Some Sage Wisdom for Warren Buffett

Who will fill the Oracle's shoes? Investors might sleep easier if their idol followed his own advice about openness

By Pallavi Gogoi

Another spring, another shareholder lovefest with the Oracle of Omaha, Berkshire Hathaway CEO Warren E. Buffett. Yet there was no joy in Nebraska on May 4, when Buffett declined to throw out the traditional first pitch at the Omaha Royals baseball game. Joked the 72-year-old Buffett in his annual letter to shareholders: "After my fastball was clocked at five miles per hour last year, I decided to hang up my spikes."

Buffett fans can soothe their fevered brows. At the Woodstock of Capitalism -- as his throng-drawing meeting is called -- he showed plenty of stamina. After bantering with shareholders for six hours, he signed autographs for many of the 15,000 who showed up. All the while, he downed with abandon his trademark Cherry Cokes and See's Candies. His hand was firm, his grip was sure.


  As any investor in Berkshire Hathaway (BRK ) will tell you, Buffett's health is an all-important matter. When he steps down -- which he insists will happen only when physical or mental incapacity forces him to do so -- the huge Buffett premium might fade quickly. With Berkshire's A shares trading at an unequaled $73,790 apiece -- 29 times trailing earnings -- the stock could face a steep slide.

To his credit, Buffett is paying some attention to the issue. On May 5, he presented his directors with a list of candidates he would like to see take his place. He does the same sort of presentation every few years. Troublingly, Buffett won't say who is on the list -- and neither will the coterie of insiders on his board.

Therein lies an interesting problem in the post-Enron era. This dogged advocate of good corporate oversight would never tolerate such secretiveness in the boards of other companies. Some of his shareholders also would like to see more candor. "If Buffett needs to reassess these people every two years, is it unreasonable to expect that shareholders would also require to assess them, rather than wait till the last minute?" asks Larry D. Coats, portfolio manager at Oak Value Fund (OAKVX ), where Berkshire stock accounts for 10% of the mutual fund. Good question.


  Buffett, who declines to talk about his reasons for not sharing with shareholders his thoughts on succession, has offered tantalizing hints in the past about how the company might run without him. Odds are that his job would be split among three people, with one honcho handling investments, another dealing with day-to-day operations, and a chairman upholding the shareholder-oriented culture. That seems to be a tacit acknowledgement that no single individual could handle the job as well as the Sage himself.

Certainly, it would be difficult for another person to weave the sort of magic that he does, given that Buffett has guided Berkshire to a 22% average annual earnings gain since 1965. "It would be inappropriate to try and seek another Warren Buffett -- there isn't going to be one," says David S. Ruder, a former Securities & Exchange Commission chairman, now professor of law at Northwestern University.

As Buffett and his board have refused to shed any light on potential successors, outsiders have filled in the blanks. In this parlor game, Buffett's son, Howard, is the odds-on favorite to take over the chairman's slot. And division chiefs Tony Nicely or Lou Simpson of Geico and Rich Santulli of NetJets are thought to be next in line.


  Yet, Buffett's vagueness about succession -- so 20th century in these good-governance days -- raises another disconcerting issue. This shareholder champion's own board falls regrettably short of new rules regarding independent directors. Of seven Berkshire directors, only one, Rhode Island banker Malcolm G. Chace, qualifies as independent.

That's why Buffett has drawn heat from the California Public Employees' Retirement System, the largest U.S. pension fund and the owner of 6,000 Berkshire A shares. The fund voted this year against the reelection of four directors: Susan and Howard Buffett, Buffett's wife and son; Ronald L. Olson, a senior partner at a law firm that pockets fees from Berkshire; and Walter Scott Jr., who owns a controlling stake in Berkshire's MidAmerican Energy Holdings Co. "These directors have family or business relationships that CalPERS believes could impair their objectivity," says the pension fund.

Such criticisms are unsettling because they're levied against a tireless advocate of good governance and outrageous CEO compensation. Coca-Cola (KO ) and Washington Post Co. (WPO ), companies where Buffett is a director, have likely felt his sting: They were among the first, for instance, to announce they would expense stock options, a hobbyhorse of his. At Berkshire, he has gone 22 years without a raise and pays himself only $100,000 a year, an amount he finds difficult to spend with his spartan lifestyle. CEOs across America would be wise to emulate that.


  Eventually, Buffett will overhaul his board -- and he says he'll comply with the independence rules in time to meet new, post-Enron mandates. Several people have already nominated themselves, he chuckles. Imagine what a job that would be? Who wants to second-guess a guru whose decisions -- often made in minutes -- fly from calculations done in his head or based on his gut feelings about management? In fact, such directors might really just serve to protect shareholders from a fire sale once Buffett decides to give up the top job.

For now, investors will just have to keep a close eye on their guru. Over time, plenty more will flock to the annual spring pilgrimage with more on their minds than just nibbling on cheese at a Berkshire-owned jeweler, Borsheim's, or savoring discounts at the company's Nebraska Furniture Mart. Says a shareholder who journeyed all the way from Europe: "I come every year to make sure Mr. Buffett is in good condition."

Some folks who stood in line to get Buffett's autograph on $100 bills or copies of his books likely paid greater attention to his gaze and grip than in the past. More independent directors -- and a bit more candor -- might give them less to worry about.

Gogoi, a Chicago-based correspondent for BusinessWeek, attended the annual love fest in Omaha this year

Edited by Douglas Harbrecht

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