I’m sure you’ve heard the adage, “The first generation builds it, the second generation makes it a success, and the third generation wrecks it.”
Too often, however, that assessment is overly generous. Hartford Funds once found that a whopping “70% of families lose their wealth by the next generation” when money is passed down.
That was definitely true of my family.
My dad’s dad owned two successful motels in Myrtle Beach, South Carolina. When he retired in 1963, he sold them for over $500,000 – the equivalent of $5.3 million in today’s dollars.
My grandfather passed away not too long after, as did my grandmother, leaving my father a sizable sum. Yet after a series of bad investments and failed relationships…
He died well before he should have, with only his social security and military benefits to his name. That left my brother and I back at square one when it came to building up generational wealth.
Fortunately for us, we still had our hard-working mom to teach us how to make it without any silver-spoon inheritance. And I’ve tried to teach the same principles to my kids.
Ultimately, it’s up to them whether they’re going to listen to their dad. We can only prepare them as best we can. That’s every parent’s calling.
Believe it or not, it’s every business’ calling, too, and for the same exact reason – preserving health and wealth.
Buffett Steps Down
Succession planning is critical for any business. But it’s especially important when a company’s public perception is very much tied in with that leader. Think about how much Apple (APPL) is still attached to the late Steve Jobs.
Or Tesla (TSLA) is to Elon Musk, for better or worse.
Or Berkshire Hathaway (BRK-A)(BRK-B) is to Warren Buffett. That’s why shares fell more than 2% this morning after his weekend announcement at the annual shareholder’s meeting.
In case you somehow missed it, the man, the myth, the Oracle of Omaha… is stepping down at the end of the year.
That’s a big shock for investors to digest. Buffett has been in charge of Berkshire Hathaway for six decades. When he bought the original company – then a textile business – in 1965, it was on its last leg.
Today, under his continuous leadership, it has a $1.164 trillion market cap. And during Buffett’s reign, Berkshire’s stock has compounded at close to 20% annually, nearly twice the rate of the S&P 500.
That leaves everyone to wonder one very good “what if” question…
What if Berkshire Hathaway fails under anyone else?
Two Red Flags at Berkshire Hathaway
Nobody knows the answer to that question, including Berkshire Hathaway’s investors. Or Buffett’s successor, Greg Abel, who was apparently surprised by the announcement.
That’s a detail I’m not impressed by.
I should probably be clear – I’m not here to criticize Warren Buffett. That would be incredibly ungracious of me, especially after such a storied career.
But for a company as large and important as Berkshire, the fact that the man taking the top job was surprised by the announcement is a rare miss from Buffett.
Abel was first named as successor in 2021. So he has known for years that he’s “it” if anything changes with Buffett’s leadership.
He also has plenty of experience with BRK’s corporate culture and expectations, having joined it in 2000. And he has been the conglomerate’s vice chairman of non-insurance operations since 2018.
Moreover, I’m sure that Buffett wouldn’t name Abel – and the board of directors wouldn’t approve him – if he wasn’t a very competent individual. I’m not questioning his capabilities.
I am, however, concerned about Buffett’s pre-meeting secrecy. According to The New York Times, he told only two people about the decision: Howard Buffett and Susan Buffett, two of his children who are on the board.
You can say he didn’t want anything to leak to the press beforehand, a fair concern. But shouldn’t he have trusted his self-named successor to stay mum?
I don’t think that’s good optics or good business.
It’s also concerning how long it took Buffett, now 94, to name a successor in the first place. As the Times reported, “For years, he faced questions about who could take over Berkshire, a uniquely complicated business.”
Yet Buffett still acted as if he had all the time in the world to make that kind of decision.
Clearly, he bet right. But with all due respect to a living legend, I don’t think it was a bet he should have made at all.
If BRK-A can fall more than 2% on the news that Buffett has decided to step down at year-end – with an established successor in place – what could have happened to shares if something had happened to Buffett without a clear succession plan?
Moreover, what would have happened to the company?
Always Be Prepared With a Succession Plan
I’ve seen the short-term and even mid-term chaos that can happen when well-established and respected leadership changes without warning… and without a proper succession plan in place.
It isn’t pretty. Not for the company. Not for employees. Not for shareholders.
Yet that kind of chaos is completely avoidable when management admits they’re not invincible. As I wrote in The Intelligent REIT Investor Guide, “Management succession is a sensitive issue that is, for obvious reasons, difficult for both investors and… management teams to discuss. Yet it’s of vital concern.”
Since “genius is tough to replace at any organization… investors need to assess the capabilities of those who will likely” replace them “and what tools they will have at their disposal when that time comes.”
That due diligence becomes a lot easier when management has not only named a successor but also fully informed them of what they need to know – instead of letting them be surprised at an enormous public meeting.
When my team here at Wide Moat Research considers a new investment opportunity, we always consider succession plans. We want to know not only who is in charge but who will be in charge if anything goes wrong.
Does the next generation have the necessary knowledge and expertise to run the business?
With some smaller or otherwise less famous companies than Berkshire Hathaway, there might not be an actual successor named. But you can – and should – still look at the larger management list, asking what they bring to the table.
Are they competent to stand up and stand in if necessary?
Like it or not, a company should always prepare for change. And when it comes to deaths and departures, those are inevitable.
It’s only a matter of time.
Regards,
Brad Thomas
Editor, Wide Moat Daily
PS: We’ll be writing more on Warren Buffett this week since there are quite a few other “nuggets of wisdom” to take away from Berkshire Hathaway’s annual meeting. Also, tune into our YouTube show on Thursday, where we’ll be discussing Buffett in greater detail still.
MAILBAG
What are your opinions on Warren Buffett’s step-down? Write us at [email protected].