March 31, 2011 / 7:35 PM / 7 years ago

Analysis: Buffett, and replacing the irreplaceable

NEW YORK (Reuters) - The problem with replacing Warren Buffett as Berkshire Hathaway Inc’s chief executive officer is that the replacement will not be Warren Buffett.

The question of who will replace the Oracle of Omaha grew thornier this week after the sudden resignation of David Sokol, seen by many investors as the most likely candidate to be next in line to run Berkshire.

Buffett, 80, has run Berkshire since 1965. The company has about 80 operating units selling everything from insurance to railroad shipping to ice cream and underwear.

Along with Steve Jobs of Apple Inc, perhaps no chief executive is as intertwined with his company as Buffett is with Berkshire.

Analysts believe the Omaha, Nebraska-based company’s stock could fall several percent on the day Buffett leaves.

“It is hard to replace a legend,” said R. Edward Freeman, a professor and corporate governance specialist at the University of Virginia’s Darden School of Business. “The right question is, who believes in the same kinds of business principles?”

Berkshire might also have to pay up for any successor to Buffett, who has for a quarter century taken a $100,000 annual salary. (The world’s third-richest person, who owns nearly one-fourth of Berkshire, can afford to.)

One possible successor might not come cheap.

Burlington Northern Santa Fe chief Matthew Rose was awarded nearly $40 million in his last three years running the railroad company before Berkshire agreed in late 2009 to buy it, a U.S. Securities and Exchange Commission filing shows. Rose’s pay is no longer publicly disclosed in SEC filings.

But analysts believe Berkshire will not need to offer an out-sized pay package to fill the CEO job.

“All the likely CEO candidates are wealthy and surely they would only do the job to do the best for Berkshire,” said Andrew Kilpatrick, author of “Of Permanent Value: The Story of Warren Buffett.”

“The most critical quality in the next CEO would be finding the person who can bring seamless trust to bear on the Berkshire family.”

NOBODY DOES IT BETTER

Sokol, the chairman of Berkshire’s MidAmerican Energy unit, abruptly left amid a surprise disclosure he bought 96,060 shares of Lubrizol Corp two months before Berkshire agreed to buy the lubricant maker for $9 billion. Buffett said neither he nor Sokol believes the share purchase was unlawful.

Before leaving, Sokol had become known as a dealmaker and Mr. Fix-It of sorts at Berkshire, having repaired the balance sheet at the corporate aircraft unit NetJets and been a point person for big transactions such as Lubrizol.

But even Sokol said he did not aspire to replace Buffett and it would difficult for anyone to do so.

“Nobody is going to do it as well as Warren does,” Sokol told CNBC television on Thursday. “In some ways, he’s gotten better, because he seems to have a broader perspective. ... I think Berkshire is very fortunate to have him.”

The companies Berkshire buys often feel the same way.

“What you lose when you lose Buffett is the global reputation and the charm,” said James Armstrong, a portfolio manager at Henry H. Armstrong Associates in Pittsburgh. “The successor won’t have the skill to attract acquisitions from all over the world and drive the same hard bargains Buffett can.”

Berkshire is expected to split the CEO and chief investment officer roles after Buffett leaves, and Buffett hired hedge fund manager Todd Combs as a potential successor for the latter job. Buffett’s son Howard would become nonexecutive

chairman.

On February 28, Berkshire said it had four managers, none of whom it identified by name, who were candidates to become CEO.

Ajit Jain, who oversees many Berkshire insurance businesses and talks with Buffett almost daily, is widely seen to be on that list. Many analysts believe Rose is there. Others may include Geico auto insurance chief Tony Nicely, MidAmerican chief Greg Abel and reinsurer General Re’s chief Tad Montross.

Buffett has praised them all. But Freeman, the Virginia professor, said the situation reminds him of the University of California at Los Angeles, which has gone through eight men’s basketball coaches since John Wooden retired in 1975. Wooden won 10 NCAA national championships. UCLA has won one since.

“How many times has UCLA tried to replace John Wooden?” he said. “A lot of basketball coaching careers have been lost. No one has the same cachet as a legend, or else they would be legends themselves.”

Reporting by Jonathan Stempel in New York; additional reporting by Ben Berkowitz; editing by Andre Grenon

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