Buffett Plays ‘I’ve Got A Secret’

For a man who is famously plain-spoken about his thoughts on business and investing, Warren Buffett can be surprisingly stingy with information that is pretty important to his fellow Berkshire Hathaway (BRK.A) shareholders.

Buffett disclosed in his annual investor letter last weekend that Berkshire’s board has selected someone to succeed him as CEO when he eventually retires. But the 81-year-old Sage of Omaha has refused to say who that person is. In fact, Buffett told CNBC that not even the designated successor has been informed. Buffett would say only that the person in question is “an individual to whom [the directors] have had a great deal of exposure and whose managerial and human qualities they admire.”

That would be all well and good, if Berkshire Hathaway were the private preserve of Buffett and the directors, but Berkshire happens to be a publicly traded company. This I’ve-got-a-secret attitude is wholly inappropriate when directed toward people who invest their hard-earned money in an enterprise. The idea that not even the designated successor has been told, if true (and there is no reason to believe that Buffett is lying), is patently absurd. What if that individual is unwilling or unable to serve, for reasons of which Buffett and the board may be unaware? What would Berkshire do if that individual gave notice that she or he planned to leave to take the helm of another company – simply say goodbye, or divulge the big secret under duress?

Moreover, Buffett and anyone else who knows, or is in a position to know, about the selection are duty-bound not to trade any Berkshire shares on the open market. They are in possession of material nonpublic information, giving them a distinct advantage over any counterparty who is not in on the secret. Buffett probably is not overly concerned, though, because he and other senior executives at Berkshire tend not to trade heavily in the company’s stock.

As Buffett observed, it can certainly be inconvenient for a company know who its “crown prince” is, for a variety of reasons. Still, Berkshire has functioned under these conditions in the recent past. Before his resignation last year in the wake of questions about his conduct, David Sokol was quite obviously Buffett’s presumed successor.

Buffett has run Berkshire for 47 years, but he cannot stay at the helm forever. Now that the board has a successor in mind, Berkshire’s shareholders deserve to know what they’re thinking. Neither Buffett nor his board is infallible, and the experience with Sokol shattered any illusions to the contrary.

Berkshire is not a special case. Any public company ought to make its plan for replacing its leadership known. If a company has no succession plan, it ought to be explicit about that too. Shareholders should know what this plan is, or if there isn’t one, they should be able to question board members as to why.

In most instances, the company’s plan will be to conduct a search for a suitable successor, sometimes from a pre-defined pool of candidates. But big and complex organizations still need understudies for their top leaders, if only to serve as interim chiefs while a broader search is conducted. A country has a vice president to avoid confusion over leadership in the event of a sudden transition. This system avoids infighting over who should take the reins, and mitigates the risk that someone will be asked to step in with no preparation whatsoever. Major companies should also have a designated successor to their top boss, even if only as a backup in the event of an emergency.

Though Apple (AAPL) was reticent about discussing Steve Jobs’ declining health, Tim Cook assumed Jobs’ responsibilities during several of the late CEO’s absences. By the time Jobs resigned last August, not long before his death, Apple’s board had a chance to see Cook in action in the company’s lead role, and Cook himself had a good idea of what the job required. There was no secret – and no surprise – about Cook’s role as Jobs’ replacement. That transition has been smooth thus far, and shareholders have expressed confidence in Cook.

Secrets and surprises have their place, but that place isn’t between a company’s board members and the shareholders they are supposed to represent.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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