Warren Buffett, the Berkshire Hathaway Inc. (BRK/A) chief executive officer preparing the firm for his eventual departure, praised the company’s roster of CEO candidates as he criticized former manager David Sokol for his stock dealings.
“There is no real chance the next CEO comes from outside of Berkshire,” the 80-year-old billionaire said yesterday at a press conference in Omaha, Nebraska, site of the company’s annual meeting. “If you picked the worst of the candidates we have, that person would be very, very good.”
Buffett sought to reassure investors as he fielded questions about the departure of Sokol, who announced his resignation in March after he’d purchased shares in Berkshire takeover target Lubrizol Corp. (LZ) Buffett said Sokol violated the company’s insider-trading rules.
Sokol’s stock deals, which Buffett called “inexplicable” considering his wealth, depleted Berkshire’s list of possible CEOs. Berkshire said in February that it had four candidates, without identifying them.
“The leading candidate right now, I would lay a lot of money on him being straight as an arrow,” Buffett said at the April 30 meeting. He didn’t name the executive.
Berkshire may have to revamp its internal controls, said Lawrence Cunningham, a professor at George Washington University, who compiled selections from Berkshire’s annual letters into a book.
“This fellow built it over 40 years, he knows all the managers personally and hand-selected most of them, and relies heavily on personal, informal trust relations that any successor won’t have,” Cunningham said in an interview. “The tasks facing the successor include installing a conventional reporting and control structure that will inherently alter the governance structure.”
Buffett defended Berkshire’s rules and code of conduct. He said the company would evaluate its policies after Sokol, adding, “We hope to get some value out of this experience.”
Berkshire’s Class A shares dropped $1,918, or 1.5 percent, to $122,832, at 3:59 p.m. in New York Stock Exchange composite trading. The stock climbed 2 percent this year.
Buffett’s responsibilities will be split, upon his death or retirement, among at least three people. A CEO will oversee the operating units and one or more investment managers will take charge of the portfolio. Buffett said his son Howard will probably assume the position of non-executive chairman and has “no designs” on taking over.
Praise for Jain
Buffett, who’s also Berkshire’s biggest shareholder, singled out reinsurance chief Ajit Jain, for praise on April 30. Jain, 59, has a mind that “works like a machine,” he said.
“I can’t think of any decision he’s ever made that I could have made better,” Buffett said. “I don’t know what his best deal was. I know what my best deal was: It was hiring him.”
Buffett visited India in March, after learning about Sokol’s Lubrizol trades. At a press conference in Bangalore, he praised Jain as “totally honorable” and said Berkshire directors would support him as CEO. The remarks came the week before Buffett disclosed Sokol’s trades and resignation.
Howard Buffett, who may help select his father’s successor, said Berkshire’s circle of most trusted managers, like Jain and Tony Nicely, will expand to include railroad chief Matthew Rose. The billionaire’s son said the heads of many of the company’s units have won his father’s trust.
“A lot of these CEOs are close to my Dad,” Howard Buffett said in a Bloomberg Television interview. “I mean Tony, Ajit. And I’m sure Matt will be closer as time goes on.”
Rose, 52, joined Berkshire last year after selling Burlington Northern Santa Fe, which he runs as CEO, to Buffett for $26.5 billion. Buffett has overseen Nicely, 67, CEO of car insurer Geico, since 1996 when Berkshire acquired full control of the unit. Buffett hired Jain more than 20 years ago to run a reinsurance business for Berkshire.
“Candidates change,” Howard Buffett said. “People often want him to come out and say, ‘Here’s the person,’ but that’d be foolish because that person can change.”
Warren Buffett’s eventual replacements will take charge of a $200 billion company whose composition and culture are 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 before acquisitions and promotions.
Sokol, 54, was considered by Buffett biographer Andrew Kilpatrick as the top CEO candidate before stepping down. Buffett announced Sokol’s departure in a March 30 statement that also described the Lubrizol stock deals.
Sokol bought about $10 million of Lubrizol shares in January while representing Berkshire in discussions about buying the lubricant maker. Lubrizol jumped 28 percent on the New York Stock Exchange on March 14 when Buffett announced a deal to buy the company for about $9 billion.
Berkshire turned over “very damning evidence” about Sokol’s deals and acted promptly in informing the Securities and Exchange Commission, Buffett said. “He violated our insider- trading rules and he violated the principles I lay out every two years to our managers,” he said.
Those remarks contrast with comments from March 30, when Buffett cited Sokol’s “extraordinary” contributions to Berkshire.
Lack of Outrage
“What I think bothers people is that there wasn’t some big sense of outrage,” Buffett said when asked about his original statement. “This fellow had done a lot of good things for us over 10 or 11 years, and I felt that if I’m laying out a whole bunch of facts that are going to create lots of problems for him for years to come, that I also list his side of the equation.”
Berkshire Vice Chairman Charles Munger, who also took questions, said he was glad that Buffett hadn’t initially acted out of anger.
“That press release was not the cleverest press release in the history of the world,” Munger said. “You want to display as much ruthlessness as your duty requires, and you do not want to add one single iota because you’re angry.”
“At no time did Mr. Sokol violate the law or any Berkshire policy,” Barry William Levine, a lawyer for Sokol at Dickstein Shapiro LLP in Washington, said in an e-mailed statement. “At no time did Mr. Sokol intend to personally profit at the expense of Berkshire or its shareholders. At no time did Mr. Sokol mislead or deceive.”
Buffett oversees the heads of Berkshire’s more than 70 subsidiaries with the help of Munger, 87, and a staff of about 20 at the company’s headquarters in Omaha. Berkshire employs more than 250,000 people across industries spanning insurance, energy and consumer goods, and Buffett entrusts operational authority to the CEOs of the individual units.
“The next CEO will do it his own way and he’s likely to do it somewhat differently,” Buffett said yesterday of Berkshire’s reporting structure. “He won’t be changing the culture.”
Buffett hosted his annual gathering for thousands of investors over the weekend at the Qwest Center, an arena in Omaha, and discussed topics ranging from Berkshire earnings to the outlook for more acquisitions.
Berkshire announced that its first-quarter profit slumped by 58 percent as natural disasters led by the Japan earthquake in March eroded insurance earnings. Buffett said the firm may have its first annual insurance underwriting loss in nine years. Net income dropped to $1.51 billion from $3.63 billion a year earlier, Berkshire said in a statement.
Berkshire is seeking purchases in the U.S. and abroad, Buffett said. It is considering a “small” acquisition in Canada for its Marmon Holdings unit, which produces industrial products, he said.
The firm would consider deals in “dozens” of countries if “we like their prospects and we like their management,” Buffett said at yesterday’s news conference. “We will answer the phone or open the letter that comes from Taiwan, China, Japan, India.”
To contact the editor responsible for this story: Dan Kraut at email@example.com