Hire Wire Apr 23 2012

Who Will Succeed Buffett?

By jason zweig

Who can fill Warren Buffett's shoes?

The chairman and chief executive of Berkshire Hathaway, who has run the conglomerate since 1965, announced this week that he has prostate cancer. The disease was detected early, and the 81-year-old Mr. Buffett is otherwise in excellent health. His prognosis is good.

But the news brought renewed attention to the question of who ultimately will succeed him. A skilled bridge player, Buffett is keeping his cards close to his vest. He has said the members of Berkshire's board have chosen a successor whom they know and admire, as well as two backups.

Yet he hasn't disclosed the successor's identity—even to the chosen person. Nor would he reveal anything during my brief conversation with him this past week.

Publicly naming his successor wouldn't just make it hard for Berkshire to change its mind later if circumstances warrant; it would demoralize the two backup choices and make them more prone to poaching by competitors.

The successor will "probably be somebody who surprises us," says David Winters, a shareholder for more than two decades whose mutual fund, the Wintergreen Fund, holds $67 million in Berkshire stock. "I would bet on somebody who doesn't have a high profile and who is not in the rumor mill."

In hopes of unearthing some of those surprising names, I asked two independent teams of financial researchers—Paul Tetlock and Tim Scully at Columbia Business School and Richard Peterson at Los Angeles-based investment firm MarketPsych—to analyze what Mr. Buffett has written about Berkshire's divisional executives in his annual letters.

Both groups of researchers specialize in "textual analysis," or the use of mathematical formulas to measure the frequency and positive or negative tone of language. In previous studies—for example, of the wording in companies' financial filings—these methods have been shown to improve forecasts of profitability.

Since 1977, Buffett has written nearly 400,000 words in his annual letters to shareholders. Messrs. Tetlock and Scully found that Buffett has mentioned Ajit Jain, head of Berkshire's reinsurance group, far more often than any other current division boss—102 times, versus 60 for the next most-cited, Tony Nicely of Geico.

They found that Buffett referred slightly more positively to Jain than he did to any other Berkshire manager. However, Tad Montross, CEO of General Re, scored a close second for overall positivity and nudged out Jain in the proportion of financially positive words Buffett used. (For example, in his 2002 letter, Buffett wrote of "enormous progress" under Montross.) Not far behind were CEOs Brad Kinstler, of See's candy; Greg Abel, of MidAmerican Energy; Don Wurster, of National Indemnity; Mr. Nicely; and Kevin Clayton, of Clayton Homes.

Using a different methodology that scores words by their association with happiness, Peterson found that Jain ranked considerably lower.

Among the current executives to whom Buffett has referred in emotional terms at least eight times, the one who scored the highest is Danny Goldman, chief financial officer of Iscar, Berkshire's Israeli-based cutting-tool division ("incredible," wrote Buffett in his 2009 letter, for example).

Nicely of Geico comes next ("stellar," as the 2005 letter put it), followed by Abel of MidAmerican ("terrific," 2008), Kinstler of See's ("extraordinary," 2007), Tom Nerney of U.S. Liability Insurance ("fabulous," 2002) and Jain ("amazing," 2006).

Among divisional CEOs to whom Buffett has referred at least four times in emotional terms, Peterson gives high positivity scores to Paul Andrews, of electronics distributor TTI; Jacob Harpaz, of Iscar; Grady Rosier of supply-chain manager McLane; and Matt Rose, of Burlington Northern Santa Fe railroad.

By far, the person to whom Buffett has referred the most is Ajit Jain. "This is true whether you look at the number of references, number of words or simply the number of years that he's mentioned," says Tetlock. Nevertheless, he warns, any inferences based, as these are, on a relatively small number of references "should be taken with far more than a grain of salt."

To be sure, being praised isn't the same as being crowned. Several executives Buffett has lauded lavishly in the past—including David Sokol, Joe Brandon and Rich Santulli—are no longer at Berkshire.

Still, textual analysis "is better than a plain guess, because it has some statistical underpinning to it," says Peterson. "The probability should at least be higher than experts' random estimates."

Berkshire's board, at least, knows who Buffett's successor will be. That is more unusual than you might think.

"Succession planning at most companies is a hollow exercise," says David Larcker, an expert on the topic who teaches at Stanford University's business school. "It's rare to have a plan in place where you know the next day [after a CEO dies] exactly what you're going to do."

This story first appeared on WSJ.com

Rob Barry
contributed to this article.
intelligentinvestor@wsj.com; twitter.com/jasonzweigwsj

Write to Jason Zweig at intelligentinvestor@wsj.com




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