Widely lauded as the world's greatest investor, multi-billionaire Warren Buffett also is one of the richest people on earth, as a direct result of having built Berkshire Hathaway Inc. (BRK.A) into one of the most valuable public companies on the planet. He has earned vast sums of money for himself and his investors not just through 53 years of savvy stock picking, but also through timely bets on bonds and the dollar. Moreover, his acquisitions of operating companies in a variety of industries have made Berkshire one of the most successful conglomerates ever.
However, Buffett is not getting any younger, with his 88th birthday coming up on August 30. Barron's columnist Andrew Bary argues that succession planning at Berkshire, as well as some key strategic pivots, are long overdue. (For more, see also: Rules That Warren Buffett Lives By.)
From Leader to Laggard
Much of the mystique surrounding Buffett comes from the spectacularly outsized returns that Berkshire generated in its first three decades under his leadership. For investors who jumped on the Buffett bandwagon during the last two decades, the experience has been increasingly disappointing.
|Average Annual Total Returns||1965 to 12/31/17||Last 20 Years||Last 10 Years||Last 5 Years|
|Berkshire Hathaway Class A||20.9%||7.0%||8.7%||11.1%|
|S&P 500 Index (SPX)||9.9%||6.7%||9.7%||13.5%|
Source: Barron's, based on Bloomberg data and Berkshire reports; data through June 13, except as noted.
8 Ways to Bolster Berkshire
In his Barron's column, Andrew Bary suggests eight actions that Berkshire should take to improve and sustain the company after Buffett inevitably has to step down.
|1. Pay a dividend|
|2. Buy back stock|
|3. Publicly name Buffett's successor as CEO|
|4. Have other key managers share in writing the annual letter|
|5. Hold an investor day featuring other key managers as speakers|
|6. Provide more-detailed reporting of investment performance|
|7. Provide more-complete and transparent reporting of subsidiaries|
|8. Revise the restrictive M&A policy, which limits opportunities|
Berkshire is sitting on a massive pile of cash, $109 billion as of March 31, and its declining relative investment performance in recent years indicates that the firm is having increasing difficulty profitably deploying its capital. Thus, Bary suggests that a judicious amount of cash should be returned to investors annually through dividends and stock buybacks.
Investor confidence in the company's future would be improved, Bary argues, if a successor to Buffett as CEO were named now. Likewise, giving key managers visibility as authors of communications to shareholders, and as speakers at presentations to investors and analysts, also would reinforce the notion that Berkshire is a team effort built for the long pull, rather than an organization whose fortunes rest with Buffett alone.
Additionally, Berkshire's board met only three times in 2017, Bary notes, tying it with one other company for the fewest meetings among the S&P 500. By contrast, the median S&P 500 company held seven board meetings. This reinforces the notion that Berkshire is Buffett's personal fiefdom, and it needs to change as the company moves forward, in a more collaborate fashion. (For more, see also: Warren Buffett: Oracle No More?)
Berkshire's reporting, regarding both its operating subsidiaries and its investment portfolio, is unusually opaque and lacking in detail. This raises concerns that losing bets are being hidden. Meanwhile, Bary believes that Berkshire's policy against getting involved in corporate auctions, in which a target company seeks to enhance its own shareholders' value by soliciting competing bids from other potential acquirers, is an unrealistic restriction on M&A activity.