Berkshire Succession Gains Scrutiny That Also Dogged Jobs
Berkshire Hathaway Inc. (BRK/A)’s board of directors should update shareholders annually on the status of Chief Executive Officer Warren Buffett’s successor, to ensure the firm sticks to a plan to name an insider, the AFL-CIO said.
Berkshire opposes the union’s proposal that the firm have a written policy to ease the eventual transition from Buffett, 81, who said last month that the Omaha, Nebraska-based company had identified a successor, without publicly disclosing who that is.
“We’re pleased they have picked an internal candidate because that’s important for the success of a company with a strong culture like Berkshire Hathaway,” said Brandon Rees, acting director of the AFL-CIO office of investment. “We’d prefer to have an assurance it’s the board driving the process and have an annual update on the process.”
Apple Inc. (AAPL), News Corp. (NWSA), FedEx Corp. (FDX) and Bank of America Corp. (BAC) are among firms whose investors previously had raised concerns that succession planning lacked clarity. Sixty-one percent of publicly traded companies don’t have a CEO- replacement plan, according to Korn/Ferry International, a Los Angeles-based executive recruiting firm.
The AFL-CIO Reserve Fund holds 1,282 shares of Berkshire’s Class B common stock valued at $103,932 as of March 16. The fund’s resolution, to be considered at the May 5 annual meeting, was put forth in part out of concern that the departure in April of Buffett lieutenant David Sokol created uncertainty about succession plans, Rees said.
“We’re encouraged now that they have since disclosed there is an internal candidate and two back-up candidates,” he said.
The AFL-CIO, which represents 12 million workers in 57 unions, doesn’t expect Berkshire to identify a candidate by name, just to assure that it’s someone who can maintain the corporate culture Buffett has established, Rees said.
Rees said he understands the resolution probably will be defeated. Similar resolutions failed in 2010 and 2011 at Bank of America, Verizon Communications Inc., Comcast Corp., FedEx, Kohl’s Corp. and United Natural Foods Inc., Rees said, citing data from Institutional Shareholder Services Inc., a proxy advisory company.
The Central Laborers’ Pension Fund made a similar request at Apple last year amid concerns that co-founder Steve Jobs’ health had deteriorated as he announced a third leave of absence since 2004. Shareholders rejected that proposal and Jobs relinquished the CEO title to Chief Operating Officer Tim Cook in August. Jobs died on Oct. 5.
“There are many companies with elderly CEOs who will need a replacement, and there are other situations where shareholders are very concerned about who will replace a popular company leader,” said Paul Hodgson, senior research associate at GMI Ratings, a New York-based governance consulting firm and rating service.
Clear plans for CEO succession are proper for good governance, he said. It’s not necessary for a company to give specific names because that might lead to other companies trying to poach the executive and it can be disruptive in terms of stock market reaction, Hodgson said.
Berkshire said in a proxy filing last week that the current process is sufficient.
“The board’s judgment as to the most capable successor could change over time and it would be highly unusual for a public company to name a successor for its CEO prior to either the incumbent leaving that position or to the establishment of a specific date for the CEO to relinquish the position,” the company said in the filing. “It would be inadvisable to publicly report on an annual basis its plans as requested by the proposal or to add additional details.”
Buffett didn’t identify the choice in his annual letter to shareholders on Feb. 25, saying instead that directors were “enthusiastic” and have had “a great deal of exposure” to the person designated to take over as CEO. Buffett didn’t specify a timeline for the switch.
Berkshire said last year that it had identified four company executives capable of being CEO. One had board approval to step in “should a replacement be needed currently,” according to a passage in a 2011 regulatory filing.
In addition to the current CEO successor designee, there are “two superb back-up candidates as well,” Buffett wrote in the letter.
Berkshire relies on Buffett, also the chairman and head of investments, to oversee a $77 billion stock portfolio and operating units with more than 270,000 workers. The board’s primary job is to ensure it has the right people running the business and that “the next generation of leaders is identified and ready to take over tomorrow,” Buffett wrote.
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