The Berkshire Hathaway CEO is also the chairman of the board.
(Photo: dpa)
The timing couldn’t have been better: Warren Buffett welcomed his shareholders to the legendary shareholders’ meeting in Omaha, Nebraska, over the weekend. And that’s at a time when the stock is — finally — making a comeback, proving Buffett’s strategy of betting on industrials and energy companies is working. Its Berkshire Hathaway conglomerate is ideally positioned for periods of rising interest rates. The star investor and CEO therefore also used the first personal meeting with his shareholders since the beginning of the pandemic to celebrate his own successes.
But the shareholders’ meeting, which Buffett has dubbed “the Woodstock for capitalists,” uncovered two major weaknesses that shareholders need to be aware of, despite recent successes. First: Index funds are gaining more and more influence. That’s particularly risky for an unusual company like Berkshire Hathaway.
Buffett’s longtime companion and deputy chairman of the board, Charlie Munger, describes the three major index providers Blackrock, Vanguard and State Street as the new “emperors” who have a disproportionate amount of power in the stock market and are increasingly exercising it at annual general meetings. Lawrence Cunningham, a law professor at George Washington University, estimates that index funds now control a good 25 percent of Berkshire’s votes.
They are getting closer and closer to Buffett, who holds 31 percent of the voting rights and will continue to reduce them. Because Buffett donates shares annually and has stipulated that after his death his assets will go to foundations that will gradually sell the shares. A motion to separate Buffett’s dual roles as CEO and chairman of the board – a common demand in Germany as well as in the US – did not get the necessary majorities this year.
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But it doesn’t always have to stay that way. For many companies, this division of roles may be a good thing. It would have disadvantages for Berkshire. Buffett, who has led the company for 57 years, has only shown in the past few weeks that his shareholders benefit when he can act quickly and unbureaucratically. He took over the insurer Alleghany in just a few days for almost 12 billion dollars. In the first quarter, he just bought shares worth $50 billion and didn’t have to go through various voting processes.
Buffett’s successor stands in the background
It doesn’t help that Berkshire, Secondly, faces major upheavals. CEO Buffett is 91, Munger is seven years older. Years ago, Buffett – on paper – arranged his successor: The head of the energy division, Greg Abel, should one day take over the post of CEO. Abel was promoted to deputy chairman of the board in 2018, along with Ajit Jian, head of the important insurance division.
In recent years, Buffett has let his successor-designate take a little more prominence. But that’s not enough. Abel and Jain sat on stage with Buffett and Munger at Saturday’s AGM, but away from the spotlight. Apparently, Buffett has too much fun pulling the strings himself.
So while the Berkshire boss has complete confidence in Abel, he is failing to open up his successor to the public right now. When someone has been at the helm as long as Buffett has, the handover process becomes particularly risky. Those close to him say that Abel is confident and can negotiate just as hard as his boss when he’s not around. At the general meeting, however, the 59-year-old seemed shy and insecure.
It will be Abel’s most important task to win the trust of the shareholders. Buffett has built extremely loyal shareholders over the decades. But he cannot take for granted that they will also be loyal to his successor. What’s more, shareholders are getting on in years just like Buffett.
It is therefore all the more important to convince the next generation to stay invested. Buffett would do well to explain this in his lifetime, even if it means taking a step back from himself. Because if Abel fails in his mission, the index funds have won.
More: “Woodstock for capitalists” is back: Buffett welcomes shareholders in Omaha and buys shares for $51 billion