Berkshire Hathaway’s Succession Woes

It was disappointing to read about Berkshire Hathaway’s recent problems. I’m a huge Warren Buffett fan and had followed David Sokol’s evolving career at Berkshire too. Business expert, Verne Harnish, had touted Sokol’s management skills in several e-mail over the past 18 months. Sokol’s downfall at Berkshire has been well documented in the press this week. Multiple stories in the Wall Street Journal, New York Times, and Fortune magazine explain the details.

I’ll let the regulators decide if his dealings with Berkshire acquisition candidate, Lubrizol, the company at the center of Berkshire’s current woes, were legal or not. I will say that the personal gains he made from leveraging his position at Berkshire were not right. It is sad that he chose to enrich himself and his family on that scale. Prior to the scandal, in a  blog post, Harnish had pointed out the memo (scroll to the end of the PDF link and read the last two pages) at the end of Warren Buffett’s letter to shareholders. Each year, Buffett reminds his managers, or “The All-Stars” as he refers to them, about their ethical and legal responsibilities to the company. He writes in the 26 July 2010 memo, “The priority is that all of us continue to zealously guard Berkshire’s reputation.” It is ironic that he also chides his troops to think about their own succession processes and to send him a note with their plans.

I shared this memo with Horst Engineering’s managers last week, before the Sokol story exploded. I used it to remind them that our 65-year old family business also has a great reputation to uphold. Integrity is at the core of what we do. We make critical components for aerospace, medical, and other high technologies. Our customers depend on us. Our employees depend on us. Sure, we have quality problems from time to time, but we have a process to deal with them and they are usually mistakes that can be prevented in the future. We learn from them. The Sokol affair is something on a different scale. It doesn’t related to product quality, but it relates to managerial integrity, trust, and shareholder value.

Berkshire Hathaway has serious succession problems. Buffett is a genius, but the company has taken a different approach than General Electric, United Technologies, and other large company’s. It is a double-edged sword, meaning that Berkshire’s decentralized approach is part of their success. However, too much depends on Buffett. My father and uncle were willing to cede responsibility to a younger group of managers, including me. They did this 10 years ago when they were still young, but they had the foresight. They remained actively involved. Buffett is 80 now and won’t live forever. He doesn’t have to retire, but he should share responsibility and do a better job at mentoring the next generation of Berkshire leaders. This situation paints a picture of a CEO who is out of touch.

Many family business leaders get this. They know how important it is to build the skills of the next generation. It isn’t easy, but it has to be done. Next week, I am speaking at the Family Business Magazine: Transitions 2011 conference. My panel’s topic is The Power of The Family Legacy and Brand. We will explore answers to these questions: “In your family, what is the legacy? The reputation? Who manages it? How do you measure it? Can you use the family legacy/brand as a competitive advantage to manage internal family issues, attract and retain high-powered employees, develop strong and unbreakable relationships with vendors and build your business with customers?”

I’ll write more about next week’s conference and share information from my presentation, but I thought that managing a company’s reputation is exactly what Sokol and Buffett should be doing at Berkshire Hathaway. It isn’t easy at a large business with 250,000 employees and it isn’t easy at a mid-sized family business. No doubt, Buffett and his team, including his Board of Directors, should do a better job.

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