David Sokol Increasingly Looks Like Buffett's Successor

David Sokol appeared on CNBC Monday morning and commented on a variety of topics. In addition to his responsibilities as Chairman of MidAmerican Energy (MDPWK.PK), Mr. Sokol recently assumed the Chairman and CEO positions at NetJets. It appears that Mr. Sokol is not only taking on more operational responsibilities at Berkshire Hathaway (BRK.A) subsidiaries, but is also appearing in public more often and commenting on a wider range of topics.

Most of the concerns regarding Berkshire Hathaway succession issues are misguided. Warren Buffett cannot be replaced, but shareholders of Berkshire Hathaway should have confidence in the fact that very capable managers like Mr. Sokol are available if necessary. While the timing of a management transition cannot be predicted, Mr. Sokol’s age, increasing responsibilities, and media exposure leads me to believe that he must be close to the top of the list of Berkshire CEO candidates.

Disclosure: The author owns shares of Berkshire Hathaway.

Comments

[Dan Braem:]

I wonder if Sokol would accept the $200,000 salary Buffett makes, or if he would continue to seek $10-$20 million annual salaries.

If it is the latter instead of the former, we will know that Buffett's idealogy will have already been eliminated and destroyed.

Oct 26 12:23 PM

[Ravi Nagarajan:]

I disagree. Buffett's salary is a special case because of his massive ownership in Berkshire. It would be crazy to try to get an incoming CEO to accept a $200K pay package. He or she needs to be paid market salaries with long term incentive bonuses tied to increases in per-share intrinsic value. Trying to hire a new CEO at below market pay is a recipe for lower shareholder returns and makes no sense.


On Oct 26 12:23 PM Dan Braem wrote:

> I wonder if Sokol would accept the $200,000 salary Buffett makes,
> or if he would continue to seek $10-$20 million annual salaries.
>
>
> If it is the latter instead of the former, we will know that Buffett's
> idealogy will have already been eliminated and destroyed.

Oct 26 12:48 PM

[Dan Braem:]

It may sound crazy, so let me clarify. Sokol has received 20M in salaries from 2006 - 2008. If he wants to adopt the Buffett idealogy, he will invest some of that money in BRK stock and let that act as his wealth creation vehicle. For better or worse, that has been the Buffett way.

My point isn't that a $200,000 salary will attract the best talent. My point is that I can see many of the principles instilled by Buffett will be eroded over time. What's next after Buffett leaves? Compensation through stock options? A large amount of share buybacks to enhance the value of those options instead of other capital allocation options?

I fear that many of the business principles that made Berkshire Hathaway unique may slowly disappear.

Oct 26 04:08 PM

[Ravi Nagarajan:]

I agree that there is a risk of the business principles Buffett represents to erode over time. It could hardly be otherwise given the loyalty people have to Buffett and his overall reputation. However, if any company can retain a "founding culture", it is Berkshire (for all practical purposes, Buffett is the "founder" of the modern Berkshire even though the textile company existed before his ownership).

I am not aware of how much Berkshire stock Sokol holds or even what his salary has been in recent years. However, I would expect him to be very well compensated and in fact would be concerned if he was not. Any compensation plan for the next CEO is no doubt going to be designed with an alignment of long term shareholder value and pay. I think Buffett has even said that the CEO may receive options, although they would be adjusted in terms of strike price for retention of earnings so the options would only pay off if the CEO generates value above and beyond simply retaining earnings.

Oct 26 04:31 PM