Buffett Lauds Sokol for NetJets Amid Interest in Berkshire CEO Succession

Warren Buffett, who hasn’t announced a successor at Berkshire Hathaway Inc., praised David Sokol, the firm’s most visible lieutenant, for his work in turning around luxury flight operator NetJets Inc.

“We are now operating NetJets at a very decent profit,” Buffett, 79, told Berkshire shareholders today in Omaha, Nebraska, at the company’s annual meeting. “I owe David Sokol enormous credit. He turned that thing around like no one could have.”

Buffett, now in his fifth decade as Berkshire chief executive officer, often boasts about the collective ability of the scores of managers who report to him. Shareholders pay closer attention when he singles out an executive for praise. Accolades for Sokol, 53, reinsurance chief Ajit Jain and Geico Corp. CEO Tony Nicely have fueled talk in past years about who will be next to lead Berkshire.

“Sokol clearly is it today,” Andrew Kilpatrick, who wrote the three-volume “Of Permanent Value: The Story of Warren Buffett,” said before the shareholders meeting. “If Buffett lives for a long time, it could be someone else.”

Buffett’s esteem for the executives he oversees rises and falls as the group is tested in good markets and bad. In the last year, 65-year-old Richard Santulli, the NetJets founder, was dropped from shareholders’ lists of CEO contenders, and younger managers like Matthew Rose of railroad Burlington Northern Santa Fe Corp. joined Berkshire.

Emerging Stars

“New managerial stars may emerge and present ones will age,” Buffett told investors in his 2005 annual letter, laying out Berkshire’s approach to settling on his replacement. At the time, Berkshire had three “reasonably young” candidates who could take over should Buffett die suddenly, the CEO said.

Sokol, Berkshire’s energy chief, added responsibility for NetJets in August. He has helped Buffett with an investment in China’s BYD Co. and a rescue package for Constellation Energy Group Inc. Shares in the Shenzhen-based electric-car maker have more than tripled in the last 12 months and Buffett reported a $917 million profit after Constellation reversed course.

Berkshire is a “long-term investor” in BYD, Sokol said in an interview today in Omaha. Vice Chairman Charles Munger, 86, said the investment might not have happened without Sokol.

“Dave Sokol helped,” Munger said. “I wasn’t sure I could get Warren to do this myself.”

Sokol is “a first-class guy, but the other ones are, too,” Berkshire board member Thomas Murphy, 84, said of the CEO candidates in a Bloomberg Television interview on April 22. “And of course, it depends on when the decision is made. If Warren’s around here five years from now, it might not be the same. I hope he’s around five years from now.”

‘Not a Problem’

Buffett said today that the question of who’ll succeed him is “not a problem.”

“For right now you want to be prepared,” Buffett said. “I had a physical. I came out fine. My doctor is not here today. It drives him nuts that I eat what I do and he can’t find anything wrong.”

Buffett, also Berkshire’s chairman, acquires managerial talent by takeover. He and Munger target well-managed companies and entice CEOs into selling their firms by promising to leave management in place. Sokol sold MidAmerican Energy Holdings to Berkshire in 2000 for $8.3 billion, including assumed debt. Rose, 51, joined the firm in February with the $27 billion sale of Burlington Northern, the biggest takeover of Buffett’s career.

Divided Duties

Buffett’s responsibilities will be split, upon his death or retirement, among at least three people. A CEO will oversee the collection of more than 70 operating units assembled by Buffett and Munger, and an investment chief will be appointed to allocate capital and manage Berkshire’s portfolio. Buffett’s son Howard will probably assume the position of non-executive chairman to preserve the firm’s culture.

Buffett’s eventual replacements will take charge of a $190 billion company whose composition and culture is largely the expression of just one person. The CEOs of each operating unit from Fruit of the Loom to Dairy Queen to Geico were vetted by Buffett in acquisitions and promotions. Shareholders, who turn out in the tens of thousands for the annual meeting, are drawn by Buffett the manager, as much as by the assortment of businesses he’s assembled.

Sokol’s energy division accounted for 14 percent of Berkshire’s pretax profit last year, while insurance operations produced 61 percent, according to Bloomberg data. The underwriting businesses, which cover risks from car crashes to earthquakes, are overseen by several managers and provide Buffett with investable funds in addition to earnings.

Ajit Jain

Jain, 58, oversees about 30 people in a reinsurance division that gave Buffett access to $26 billion of funding for his investments as of Dec. 31. This accumulated premium, or so- called float, is generated from Jain’s bets on large risks like natural disasters. It’s so important to Berkshire that Buffett instructed shareholders on what to do if they’re ever faced with a shipwreck and a choice to save him, Munger or Jain.

“Swim to Ajit,” Buffett said in his annual letter.

At today’s meeting, Buffett praised Jain for running “a disciplined operation.”

“Ajit cannot be replaced,” Buffett said. “When I tell you the value that Ajit has added to Berkshire, believe me, I’ve understated.”

Nicely, 66, has reported to Buffett since Berkshire bought Geico in 1996, and has won praise from his boss for delivering profits and signing up new drivers. Nicely “continues to gobble up market share while maintaining disciplined underwriting,” Buffett said last year.

Reviving NetJets

Santulli, once considered a favorite to succeed Buffett, was caught off guard by the recession and allowed NetJets to slide into losses before leaving the firm. Sokol fired pilots and wrote down the value of airplanes to restore profits.

“His leadership has been transforming,” Buffett said in his annual letter of Sokol’s work at NetJets. “After suffering a staggering loss of $711 million in 2009, the company is now solidly profitable.”

Buffett also praised Grady Rosier, CEO of the McLane food distributor, in his annual letter, for turning in record profits as other Berkshire manufacturing, service and retailing units suffered in the economic decline.

Buffett brought Comcast Corp. Chief Operating Officer Stephen Burke, 51, to Berkshire as a board member in December.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

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