BREAKINGVIEWS: Buffett's "trust me" succession plan doesn't fly

NEW YORK Mon Feb 27, 2012 3:49pm IST

A woman displays playing cards for sale with a picture of Berkshire Hathaway Chairman Warren Buffett as the king of spades at a souvenir stand at the company trade show during the BH annual meeting in Omaha, Nebraska April 30, 2011. REUTERS/Rick Wilking/Files

A woman displays playing cards for sale with a picture of Berkshire Hathaway Chairman Warren Buffett as the king of spades at a souvenir stand at the company trade show during the BH annual meeting in Omaha, Nebraska April 30, 2011.

Credit: Reuters/Rick Wilking/Files

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NEW YORK (Reuters Breakingviews) - Warren Buffett says he has at last identified someone to replace him when he's gone. Anointing a successor at Berkshire Hathaway is an important step in what will be one of the most significant corporate transitions since the torch was passed at Apple. Yet in his annual letter published on Saturday, Buffett demurred on saying exactly who. Given recent events, his "trust me" plan doesn't fly.

Few industry titans want to be a lame duck. Buffett, even at 81, is no exception. Though he has hired two money managers, Todd Combs and Ted Weschler, to eventually take over the company's $100 billion-plus investment portfolio, Buffett made clear neither man would be running Berkshire, saying they'd both report to the future mystery chief executive.

The Oracle of Omaha's shortlist needed a redraft not long ago. David Sokol, who turned around Berkshire's flailing corporate jet business, was considered by many Buffettologists to be next in line. But Sokol left amid scandal last year after he traded in shares of Lubrizol at the same time he was recommending his boss buy the company -- which Buffett eventually did for nearly $10 billion. The episode cast doubt on Buffett's character assessment skills, especially when he initially defended Sokol's actions.

And though Buffett has built Berkshire into an investing powerhouse, he himself has struggled with the sprawling $200 billion conglomerate lately. He and partner Charlie Munger have failed to deliver the outsized returns that made them famous. In 2011, the company's gain in book value per share -- Buffett's preferred performance measure -- of 4.6 percent only narrowly exceeded that of the S&P500, in one of its weaker showings since 1965. Berkshire also lagged the broader market in 2009 and 2010. And Buffett conceded that a winning streak of 43 five-year periods is probably about to break.

Ajit Jain, who runs Berkshire's reinsurance business, still looks to be a front-runner to succeed Buffett, though others like Tony Nicely of Geico could also fit the bill. Buffett's mentor, Ben Graham, once said the essence of investment management is the management of risks. Buffett should help his own shareholders manage one of the biggest risks at Berkshire -- and just tell them precisely who he has in mind to run the place.

CONTEXT NEWS

-- Warren Buffett, the chairman and chief executive of Berkshire Hathaway, said he has settled on a successor for the company, but did not say who, in his annual letter to shareholders published on February 25. "When a transfer of responsibility is required, it will be seamless, and Berkshire's prospects will remain bright," Buffett wrote.

-- Berkshire annual report, click here

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

(Editing by Jeffrey Goldfarb and David Evans)

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