Buffett turns to deputies to find successors for unit CEOs

Warren Buffett isn’t the only chief executive that Berkshire Hathaway Inc. shareholders have to worry about replacing. Managing CEO turnover has become more demanding with the company’s expansion.
Last week, the Benjamin Moore & Co. paint unit named its third chief in two years, bringing in an executive who has worked with Ted Weschler, 52, one of Mr. Buffett’s investing deputies.
As the company grows and managers get older, Mr. Buffett, 83, can’t always count on his preferred method of naming CEOs, which is to ask leaders of the more than 80 businesses to find their own successors. Benjamin Moore shows that Mr. Buffett is relying on newcomers such as the paint maker’s chairman, Tracy Britt Cool, 29, and Mr. Weschler to help with the task.
“Occasionally, you’re going to find subsidiaries that just don’t have a second in command,” Robert Miles, author of “The Warren Buffett CEO: Secrets from the Berkshire Hathaway Managers” (Wiley, 2003) said by phone. “But I think the system works.”
Since 2007, there have been internal promotions to CEO at subsidiaries such as ice cream seller Dairy Queen; Cort, a furniture rental company; luxury-plane operator NetJets IP LLC; and MidAmerican Energy Holdings Co., which runs electric utilities and gas pipelines. Berkshire used a different playbook at Benjamin Moore, one of four units that counts Ms. Cool as chairwoman.
The 130-year-old paint maker, which Mr. Buffett bought in 2001 for about $1 billion, has been pressured in recent years as more people shop at big-box stores. The subsidiary relies on sales through independent retailers, an approach Mr. Buffett has said he supports even though it has led to clashes with management.
‘Differing View’
Denis Abrams was replaced as Benjamin Moore’s CEO in 2012 because of a “differing view” about strategy, Mr. Buffett wrote in a letter to the departing executive that year. On Sept. 27, the company said Mr. Abrams’s replacement, Robert Merritt, had left.
The new Benjamin Moore CEO, Michael Searles, ran Wilsons The Leather Experts Inc. while Mr. Weschler was on the retailer’s board and was one of its largest investors. That connection shows the investment manager’s evolving role since being hired by Mr. Buffett in 2011, said James Armstrong, president of Henry H. Armstrong Associates Inc., which oversees Berkshire shares.
In addition to picking stocks for Mr. Buffett, Mr. Weschler has bid for a bankrupt mortgage business and negotiated a transaction that pushed the company deeper into newspapers. Mr. Weschler and Todd Combs, 42, have been designated to take over Mr. Buffett’s investing duties after his eventual departure. The billionaire has said his son Howard could serve as nonexecutive chairman and that the board has picked the next CEO.
Ms. Cool’s portfolio has been growing at Berkshire since she joined in 2009 as Mr. Buffett’s financial assistant. She already had made decisions about management changes at two of the four companies she oversees, Mr. Buffett said in May at a Fortune magazine event.
In addition to Benjamin Moore, her duties include leading the boards of insulation maker Johns Manville, party supplier Oriental Trading and frame maker Larson-Juhl Inc. Mr. Manville promoted chief financial officer Mary Rhinehart to CEO in 2012.
Berkshire turned to an outsider in 2009 when it brought on Beryl Raff, formerly of J.C. Penney Co. Inc., to lead Helzberg Diamonds after sales declined across the industry. Mr. Buffett didn’t return a message seeking comment.
The billionaire asks unit CEOs to send him a letter saying who should take over if a replacement is needed immediately. In a 2010 memo requesting that information, he emphasized his hands-off approach, telling the executives they can report to him “as little or as much” as they see fit, outside of large capital expenditures, acquisitions and changes to post-retirement benefits.
‘Enormous responsibility’
“We give an enormous responsibility to the managers of our businesses, probably more than any large company,” he said at the Fortune event. “We want them to feel like they have a sense of ownership.”
That arrangement allowed Berkshire to keep its headquarters staff to two dozen, even as the company expanded to employ more than a 280,000 people, he said.
Management turnover at some of the smaller units shouldn’t worry Berkshire investors, Mr. Armstrong said. The company’s profit comes primarily from a few businesses, such as railroad Burlington Northern Santa Fe Corp. and auto insurer Geico.
“They’ve had so much less turnover than any other company their size, and these smaller units are not going to move the needle,” Mr. Armstrong said. “What you really need is good leadership at the railroad, you need good leadership in insurance, you need good leadership in the electric-power business. That’s really what generates most of the earnings.”
Mr. Miles said history is a good guide for how well Mr. Buffett’s system of managing turnover works. When David Sokol resigned in 2011 after disclosing that he bought stock in a Berkshire acquisition target, Mr. Buffett was able to name replacements to fill his roles overnight, the author said.
The system has also bred loyalty. In all his years running Berkshire, Mr. Buffett “hasn’t lost one CEO to a competitor,” even though he’s had to fire a few, Mr. Miles said. “Who can say that?”
(Bloomberg News)