When Warren Buffett announced last week that he had finally chosen a successor to one day take over the reins of Berkshire Hathaway — but didn’t actually say who that person is — some investors and other interested parties weren’t happy.

Buffett’s comments came in his annual letter to Berkshire shareholders, in which he covered a number of topics, such as the company’s recent performance, continuing doldrums in the housing industry, and the status of recent investments, including both winners and losers.

But his discussion of the succession issues is what led media coverage of the letter. Not only did Buffett choose not to name the heir apparent, but he also noted that there were two unnamed backup candidates, according to an article in The Wall Street Journal. Furthermore, the Journal pointed out, the only details he offered about the chosen one is that “the person ‘is an individual to whom [directors] have had a great deal of exposure and whose managerial and human qualities they admire.'” 

Articles in both the Journal and The New York Times noted that an earlier heir apparent, David Sokol, was knocked out of the running when he resigned over allegations of insider trading. The Times, however, went on to suggest that “in searching for clues into Buffett’s successor, the letter perhaps heaped the most explicit praise on” Ajit Jain, head of the company’s reinsurance operations. Two other current executives — Tad Montross and Matthew Rose — have also been mentioned as possible successors.

While Buffett has been generally unforthcoming on the topic of succession — and repeated in his letter that he has no plans to step down — it looks like some investors are losing patience with the waiting game. Berkshire’s share performance has lagged the broader market recently, and according to the Journal, some investors suggest that Buffett’s failure to resolve the succession issue is one of the reasons.

KnowledgeToday asked Wharton faculty for their take on Buffett’s handling of the succession question.

According to Wharton accounting professor Wayne Guay, “when you have an 81-year-old CEO who is not sure when he will choose to retire, investors will obviously be concerned about succession planning…. This is even more important for Berkshire than the typical firm, given Buffett’s high profile and the perception that Buffett is Berkshire Hathaway. Comparisons could be made to the succession planning that took place at Microsoft, Apple and other firms with high profile founder CEOs.”

However, Guay adds, in general, firms “will not announce a successor until it has been set in stone with all the I’s dotted and T’s crossed. It is very bad to announce a successor and then have to rescind the announcement if the heir apparent cannot reach a formal agreement with the firm. Failure to reach an agreement with the chosen successor would then mean that the firm has to move down to its second choice or third choice, and investors will likely conclude that those lower choice successors are not as good as the top choice.”

From his reading of this week’s coverage in the Journal, Guay says “it does not appear that a formal agreement has yet been reached with the successor because of the mention of a couple of ‘alternative’ successors waiting in the wings. By waiting until the successor has been set in stone, Berkshire can then announce that they have appointed the best person to run the firm.” Keeping the issue “close to the vest now [means that] no one will know whether, in fact, they got their first choice or not. I think this is a common strategy for announcing successors. When a successor is finally announced, it is generally always sold to the public as the best choice to run the firm.”

Wharton management professor Lawrence Hrebiniak, however, wonders if Buffett “is losing it just a bit. Company performance has been down slightly of late. People certainly haven’t forgotten the David Sokol fiasco and how Buffett was duped for a while by his friend. And now [we have] the ballyhooed notice of the secret choice of successor where even the successor doesn’t know who he is and when he might be tapped for the job. When will Buffett retire, and will his choice of successor still be the right one for the company at the time? How will the supposed group of successors now interact or work together? Clearly with uncertainty and perhaps even with a bit of paranoia as they search for clues about Buffett’s decision. This, in my opinion, isn’t good succession planning. I know Buffett is a bit different than most CEOs, but this is off base, even for him.”  

Wharton management professor Nicolaj Siggelkow suggests that since Buffet has not announced he is retiring anytime soon, “it’s not clear why he should have revealed any name. If he retires in five years, the successor might be quite a different person than the one he is currently thinking of. I see this announcement mainly as saying: ‘We have a credible contingency plan should something unexpected happen to me. Not only do I know who would succeed me, but the board has already signed off on this decision as well, i.e., there won’t be any time of uncertainty.’”  

With an unknown retirement date, “it’s really not clear what would be gained by identifying the person now,” Siggelkow adds. “The internal politics at Berkshire would change: People would deal differently with this person and others might become less motivated. At the same time, the person would get much more external attention without really having much more internal control. None of this strikes me as particularly helpful.”