Berkshire Hathaway’s Culture in 2050
By mid-century, changes in Berkshire Hathaway's voting control could make a breakup of the conglomerate likely.
Berkshire Hathaway’s 2024 Annual Report will be released on February 22 along with Warren Buffett’s letter to shareholders, an event that is always eagerly anticipated by shareholders and the investing community. Mr. Buffett will mark his sixtieth anniversary of taking control of the company in 1965 and it is likely that he will take some time to reflect on Berkshire’s history. A decade ago, Berkshire released special letters from Warren Buffett and Charlie Munger to mark the fiftieth anniversary along with a commemorative book that is still available for purchase.
The death of Charlie Munger in late 2023 at the age of ninety-nine was a stark reminder that we are getting close to the end of an era. Warren Buffett will turn ninety-five this year and has increasingly spoken and written about his own mortality, most recently in a press release announcing charitable gifts to family-run foundations in November. It would be ghoulish to try to guess when Mr. Buffett will pass the baton to Vice Chairman Greg Abel, but it would be highly unrealistic to presume that Mr. Buffett’s tenure as an active CEO will last beyond the end of this decade, even if he achieves centenarian status.
When Charlie Munger spilled the beans on CEO succession at the 2021 annual meeting, it was in the context of Greg Abel being fit to maintain Berkshire Hathaway’s unique culture. Mr. Munger was certain that Mr. Abel would be up to this task, and by all accounts Mr. Buffett is in full agreement. Greg Abel is sixty-two years old and Mr. Buffett has made many comments over the years indicating that he expects future CEOs of Berkshire to have long tenures, implying that Mr. Abel is willing to serve well into his seventies.
The future Board of Directors will be led by Mr. Buffett’s son, Howard, who is currently seventy-one years old, and most other board members have a long tenure and significant ownership interests. Mr. Buffett’s three children will not inherit his Berkshire Hathaway stock. Instead, his shares will be donated to a family foundation that his children will run. Over time, Mr. Buffett’s shares will be used to fund philanthropic spending, but it is his firm desire to avoid creating a dynastic foundation, as he reiterated recently:
I’ve never wished to create a dynasty or pursue any plan that extended beyond the children. I know the three well and trust them completely. Future generations are another matter. Who can foresee the priorities, intelligence and fidelity of successive generations to deal with the distribution of extraordinary wealth amid what may be a far different philanthropic landscape? Still, the massive wealth I’ve collected may take longer to deploy than my children live. And tomorrow’s decisions are likely to be better made by three live and well-directed brains than by a dead hand. As such, three potential successor trustees have been designated. Each is well known to my children and makes sense to all of us. They are also somewhat younger than my children. But these successors are on the wait list. I hope Susie, Howie and Peter themselves disburse all of my assets.
Mr. Buffett is well within his rights to dictate the timing of the disbursement of his estate. He has been vocal about doing so in a way that does not harm the interests of Berkshire Hathaway shareholders. Berkshire has a dual class share structure that I have written about in much detail in the past, so I will not repeat the specifics here. Suffice it to say that the Class A shares have disproportionate voting rights and Mr. Buffett’s ownership of Class A shares have allowed him to retain over 30% of the vote while donating well over half of his economic interests to charity since 2006, a subject I discussed in much detail a few years ago.
After Mr. Buffett’s death, his remaining shares will be donated to the family foundation run by his children and will be liquidated over a period of time that I suspect will not last more than fifteen years. The mechanics of this liquidation are straight forward. Mr. Buffett’s Class A shares will be converted to Class B shares prior to being sold to raise cash for philanthropic activities. By converting the Class A shares to Class B, the foundation will ensure that super-voting Class A shares are not available to other shareholders which would dilute the foundation’s vote. This will be integral to the foundation maintaining its voting power for as long as possible. My article on voting control explains the mechanics in more detail.
While it would be ghoulish to try to specify the timing with too much precision, it seems highly probable that his family foundation run by the children will have either wound down entirely by the early to mid 2040s or at least will be so depleted as to no longer be a major player when it comes to voting power. At that point, Mr. Buffett’s wish to not create a dynastic foundation will be fulfilled, but the cost will be that Berkshire will no longer have a very large shareholder controlled by Mr. Buffett’s trusted family members.
By 2045, Greg Abel will be eighty-two years old which might be considered youthful by Buffett and Munger standards but is well past retirement age for nearly all executives. Will Mr. Abel have a desire to run Berkshire Hathaway into his eighties? Will he be healthy enough to run Berkshire even if he has a desire to run it? Nothing in life is certain, but anyone who has seen the effects of old age must understand that it would take a remarkable man to remain equipped to run a company like Berkshire Hathaway well into his eighties. Mr. Abel might well be such a man, but we cannot count on it.
By the 2040s, Berkshire is very likely to have gone through its second CEO transition. Obviously, the identity of the CEO after Greg Abel is impossible to even predict at this point. It certainly will not be Ajit Jain, who is several years older than Mr. Abel, and it could very well be an executive that we have never heard of or has yet to even join Berkshire Hathaway. The best case scenario is that Mr. Abel will run Berkshire into the 2040s and a long-tenured Berkshire executive will emerge long before a transition to act as a second in command, but nothing can be assured.
For many years, I have felt confident that the CEO transition from Mr. Buffett to his direct successor will be smooth. I felt this way even before I knew that Mr. Abel was the successor and I feel even better about the transition knowing that he will be in charge. As I wrote last year, Mr. Abel has overseen important operational improvements at Berkshire’s sprawling MSR group since assuming the Vice Chairman role in 2018, and by all accounts he is an extremely skilled executive. He has also been responsible for capital allocation at Berkshire Hathaway Energy. He is steeped in Berkshire’s culture and will do all he can to uphold it. However, Mr. Abel does not control a meaningful percentage of Berkshire’s vote.
There is no way anyone can look forward two decades to determine what Berkshire’s culture will look like given all of the variables involved. However, we can project that there will not be a dominant shareholder with over 30% of the vote and the Buffett family’s role will be principally one of moral authority once the foundation’s shares are disbursed. We do not know if Mr. Buffett’s grandchildren or great-grandchildren will be included on the board, and his children are all senior citizens already. We do know that other great American companies have faltered once the founders have left the scene, even in cases where family members remained but with little voting control.
Although it is a smaller factor by far, many of Berkshire’s longtime shareholders who purchased Class A shares are getting older and nearing the point where they will be selling or giving away their interests. In many cases, Class A shareholders who are ideologically aligned with Berkshire’s culture will convert their Class A shares to Class B shares before selling or giving away smaller pieces of their holdings. In doing so, these longtime shareholders will dilute their vote.
In the past, I have advocated a potential 50-for-1 split of the Class A shares. I did so not for the typical reasons for stock splits but because a share price under $19,000 for the Class A shares would allow for gifts of one share that falls below the annual gift tax exclusion in the United States. Americans are permitted to give up to $19,000 to any individual each year (adjusted for inflation) without impairing their lifetime estate tax exemption. Many Class A shareholders convert to Class B prior to making gifts of their shares. A 50-for-1 split would allow gifts of Class A shares that fall below the exclusion. This would keep super-voting shares in the hands of people who are more likely to be aligned with Berkshire’s culture.
Mr. Buffett insists on having his foundation liquidate relatively quickly, which is obviously his prerogative, but it should be noted that a more gradual program of giving would extend the voting control of the foundation further into the future. If Berkshire begins to pay dividends in the future, a longer-lived foundation could use dividend payments to fund charitable giving rather than selling shares, thereby preserving voting control for a longer period of time. However, this is a moot point, since Mr. Buffett obviously knows this and is not inclined to risk having his wealth allocated far into future decades by people who he does not personally know and trust, which is perfectly understandable.
I will go out on a limb and make one more prediction that seems like a near certainty: Berkshire will face massive pressure to split up in the future. Wall Street bankers will be circling the company like sharks the day Mr. Buffett leaves the scene. Initially, they will be powerless to win board approval for their proposals since Howard Buffett will rightly tell them to pound sand, just as his father would want. But as the years turn to decades and the foundation’s voting power declines, the sharks will circle closer and closer.
Once Berkshire’s ownership looks like a typical mega-cap company, I think we can predict what is likely to happen. By 2050, Mr. Buffett will be long gone. Even if his children live to a very old age, their ability to protect the conglomerate structure that Mr. Buffett created over the past sixty years will be massively diminished due to the foundation’s policy of winding down its affairs sooner rather than later. Perhaps Mr. Buffett’s grandchildren or great-grandchildren will pick up the baton and serve on the board, but aside from the name and whatever moral authority they can muster, they too will have limited power.
A breakup of Berkshire Hathaway in two or three decades seems more likely than not in my opinion. This would be unfortunate because the Berkshire Hathaway playbook has worked so well for decades, but it will not necessarily be a disaster for shareholders. Wall Street may be full of sharks, but they will have limited ammunition unless the company’s performance falters. If the culture deteriorates over time, the “safety valve” for shareholders might in fact be to break up the conglomerate into units that are easier to manage.
Berkshire Hathaway’s current structure works because of a remarkable culture created by two remarkable men, and it should outlast them by many years, but probably not forever. I’m writing this partly because I would like to look back in a couple of decades and realize that I was entirely wrong!
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