Buffett's Plan For Successful Succession

A couple of weeks ago, Berkshire Hathaway Chairman Warren Buffett officially put the kibosh on what many an investor must have regarded as the ultimate succession plan: "I've reluctantly discarded the notion of continuing to manage the portfolio after my death -- abandoning my hope to give new meaning to the term 'thinking outside the box,'" Buffett, 77, wrote in his annual letter to shareholders.

Despite his tongue-in-cheek approach, Buffett touched on one of the most important issues an enterprise faces: figuring out who's the right person to one day take the reins.

A company's very "survival," Peter Drucker wrote in his 1946 book Concept of the Corporation, depends on the ability "to develop independent leaders below the top who are capable of taking top command themselves, and to devise a system under which succession will be rational and by recognized merit rather than the result of a civil war within the institution and of force, fraud, or favoritism."

Drucker's thinking on many topics evolved over the course of his long career. This wasn't one of them. In Management Challenges for the 21st Century, published in 1999, he echoed what he had concluded more than 50 years earlier: "Succession has always been the ultimate test of any top management and the ultimate test of any institution."

Failed Succession Planning

What's amazing is how many organizations are, by this measure, outright failures. The Human Capital Institute, a professional association and research group, estimates fewer than 50% of North American companies with revenue of more than $500,000 "have any meaningful CEO succession planning in place."

Even some of the biggest corporations have been caught flatfooted. After Stan O'Neal was ousted as Merrill Lynch's chief executive last year, his predecessor, Daniel Tully, decried the fact that the investment bank was forced to look outside for a successor. Previously, "we spent days, months talking about succession planning," Tully said in an interview with a Bloomberg reporter. In what he called the "hit-by-the-bus scenario," names were continually collected in case "something happened to the chairman."

The philanthropic universe isn't any better. A 2006 survey by DRG, an executive recruitment firm that works exclusively with nonprofits, found that 58% of social-sector chief executives and their boards hadn't discussed succession -- even though 40% of CEOs intended to leave their job within two years. Size mattered not. "Organizations, large and small, are equally challenged and equally unprepared for leadership changes," notes DRG managing partner David Hinsley Cheng.

How does this happen?

Some of it is the result of fear -- specifically, a fear by certain leaders (or "misleaders," as Drucker labeled them) of having smart, self-assured colleagues around them. "An effective leader knows, of course, that there is a risk: Able people tend to be ambitious," Drucker wrote in 1992's Managing for the Future. "But he realizes that it is a much smaller risk than to be served by mediocrity. He also knows that the gravest predicament of a leader is for the organization to collapse as soon as he leaves or dies."

Grooming and Promoting

Indeed, there is powerful evidence that the best institutions constantly cultivate and elevate those within -- and don't fall into the trap that says the only way to stimulate progress and change is to reach outside for new blood.

In their book Built to Last, Jim Collins and Jerry Porras reported that of 113 CEOs who had overseen corporations that were both outstanding and enduring -- "visionary companies," in their words -- only 3.5% came directly from somewhere else. This compared with 22% of the 140 CEOs at the other companies they examined, businesses that were deemed "good" but not great.

What's more, the most excellent organizations nurture their people up and down the line. Collins and Porras pointed to the financial publication Dun's Review, which once described Procter & Gamble's program for grooming managers as "so thoroughgoing and consistent that the company has talent stacked like cordwood -- in every job and in every level."

When it comes to choosing who to promote, there is no shortage of advice out there. The management shelf is crowded with books on the subject. Drucker, though, kept things pretty simple. One hard-and-fast rule is that the leader heading for the exit should never select his or her own heir. He or she can be part of the process -- but shouldn't control it. Otherwise, vanity is apt to override most every other consideration.

"We tend to pick people who remind us of ourselves when we were 20 years younger," Drucker said. "First, this is pure delusion. Second, you end up with carbon copies, and carbon copies are weak."

Strength in Numbers

As for Berkshire Hathaway, it's evidently inclined to find different folks to put on the three hats Buffett wears: chairman, chief executive, and chief investment officer. Buffett has indicated that his son, Howard Buffett, will become chairman -- a way to help preserve the company's distinctive culture. Three internal contenders are being eyed for the CEO gig. (One of those widely thought to be in the running, David Sokol, just last week modified his duties at Berkshire's utility unit, leading some to speculate he may be the favorite.)

For the investment job, Buffett said he has identified four outside possibilities, and "all wish to work for Berskhire for reasons that go beyond compensation." Earlier, Buffett had suggested he might bring in a potential successor or two in this area -- "a younger man or woman" -- in something of an understudy role.

Meantime, Drucker would no doubt be delighted the billionaire is so clearly determined to meet his definition of true greatness: "the leader who himself has strength and leaves behind strength.