivated an aggrieved Buffet to purchase more shares from the company to become majority shareholder. In 1967, Buffet set his sights on insurance, and decided to purchase the National Indemnity Company. Since then, he shut down the remaining textile mills and continued to acquire subsidiary companies while investing in the stock market. Currently, Forbes magazine ranks Berkshire Hathaway as the fifth biggest public company in the world. Presently, Buffet serves in the capacity of CEO, Chairman, Chief Investment Officer (CIO) and majority shareholder. As such, the company must find an individual or group of individuals with the expertise required to perform the diverse functions. The proposed succession plan is split into five parts whereby three parts focus on personnel, one on corporate culture and the last on institutional ownership. The company’s Board of Directors proposes that Buffet’s managerial position should be split into two functions, an investment function and an executive function. The person assigned the executive function will be responsible for capital allocation, overseeing Berkshire Hathaway’s acquisitions and other CEOs of the company’s subsidiaries. In addition, the person will hold the title of Chief Executive Officer (CEO). For this function, the board has identified the group of CEOs in charge of the company’s subsidiaries as possible candidates. Cunningham posits that the person chosen for this function will be an individual Buffet holds with high regard and interacts with on a regular basis. Conversely, two people will handle the investment function, Todd Combs and Ted Weschler. Hired by Buffet to invest a percentage of the company’s capital assets, the two will now take on the company’s entire investment portfolio. However, it is important to note that investment portfolio only accounts for twenty percent of the company’s revenue value. The two main responsibilities of the two men will be deciding when to acquire or dispose of stock (shares) and what to do with the generated revenue. Buffet proposes that one of his family members should replace him as Chairman of the company. Many speculate that his eldest son Howard will take on this responsibility. The decision to assign the position to a family member rests on Buffet’s fixation on sustaining the company’s cultural heritage. Having a family member serving in this capacity will help ensure that preexisting policies remain in place; therefore, maintain the organization’s culture. For most people, the focus remains on what will happen to Buffet’s controlling interest in the company. Presently, Buffet owns 20.5% of the company’s economic interest (shares) and 34.41% of the voting power (Cunningham). Based on predictions made by analysts, the company will no longer have a controlling shareholder after Buffet’s exit. This is not the case as per the company’s succession plan, which outlines the distribution procedure of Buffet’s shares. As per the document, distribution will occur gradually over a period of twelve years whereby the beneficiaries will in turn get an opportunity to liquidate the shares steadily on an annual basis. This system is intended to transfer control gradually to the general market rather than abruptly. In my opinion, the proposed succession plan indicates Berkshire’s desire to ensure a seamless transition from Buffet to his successors. In addition, ample preparation prior to succession reassures stakeholders, as the company is not likely to fall into destruction after the change in leadership. The plan shows that company has prepared amply based on taking a couple of relevant facts into consideration. For example, based on the company’s size and net worth, assigning all these responsibilities to a single individual might prove overwhelming for the individual; therefore, result in problems for the organization. In light of this, opting for non-devolution of functions by putting his son, choosing a top manager or hiring a talented CEO from another company would not result in beneficial outcomes for the company. Another proposal was to sell off the company’s subsidiaries. This would also not suffice, as the organization’s culture does not allow for such an action. Buffet built Berkshire Hathaway based on a performance-oriented model. He encouraged all the CEOs in charge of the subsidiary companies to run their organizations like their only asset never to be sold. By looking at the subsidiary companies from such a perspective, Buffet encouraged the CEOs to focus on long-term maximization of these subsidiaries’ economic value. Selling off these subsidiaries would also destroy his legacy and fixation on ensuring the sustenance of preexisting policies. It would also not be in the best interest of the company’s stakeholders who benefit financially from the extensive network of subsidiary companies. Reference Cunningham, L. A. (2014). Beyond Buffett: The Enduring Value of Values. New York: McGraw Hill. Read More