Warren Buffett's Succession Planning Success

Warren Buffett is one of the world's wealthiest men and is arguably the most successful investor of the past two generations. His otherwise sterling reputation took a hit last week when it was disclosed that one of his deputies frequently touted as likely successor was resigning - and most observers believe he was forced to do so. The Corporate Library blog points out that this is not the succession planning failure that some make it out to be, but a success worthy of emulation:

"Warren Buffett famously dubbed his corporate jet "The Indefensible." His lucky shareholders would probably call him "The Irreplacable." The most successful investor in history turned 80 last August and while all evidence shows that he is still at the top of his game, he has been candid in acknowledging that his company has to find a successor.

The downside to making such a disclosure is when things don't work out. And that is what happened when David Sokol made an abrupt departure from Berkshire this week. The on-the-record statements were bland, which led to immediate speculation in the press about what was really going on. This is to be expected -- that vague resignation letter language about Sokol's plans to create "an enterprise which will provide opportunity for my descendents and funding for my philanthropic interests" is one step above the ever-popular "to spend more time with my family" or the more creative "hiking on the Appalachian Trail."

Let's assume that the the worst-case scenarios proposed by Buffett-watchers are correct, and that Sokol was asked to leave over a transaction where he traded ahead of Berkshire. The Wall Street Journal said

That Mr. Sokol was seemingly influenced by a pitch from a banker to buy shares in Lubrizol is strange in itself, given the idea was presumably intended for Berkshire shareholders. The optics look even worse because he made $3 million from the trade when Berkshire subsequently bought it for a premium.

Buffett responded to this in a press release, stating clearly that Sokol's purchases were "in no way unlawful." His position was disclosed and he played no role in Berkshire's decision to acquire the company.

This is a succession success story. Berkshire has one asset that is even more valuable than Buffett's ability to recognize shareholder value. That is Buffett's understanding that while his sector attracts a lot of people who want to have a lot of money, he will create more sustainable long-term value for shareholders by relying on people who have values.