After Decades of Hints, Buffett’s Heir May Now Be More Apparent
“If I die tonight, I think the stock would go up tomorrow.”
That was Warren Buffett, addressing an arena full of shareholders at Berkshire Hathaway Inc.’s annual meeting in Omaha in May. For more than half a century, he’s made the company his investing canvas, designing an unlikely conglomerate. It owns Geico, BNSF Railway, Fruit of the Loom, Dairy Queen, Duracell, and dozens of other companies, as well as billions of dollars of stock in blue chips such as Apple Inc. and Coca-Cola Co.
The glue is Buffett, who’s argued persuasively for decades that this hodgepodge makes sense. His market-beating returns have helped: $100 invested in Berkshire in 1964, when he began aggressively buying shares to take control, would be worth more than $2 million today. “There’d be speculation about breakups,” Buffett went on at the meeting, and the shares would trade higher because some investors would assume that the parts are worth more than the whole. Finally, the guy standing in the way would be gone, he said, adding dryly, “It would be a good Wall Street story.”
Nothing of the sort is likely to happen while Buffett is there. He’s still the controlling shareholder, Berkshire is his life’s work, and he doesn’t want it torn apart by investment bankers or activist investors. To slow that process, Buffett assembled a board that backs his approach, and after his death he’ll leave his remaining shares to charities run by family and friends who know his wishes. But the pressure to dismantle his creation will mount—eventually.
The bulwark against that impulse will be Buffett’s successor as chief executive officer, whose identity is one of the business world’s best-kept secrets. In all his years of giving interviews and taking questions at the company’s marathon annual meeting, Buffett has acknowledged that the board has picked his replacement, but he’s never disclosed the name.
Maybe that’s because doing so would take the spotlight off Buffett, who, at 87, still loves the attention. At the annual meeting, his likeness has adorned Coke cans and sneakers, rubber duckies and underwear. It’s a celebration of capitalism—but also of Buffett. When he walks through the hall where Berkshire’s businesses display their wares, fans throng around him, snapping selfies.
Keeping the successor’s identity a secret also gives the board more flexibility. Circumstances can change, after all, and probably have during the long period Berkshire’s board has been weighing its options. These days, however, most arrows are pointing toward one man.
People have tried for decades to guess Buffett’s heir, but it’s always been an academic exercise: He never hints at retirement, his health seems to be remarkable, and his grip on the company is firm. In the meantime, contenders have come and gone. In 2000 the Wall Street Journal put Richard Santulli, the head of Berkshire’s NetJets business, on its short list of candidates. He quit to pursue other ventures in 2009. In 2008, Barron’s predicted in a cover story that David Sokol, head of Berkshire’s energy business, would take over. He resigned three years later.
Buffett, at least, has talked about the qualifications for the position. In a 2015 letter to shareholders, he said the board wants his successor to be drawn from the company’s ranks and “relatively young, so he or she can have a long run in the job.” He suggested future Berkshire CEOs should hold the post for more than a decade and that they should be “rational, calm, and decisive.” And, he noted, they should have upstanding character, be unmotivated by ego or a big paycheck, and be “all-in” at Berkshire.
Nowhere in all this is there a mention of stockpicking skills. To help the next CEO, Buffett hired two former hedge fund managers, Todd Combs and Ted Weschler, in recent years. They’re responsible for about $20 billion of Berkshire’s massive stock portfolio and preparing to oversee all of it when he’s gone. They’ll also help evaluate deals. Nor will the successor likely serve as chairman. That’s a role earmarked for Buffett’s eldest son, Howard, who’s on the board. His main job will be to guard the company’s culture—and force out any future CEO who messes with it.
At the same time this was laid out, Berkshire released a separate letter from Vice Chairman Charles Munger. In it, Munger called two executives—Ajit Jain and Greg Abel—examples of the company’s “world-leading” managers who are in some ways better than their boss. While Buffett later denied that any executives were in a “horse race” to succeed him, the logical inference from Munger’s letter was that the board had already settled on one of these two—and probably wasn’t as seriously considering other internal candidates such as BNSF Executive Chairman Matt Rose or Tony Nicely, the CEO of Geico. Abel declined to comment, and Jain and Buffett didn’t respond to requests for comment.
Jain and Abel each fit many aspects of Buffett’s carefully tailored job description. They’re deeply committed to Berkshire’s culture, which prizes efficiency and long-term thinking. Neither has outward character flaws that would immediately be disqualifying. And each has built large businesses for Buffett.
Jain runs the company’s namesake reinsurance operation, which for decades has provided Berkshire with billions of premium dollars for investments and acquisitions. Buffett has repeatedly said that Jain has probably made more money for shareholders than he has. In 2011 he said the board would make Jain CEO if he wanted the job.
Abel has steadily expanded a utility holding company in Iowa into a colossus in the energy industry. It runs several power companies throughout North America and the U.K., interstate natural gas pipelines, and giant wind and solar farms. It’s a big part of Berkshire that stands to get only bigger, Buffett said in May, adding that it’s “hard to imagine a better-run operation.”
A key distinction between the two executives is age: Jain is 66, Abel is 55. Buffett is proof that the CEO can do well by shareholders long past typical retirement age. Even so, Jain has been facing some health challenges that could eventually make working more difficult, according to people who’ve recently spent time with him. Analysts and some longtime investors don’t think he wants the job. He’s also spent his career in insurance, a business less essential to Berkshire than it once was.
All this has many Berkshire investors and others close to the company homing in on Abel. When Sarah DeWitt, an analyst with JPMorgan Chase & Co., initiated coverage of Berkshire in September, she noted the energy executive was the “most likely” successor. While Jain was also a possibility, she wrote, “his age may preclude him.”
Berkshire’s success has created a massive challenge: its size. This year’s U.S. stock rally has helped push the company toward a market value of almost half a trillion dollars. A conglomerate that big simply can’t grow as fast as a smaller business.
Not only will returns most likely be lower under the next CEO but the job itself will be more difficult. In May, Buffett estimated that over the next decade, the company will have to figure out what to do with some $400 billion—more than he’d deployed over the previous five decades. “You need a very sensible capital allocator in the job,” Buffett said of his successor. “Capital allocation might even be their main talent.”
That’s a skill Abel has spent years honing. An accountant by training, he joined the business he now runs in 1992 when it was a small geothermal power producer in California. Its head at the time was Sokol, who spotted talent in the young executive and promoted him to bigger roles. In 2000, as investors chased the latest dot-com stocks, Berkshire bought a majority stake in the business.
Being part of Buffett’s empire created an opportunity. Abel’s company, then called MidAmerican Energy Holdings, was able to retain its earnings, a rarity in the utility industry, where the norm is to pay generous dividends. That extra cash meant he and Sokol had to find opportunities to reinvest the money. They snapped up more power companies and pipelines. They also expanded aggressively into renewable energy. The company’s Iowa utility now generates about half its electricity from wind.
In 2008, Abel became CEO of MidAmerican. Sokol took on a broader position at Berkshire at that time but resigned three years later after trading in the stock of a company he suggested Buffett buy. A board committee found that he’d broken the company’s insider-trading rules. Regulators declined to take action.
Stepping out from Sokol’s shadow over the past decade has increased Abel’s prominence at the conglomerate. In 2014 his business was renamed Berkshire Hathaway Energy, identifying it more closely with Buffett.
From outward appearances, Abel is the antithesis of a Wall Street master of the universe. He grew up in Edmonton, studied commerce at the University of Alberta, and runs his business from Des Moines. Like Buffett, he’s no hayseed and can easily keep pace with Harvard-trained elite. He’s negotiated many tough deals. For a time, he ran a utility in the U.K. People who’ve worked for him say he’s steeped in the details of his operations. He often visits his far-flung utilities in person. “He’s made big bets,” says Jeff Matthews, an investor who’s written three books about Berkshire. “He’s as smart as they come.”
In a way, Abel has structured his empire to mirror the way Buffett runs the whole conglomerate. Berkshire Hathaway Energy employs more than 20,000 people across all its businesses. But the head office has about two dozen staff. That keeps the overhead small and leaves most decisions to the presidents of the company’s utilities.
Abel has also been getting exposure to other industries. He’s a director of Kraft Heinz Co., the food giant that Berkshire controls with buyout firm 3G Capital Inc. He’s also served on the boards of an Iowa convenience-store chain and two insurance companies. In addition, he oversees Berkshire’s large residential real estate brokerage business and an investment in Chinese electric car maker BYD Co.
Like many Berkshire executives, Abel is already very wealthy. He’s collected tens of millions of dollars in salary and bonuses over the years. He also has a 1 percent stake in the business he runs. According to regulatory filings, that holding can be converted into more than $400 million worth of Berkshire stock, a move that would directly align his interests with shareholders if he became CEO. “I would certainly applaud that,” says David Rolfe, chief investment officer of Wedgewood Partners Inc., a money manager that owns stock in Berkshire. “That would not be an unnoticed throwaway line in the press release” on succession.
Abel doesn’t seem like he’s gunning for Buffett’s job, and he could even turn it down if asked. He doesn’t exude Buffett’s charisma and rarely does interviews. But that doesn’t matter. Spending hours on cable TV and hobnobbing with celebrities such as LeBron James and Arnold Schwarzenegger is fun, but it’s not what made Buffett so successful. “The next CEO will not have the same PR requirements,” says Richard Cook, a longtime Berkshire shareholder and fund manager in Birmingham, Ala. “Being as good as Buffett is on CNBC is not a way to judge the results.”
Buffett is singular. There are shelves of books about him. Legions of investors have been inspired by his way of thinking about business and money. At stake in succession is whether his life’s work will live on—as he says it will—or whether it only makes sense with him at the top.
His successor will have to protect that legacy while running one of the world’s biggest and most unusual conglomerates. He’ll have to allocate billions of dollars, manage the occasional scandal that could tarnish the company’s reputation, and keep the dozens of CEOs who run Berkshire’s businesses motivated and happy. Perhaps most important, he’ll have to keep outsiders from tearing it all apart.