A REPORT OF BERKSHIRE
HATHAWAY SUCCESSION PLAN
ANALYSIS
PRESENTED BY
BRIAN HEMMI, DIANNA ROBINSON AND HEATHER ANDERSON
A Report of Berkshire Hathaway Succession Plan Analysis
A Report of Berkshire Hathaway’s Succession Plan Analysis
Prepared for
Professor Janell Barnard-Keller
COM/BUS 338 Instructor
Prepared By:
Brian Hemmi, Dianna Robinson and Heather Anderson
University of Michigan-Flint
November 23, 2014
MEMO
TO:
Professor Keller, COMP/ENG
FROM:
Group 6, Brian, Dianna, Evaett and Heather
DATE:
November 23, 2014
SUBJECT:
Berkshire Hathaway Succession Plan Analysis
This is a report of a research- based analysis of Berkshire Hathaway per your request.
In researching Berkshire Hathaway and Warren Buffett’s succession plan, we learned a lot about
the conglomerate and the importance of every business having a succession plan. We learned that
Warren Buffett is still the CEO and a strong force within the company with no intentions to step
down in the near future. We investigated if there were any appointees in place to take over if Buffet
had any sudden health problems and found that his most immediate successor left the firm.
Using databases and articles, we also researched the potential impact of hiring a CEO from outside
the company opposed to promoting from within. We also did a comparative analysis on other firms
and the impact of sudden termination/death verses having a planned succession time.
In closing, we would like to thank you for your support with this project. We appreciate all the
guidelines, examples and teaching you did to help us to create this professional report. We were
able to split up the assignment into even sections allowing us to share responsibility as well as input
as we proof-read, gave suggestions and helped each other in almost every aspect of this project.
We trust you will find this report perceptive and useful in future planning.
TABLE OF CONTENTS
Introduction ....................................................................................................................................1
Current Succession Plan ................................................................................................................1
Importance of Succession Plans.................................................................................................1
Berkshire Hathaway Succession Concern ..................................................................................2
Berkshire Hathaway Current Succession Plan............................................................................2
Compare and Contrast Hiring Outside vs. Promoting from Within ..................................................3
Impact of Promoting From Within an Organization......................................................................4
Advantages of Hiring from Outside of a Corporation ...................................................................5
Effects of Sudden vs. Planned CEO Changes................................................................................7
Sudden CEO Changes ...............................................................................................................7
Controlled CEO Changes ...........................................................................................................8
Conclusion .....................................................................................................................................9
Bibliography .................................................................................................................................11
LIST OF ILLUSTRATIONS
Figure 1. 6 Step Succession Plan ................................................................................................. 1
Figure 2. Percent of New Hires Fred in 2009-2011 ....................................................................... 3
Figure 3. Growth of Outside Hires ................................................................................................. 4
Figure 4. Long Tenure and Diminishing Returns ........................................................................... 6
A Report of Berkshire Hathaway Succession Plan Analysis
Introduction
Berkshire Hathaway is a large holdings company that has branched out tremendously from its
beginnings. The company originated over 150 years ago as a textile manufacturing company and
has since grown to have holdings in almost every sector of the business world. Berkshire ranges
from the textile industry to utility companies, insurance and more. The focus of our report is to
analyze the effect of CEO changes within a company and gives our opinion of the best method to
implement such changes. Our research focused specifically on the current CEO Warren Buffett
regarding his role and possible methods of his succession. We concluded that it is important to have
a succession plan in place in a company that is centered around investments and has many diverse
subsidiary companies. We also concluded that it would be most beneficial for both the firm and
investors to hire a new CEO by promoting from within the company rather than hiring a candidate
from an external source.
Current Succession Plan
Importance of Succession Plans
Succession planning is a process of filling key leadership positions in any company and
ensuring that employees are recruited and developed to take over roles. Some jobs, if left vacant or
filled by anyone but the best qualified person, could leave the company vulnerable. If done
effectively and carefully, could save a company’s reputation and prevent a company from ultimately
closing the doors. A succession plan is essential for any business. It gives everyone involved,
employees, shareholders, board of directors, etc, the ability to carry the company forward. The chart
below is an example of a six step Succession Plan and how it flows.
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Figure 1. Six Step Succession Plan via www.opm.gov
Berkshire Hathaway Succession Concern
Berkshire Hathaway’s shares lagged behind the broader market over the past two years because
many investors were uncertain over future leadership. There have been concerns of the company’s
succession plan since David Sokal, the presumed successor, resigned in 2011. There has not been
any talk of a successor until recently. The current CEO, Warren Buffett is 84 years old and has
passed normal retirement age and does not plan to step down anytime soon. The company, for
decades, has been closely identified with Mr. Buffett, who makes decisions on large acquisitions of
stocks or whole businesses that determine the company’s performance over time.
Berkshire Hathaway Current Succession Plan
The company understands the importance of a succession plan and has addressed the issue in its
most recent annual report to the shareholders, stating that there is indeed a succession plan in place.
In the report, Warren Buffett stated that he is in perfect health, but when he dies, his multiple roles
will be divided among different people. He also stated that there are “back up candidates” in place;
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however, their names remain undisclosed. Buffett expects that the successors would work closely
together, and it seems that he is currently working with them. According to L. Cunningham (2014)
in Berkshire Beyond Buffett, the succession plan has five parts, three concerning personnel and two
involving institutional ownership and corporate culture. Buffett’s managerial positions will be
divided into an executive function and an investment function. The successor will be responsible for
Berkshire’s acquisitions, allocating capital, and consulting with overseeing Berkshire’s remaining
subsidiary CEOs. In general, it is good practice to hold back names of successors due to potential
tension among employees. For example, General Electric released the names of four candidates to be
successors once Welch steeped down. Once they revealed that Immelt would become the CEO the
remaining candidates shortly after announced that they would be taking CEO positions with other
companies. Announcing names of possible successors could cause a company to lose good
employees, which could cause the company to suffer. Another company that had problems with their
succession plan was Hewlett Packard. According to Bersin.com, HP has had a “series of unplanned
CEO changes” and they still do not have a process to “build a successor internally.” Not having a
strategic plan and strong leadership could cause problems with employee morale and stock prices.
Hewlett Packard’s stock prices have been down approximately 32% due to the uncertainty in
leadership. An example of a company that had a successfully transition in the succession process is
Apple. Steve Jobs planned and trained his successor, Tim Cook, years before his death. Mr. Buffett
may take a similar road as Mr. Jobs and work right up to his death. This path has had less of an
effect on the stock price but it still leaves some worries for customers, employees, and shareholders
Compare and Contrast Hiring Outside vs. Promoting from Within
There are many benefits to filling a CEO position by hiring from within a company versus hiring
from outside the corporation. Although, over the years, we have seen an increase in major
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organizations choosing to hire from outside their corporations, the number of companies promoting
from within, still far outweigh the other. This section of the report will evaluate the key benefits of
both options.
Impact of Promoting From Within an Organization
Promoting from within a current corporation's management structure can produce many positive
results. One benefit is the signal it sends to the rest of the organization that it is possible to advance
in the company. In his report in the Wharton Journal, Professor Wayne Guay likens CEO promotion
to that of a prize given in an
employee tournament; this prize
has the positive effect of
incentivizing its executives into
trying their hardest (Wishing Upon
a Star). He goes on to state that
hiring from outside the company
can have the negative effect on the
current executives by taking away
their much sought after prize
(Wishing Upon a Star).
Another benefit of promoting a current executive is that it can assure the second-tier of executives
that they won’t be laid off (Wishing Upon a Star). Often when a new CEO is brought in, they bring
in their own management team and remove the current executives (Wishing Upon a Star). The last
benefit mentioned in the article is found in keeping the current knowledge about the corporate
Figure 2. Percent of New Hires Fred in 2009-2011
culture and intellectual capital;
Professor Peter Cappelli notes that employees from within a corporation have all the knowledge
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about the origination and a promotion from within, maintains a stable culture (Wishing Upon a Star).
This article states that hiring a CEO from outside the company would automatically mean a longer
learning period (Wishing Upon a Star).
Longevity is another factor when considering which type of hire to make. In a 2012 FORBES article,
Susan Adams cites a Booze & Co. study which shows that of the world’s largest companies, from
2009 to 2011, these companies fired 35% of their CEOs hired from outside the corporation versus
the 19% fired of hires who were promoted from within (Adams, New CEO Study). This shows that
the turnover rate is much lower for promotions from within in the first year (Adams, New CEO
Study). The article also states that CEOs promoted from within stay at those positions for years
longer than those hired from other organizations (Adams, New CEO Study).
Advantages of Hiring from Outside of a Corporation
Even though it is still most common to promote from within an organization, the number of outside
hires of CEO positions has grown from 15% in the 70s to 35% by 1999 (Wishing Upon a Star).
There are a few reasons we can speculate on, one being that the board of directors have become
more involved with the heartbeat of the organization. If companies have active board of directors, it
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become unnecessary for a CEO to have firm specific credentials, it can be acceptable to excel in a
few key top general ones (Wishing Upon a Star)).
Other benefit of hiring from
outside the firm include
renewed energy and the
potential of gaining from
someone with different
experiences and capabilities
which is often a key
ingredient for success in a
company experiencing
significant change (Wishing
Figure 3. Growth of Outside Hires
Upon a Star).
Hiring from outside the corporation could benefit the company by shaking up the status quo. It sends
a signal to the executives that they are ready for a change (Wishing Upon a Star). Also, hiring from
outside the current organization helps remove the previous CEO quicker than promoting from within
(Wishing Upon a Star). Often boards and CEO’s feel obligated to humor former CEO’s opinion even
if not in the best interest of the company (Wishing Upon a Star).
In conclusion, there is much evidence given that it is more beneficial overall for a corporation to
train, advance and eventually hire a new CEO from within the organization. For Berkshire
Hathaway, we believe the organization as a whole would benefit from having a plan to promote from
within while keeping advisors on retainers from other organizations to help keep that perspective
with the new leadership.
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Effects of Sudden vs. Planned CEO Changes
In today’s marketplace there are many factors that can affect a company, its functionality and health.
One major factor can be the departure of a CEO, whether it be a termination, voluntary resignation
or even a death. Any major changes in the CEO position affects investors’ confidence and therefore
the company's stock prices. If investors perceive a negative change, e.g. a less qualified CEO, the
stock price drops which has a negative effect on the company as a whole. There are many indicators
that can be used to analyze a company's health. One of the best ways to determine the current health
of a company is through the study of their stock price, determined by the confidence of the investors
in said company and its CEO. Stock prices will be effected based on the confidence the stakeholders
perceive of a substitute CEO with equal skills being found that will have the same compensation as
the last CEO (Journal of Accounting and Economics). If the stock prices goes down, it is a good
assumption, the investors have less confidence in the new CEO.
Sudden CEO Changes
Although there are many examples of a sudden change in the CEO position, we will look at Apple
Inc. After the CEO of Apple, Steve Jobs passed away in 2011, Apple recorded a stock drop of more
than five percent overnight, a direct response to the news of his death (Kollewe). Tim Quigley did a
study of CEO deaths since between 1980 and 2008. In this study he found the average next day
price change was 5.6% while over thirty days from the announcement, it became a 14.6% change
(Kwoh). Quigley also did a study on CEO deaths from 1950 to the end of the 1970’s which only had
a next day change of 3.5% change and a thirty day change of only 7.6% (Kwoh). This shows that in
our modern day culture with our modern day technology, a CEOs sudden death has a much larger
impact on the company’s stock prices.
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Controlled CEO Changes
CEO turnover is not always a bad thing for a company. Depending on the past experience and skill
set of the new candidate, this change can increase the company’s stock price and potentially boost
company performance. Other factors can affect the success of the company in response to CEO
changeover. A group from the Harvard Business Review did research on the link between the
CEO’s performance and their length of time in that capacity. The graph below shows the results of
this study
Figure 4. Long Tenure and Diminishing Returns
This study found that CEOs are most effective with at least 4.8 years with the corporation. It shows
that shareholders, customers and employees have the greatest benefit when a CEO stays at his or her
position for at least that long. This study also looked at the benefits and layoffs of the company on
the employee side and how strong their customer relations were. They attributed this pattern to the
ways CEO’s learn. “Previous research has shown that different learning styles prevail at different
stages of the CEO life cycle. Early on, when new executives are getting up to speed, they seek
information in diverse ways, turning to both external and internal company sources. This deepens
their relationships with customers and employees alike.” (Luo). This means that in the beginning of
their term, the new CEO invites both employees and customers to be more active in the company’s
processes the CEO will actively look for input. This dependence and open communication gives
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both the customer and employee a high level of satisfaction and therefore would increase
participation (Luo).
The study also found that long term CEO’s tend to start to avoid risks that they originally would
have taken. In the past, they would have taken larger risks to increase the chances of bigger returns
for the company (Luo). Unfortunately, along with this protective tendency, long term CEO’s also
switch to internal sources for their information gathering and feedback. Switching to internal
sources such as their own experience and possible historical ways of processing, gives CEO’s a
much narrower view of the overall company and the future and also potential isolates them from
their customers which, in turn can have a negative impact on how the customer’s view the company.
Of the two methods of a CEO leaving a company, the unexpected death has a much greater impact
on the company in a negative manner. When a CEO is replaced while alive, these changes will often
have a positive effect on the performance of the firm at least, for next few years. While the initial
stockholder opinion relating to either situation may be negative, it is shown that a non-death
replacement has a greater positive impact on a company than an unexpected death. This controlled
replacement can also be seen as a progression by stockholders thereby increasing the value of the
company’s stock (Luo).
Conclusion
There are a lot of companies that do not either have a succession plan in place or do not spend the
time and money to make sure that they have a strong plan. Having a strategic plan is necessary to
have a smooth successor transition. We recommend that Berkshire should first analyze the company,
by looking at the company’s strengths, weaknesses, opportunities, and threats. Second, identify the
talents of each internal employee while still being aware of potential employees outside of the
company. Training and grooming the successors years before Mr. Buffett leaves the company will
promote stability and organization for the employees and shareholders. This will help the successors
and the company be prepared for a planned and unplanned change. It seems that the plan that
Berkshire Hathaway has in place is well thought out and already being executed. Having more than
one person take over all Mr. Buffett’s duties is a great plan so that one person is not overwhelmed
because he does so much for the company.
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We have concluded that it is vital to any organization to have a succession plan in place. We believe
that for Berkshire Hathaway, it would be beneficial to groom the new CEOs from within their
organization to allow for a smoother transition, and promoting stability in the company and
investors. We also advise there to be a planned timeline for the succession plan to take place to
decrease the probability of a need for a sudden change.
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Bibliography
(2005, April 06). Wishing Upon a Star: Hiring a CEO from Inside the Company Vs. Going Outside.
Retrieved from http://knowledge.wharton.upenn.edu/article/wishing-upon-a-star-hiring-aceo-from-inside-the-company-vs-going-outside/
(2005, September). Succession Planning Process. Retrieved from https://www.opm.gov/policydata-oversight/human-capital-management/reference-materials/leadership-knowledgemanagement/successionplanning.pdf
Adams. S. (2012, May 25). New CEO Study Underlines Merits of Promoting from Within.
Retrieved from http://www.forbes.com/sites/susanadams/2012/05/25/new-ceo-studyunderlines-merits-of-promoting-from-within/
Bersin, John. (2011, October 26). Succession Management at IBM, Contrasted with Apple and HP.
Retrieved from http://www.bersin.com/blog/post/succession-management-at-ibm2ccontrasted-with-apple-and-hp.aspx
Cunningham, Lawrence A. (2014, August 01). Berkshire Hathaway’s Profound Succession Plan:
B.E.R.K.S.H.I.R.E. Retrieved from http://www.valuewalk.com/2014/08/berkshire-hathawaysprofound-succession-plan-b-e-r-k-s-h-i-r-e/
Favaro. K., Karisson. P. O., & Neilson. G. L. (2014, May 30). The Lives and Times of the CEO.
Retrieved from http://www.strategy-business.com/article/00254?pg=all#ceo_turnover
Kollewe, J. (2011, October 6). Apple Stock Price Falls on Steve Jobs’s Death. The Guardian.
Retrieved October 24, 2014, from
http://www.theguardian.com/technology/2011/oct/06/apple-stock-steve-jobs
Kwoh, L. (2012, August 15). How CEO Death Affects Markets. The Wall Street Journal. Retrieved
October 24, 2014, from http://blogs.wsj.com/atwork/2012/08/15/terminal-value-how-ceodeath-affects-markets/
Luo, X., Kanuri, V., & Andrews, M. (2014, March 1. Long CEO Tenure Can Hurt Performance.
Harvard Business Review. Retrieved October 24, 2014, from https://hbr.org/2013/03/longceo-tenure-can-hurt-performance/ar/1
NG, Serena. (2012, February 26). Berkshire Brings Clarity, if Not Names, to Buffett Succession
Plan. Retrieved from http://online.wsj.com/news/articles/SB100014240529702039608045
77244973811340012
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Sources:
Images: Six step Succession Plan process via www.opm.gov
APA Special Notes
No Date = (n. d.).
List in order of date published (if no author)
Alphabetical order (of author)
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