The David Sokol resignation has been rich fodder for newspaper headlines, but despite the various editorial angles, there's really only one takeaway for Berkshire Hathaway (BRK.A) investors: There is not a clear cut favorite to replace Warren Buffett. While Buffett has frequently stated that there are three or four good candidates at the firm who could step into the CEO role immediately, investors realize that having a lot of good candidates means that there isn't a great candidate.
It's impossible to get a true understanding of why Buffett has had such a hard time finding an heir apparent, but there may be two possible problems with the CEO search.
Are ego's creating friction between and possible successors?
Warren Buffett is not just the greatest investor in the world, he is also on of the most respected CEOs. If that wasn't enough, he's really much more than that. He's a cultural icon with a growing global cache. For the successful in-house managers that will likely succeed Buffett, maybe the pressures and required humility are too much to bear. Each one of the possible successors has been a great success in their own right, but they all know that taking the CEO role at Berkshire is tantamount to stepping into oversized shoes that you will never grow into.
To make matters worse, for all of Buffett's public charisma, he has always functioned much better on his own, especially when it comes to investing. Maybe this personal preference has made it hard for potential successors to work close enough with Buffett to feel like they'll have the tools necessary to succeed once they assume the mantle. While we don't know the truth behind the Sokol matter, it's at least plausible to think that Sokol's actions may have been the actions of a slighted man. A CEO who felt entitled to more attention and praise than was given to him.
Could these problems be solved if Buffett worked with a successful and qualified female successor? Female CEOs are just as likely to have strong egos as are male CEOs, but there's the possibility that Buffett will tone done his own ego enough to fully work with a female successor in a way that he has not with the current male successors. Maybe it's just coincidence, but Warren Buffett seems to give his best interviews with female reporters such as Alice Schroeder, Liz Claman (Fox Business) and Becky Quick (CNBC). In Michael Lewis' review of The Snowball in The New Republic, he states that "Buffett has a long and happy history of admitting attractive, intelligent women into his life."
Is Buffett targeting the wrong skills?
Buffett's group of possible successors (Matthew Rose, Ajit Jain, Gregory Abel and Tony Nicely) are the CEOs of his largest holdings. This seems like a very reasonable tactic, but it really underestimates Buffett's role. While Buffett has shown an ability to excel as a hands on executive (most notably during his stint at Salomon Brothers), his true strength has been as an investor and in more recent years, as a Berkshire Hathaway promoter. Much of Berkshire Hathaway's success has come from Buffett's ability to sell the Berkshire Hathaway culture with charm and charisma. It's this culture that allows Berkshire to purchase companies below fair value. The value of this dimension in Buffett's job cannot be underestimated.
Before Sokol's resignation, he was considered by many to be a front runner for the CEO position at Berkshire Hathaway. But after watching his post resignation interview on CNBC, it's not clear if anyone can match the Buffett charisma or if that's even an element that he has focused on. Going forward, the next CEO should be comfortable as the face of Berkshire Hathaway.
Notable Fortune 500 Female CEOs
Andrea Jung, Avon Products (AVP)
Andrea Jung may be the most unlikely but also the best wild card candidate for the Berkshire Hathaway CEO role. She has the charisma to be the face of Berkshire Hathaway and her years in retail ensure that she has the skills to promote the Berkshire culture with the same energy as Warren Buffett. In addition, as a director at Apple (AAPL) and General Electric (GE), she has the respect from the corporate community to take on the top role at Berkshire Hathaway.
With a price/sales of 1.08, forward P/E of 12.40 and return on assets of 10%, it's not an expensive company.
Indra K Nooyi, Pepsico (PEP)
We have previously discussed Pepsico in our article about cheap dividend paying stocks. While we think Pepsico offers an interesting opportunity for investors, Buffett cast his vote in the soft drink wars a long time ago. As a major shareholder of Coca-Cola, it's unlikely that Berkshire Hathaway would ever consider Pepsico.
Ursula M Burns, Xerox Corp (XRX)
Ursula Burns' inspiring personal story would resonate well with Buffett and fit in nicely with the Berkshire Hathaway mythos. In addition, the company itself is trading at Buffett-type prices. With a great brand, a forward P/E of 8.6, a PEG ratio of 0.36 and a trailing cash flow yield greater than 10%, this is a company that Buffett may like.
Carol M Meyrowitz, TJX Companies (TJX)
Berkshire Hathaway is unlikely to buy this name, but it's not because it's an expensive stock. With an 11.91 forward P/E and a PEG ratio below 1.00, the stock has attracted the attention of other famed value investors, but Berkshire Hathaway has been famously leery of retailers.
Meyrowitz has been with the firm since 1983. As a long time executive at a discount retailer, she may have the skills to sell Berkshire's culture.
Irene B Rosenfeld, Kraft Foods (KFT)
Berkshire Hathaway has a more than 105 million share-stake in Kraft Foods. On paper, this makes Kraft Foods an easy target as a Berkshire Hathaway acquisition and Irene Rosenfeld as a possible heir apparent. But anyone who has followed recent Kraft Foods or Berkshire Hathaway developments knows that Irene Rosenfeld will never have a managerial role at Berkshire. During Kraft's bid for Cadbury Plc, Buffett was so incensed with Rosenfeld's willingness to overpay that he uncharacteristically went public with his displeasure. With price/sales of 1.12, a truly global reach and an overweight cost structure, Kraft Foods could be Buffett's white elephant- but don't expect Rosenfeld to stick around if it happens.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PEP, KFT, XRX over the next 72 hours.
