Warren Buffett is celebrating a Golden Anniversary. This year marks 50 years that he and business partner, Charlie Munger, have managed Berkshire Hathaway.
In Buffett and Munger’s annual letter for shareholders, the pair reflect on the previous 50 years as the head of Berkshire Hathaway. He also provides perspective on what the next 50 years could hold. As an 84-year-old, the future will obviously hold a new head for the holding company that oversees and manages a number of subsidiary companies.
Here Buffett writes what characteristics will be needed for the next Berkshire Hathaway CEO to be successful:
Choosing the right CEO is all-important and is a subject that commands much time at Berkshire board meetings. Managing Berkshire is primarily a job of capital allocation, coupled with the selection and retention of outstanding managers to captain our operating subsidiaries.
Obviously, the job also requires the replacement of a subsidiary’s CEO when that is called for. These duties require Berkshire’s CEO to be a rational, calm and decisive individual who has a broad understanding of business and good insights into human behavior. It’s important as well that he knows his limits. (As Tom Watson, Sr. of IBM said, “I’m no genius, but I’m smart in spots and I stay around those spots.”)
Character is crucial: A Berkshire CEO must be “all in” for the company, not for himself. (I’m using male pronouns to avoid awkward wording, but gender should never decide who becomes CEO.) He can’t help but earn money far in excess of any possible need for it.
But it’s important that neither ego nor avarice motivate him to reach for pay matching his most lavishly-compensated peers, even if his achievements far exceed theirs. A CEO’s behavior has a huge impact on managers down the line: If it’s clear to them that shareholders’ interests are paramount to him, they will, with few exceptions, also embrace that way of thinking.
The ABCs of Business Decay
My successor will need one other particular strength: the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency. When these corporate cancers metastasize, even the strongest of companies can falter.
The examples available to prove the point are legion, but to maintain friendships I will exhume only cases from the distant past. In their glory days, General Motors, IBM, Sears Roebuck and U.S. Steel sat atop huge industries. Their strengths seemed unassailable.
But the destructive behavior I deplored above eventually led each of them to fall to depths that their CEOs and directors had not long before thought impossible. Their one-time financial strength and their historical earning power proved no defense.
Only a vigilant and determined CEO can ward off such debilitating forces as Berkshire grows ever larger. He must never forget Charlie’s plea: “Tell me where I’m going to die, so I’ll never go there.”
If our noneconomic values were to be lost, much of Berkshire’s economic value would collapse as well. “Tone at the top” will be key to maintaining Berkshire’s special culture. Fortunately, the structure our future CEOs will need to be successful is firmly in place.
Read the entire 2014 letter to Berkshire Shareholders. Bill Gates, Buffett’s good friend and board member of Berkshire Hathaway says it’s the best letter Buffett has ever wrote.
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