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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Little D passed her second of three #taekwondo #blackbelt tests. The third, and biggest, is in October. #tkd #sunset #md90 🌞✈️ #echoamphitheater #carsonnationalforest #newmexico Stopping to stretch our legs and use the potty was the best $2 I've spent in a while. I even borrowed a nickel from @trailrunningmom and got rid of the 95 cents in my pocket. Amazing #durango #colorado trails. These are the #HorseGulchTrails near @fortlewiscollege which has an amazing #cycling culture. When I raced collegiates @bcclubcycling & @bucycling in the early 90's, it wasn't anything like what's happening with the powerhouse @flccycling team. What an amazing backyard. Imagine rolling out of your dorm and onto this landscape. I would never go to class! Don't tell my kids I said that! #mountainbiking #cyclocross #teamhorstsports #teamhorstjuniorsquad #horstspikes 🚵‍♀️ @trailrunningmom finished in 41 hours and 1 minute. #hr100 #hardrock100 #shenipsitstriders #teamhorstsports #trailrunning #ultrarunning #womenofultrarunning @trailrunningmom  at the #hr100 #womenofultrarunning @trailrunningmom  at the #hr100 #womenofultrarunning @trailrunningmom left the Chapman Aid Station at 2:10 P.M. I paced her from Ouray (56.6 miles) to Chapman (82.2 miles). @ultramarathondan will take her to the finish of the @hardrock100 #hr100 #hardrock100 Most importantly, she is in good spirits and despite the altitude, is moving OK on the climbs, albeit slowly. As for the descents, her legs are trashed but she is still bombing them. Finish could be in the 40-42 hour range if all goes well. Who knows? Lots of variables! Fingers crossed. I have tons of photos to go through, so I selected one of our crew with Deb as she headed out for the final 18 miles. #trailrunning #ultrarunning #shenipsitstriders #teamhorstsports We finally reconnected with @trailrunningmom She arrived at Grouse Gulch, 42.2 miles at 8:33pm and departed at 8:50pm. She was soaked to the bone after climbing her first ever 14,000 foot peak. Handies had lots of hail and rain. She changed every piece of clothing and shoes and felt much better. The drive to/from was white knuckle insanity with our rental. @ultramarathondan is with her now. It will be a long night. I'll see her in Ouray. Our kids  have been awesome. Mom just wants to finish, but a long way to go. @hardrock100 #hr100 #hardrock100 #trailrunning #ultrarunning 🏃🏻⛰

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