Larson-Juhl president, Craig Ponzio, who had overseen the 1988 merger, proposed in 2001 that Berkshire acquire the company. Buffett had never heard of it, but within two weeks made a deal for the business, then generating annual sales of $314 million. Ponzio retired while McKenzie stayed on as chief executive. Through the mid-2000s, the company prospered, expanding into sales of artwork. Yet profits slipped amid challenging industry economics. Consumers objected to the cost of custom framing—routine jobs run hundreds of dollars—while retailers insisted on high margins to enable offering a wide choice of styles.
Back at Berkshire headquarters, Buffett had asked Tracy Britt Cool, another young manager, to help oversee some of Berkshire’s smaller companies or those needing help from headquarters—and Larson-Juhl fell into both categories. For Cool at Larson-Juhl that winter of 2012, one task was to seek a replacement for McKenzie, and Van Pelt got the job. Since then, Van Pelt has been toiling to vindicate the vote of confidence, heralding a “strong culture” at Larson-Juhl and trying to navigate the squeeze between frame shop demand for high margins and consumer aversion to high prices.2
Buffett’s 2009 hiring of Cool unloaded some responsibilities and expanded institutional memory as Berkshire’s growth exploded and Buffett continued to plan ahead. Steps like these help clarify Berkshire’s future beyond Buffett and are the start of an answer to the perennial question: “What happens to Berkshire if Buffett gets hit by a truck?”3
This question has nagged the company’s constituents for two decades. The concern was that the fate of the man and the company he built were one. With Buffett’s demise went Berkshire. But after years of intensive definition, by words, deeds, and training, Buffett has institutionalized Berkshire’s attitudes and practices so that it is poised to endure long after his departure. (He is also in very good health, so using the example of a truck in the perennial question remains apt.)
Since 1993, Buffett has written about what will happen after he’s gone, and he and the Berkshire board have formalized the plan. As updated in 2006, the succession plan prescribes splitting Buffett’s job in two: management (a chief executive officer) and investment (one or more investment officers). On the investment side, Buffett wrote:
At one time, Charlie was my potential replacement for investing, and more recently Lou Simpson has filled that slot. Lou is a top-notch investor with an outstanding long-term record of managing GEICO’s equity portfolio. But he is only six years younger than I. If I were to die soon, he would fill in magnificently for a short period. For the long term, though, we need a different answer.4
So Berkshire recruited younger investment managers Todd Combs and Ted Weschler. They, and maybe one more officer to assist them, should be able to handle the investment line of Buffett’s job. They possess the necessary skills to manage the securities investments and have proven track records—surpassing Buffett in some years.5
In many ways, it will be more difficult than in the past, however. Combs and Weschler run only a portion of Berkshire’s portfolio, $7 billion each out of $115 billion total at year-end 2013. Without Buffett, the portfolio they are eventually to run will be far larger than what they have managed in the past. All else being equal, it is harder to outperform the market with a large portfolio than with a small one.
The number of holdings in Berkshire’s portfolio will also grow. Today, Berkshire’s portfolio is concentrated. Its largest four positions—American Express, Coca-Cola, IBM, and Wells Fargo—are worth $60 billion, more than half the portfolio; its largest eight (adding ExxonMobil, Munich Re, P&G, and Walmart) represent more than 70 percent. One duty will be to monitor these positions and, if economic characteristics deteriorate, to sell. There will be scant opportunities to reinvest such large blocs—averaging $10 billion—in single companies. That means adding diverse stocks, making it harder to outperform.
On the other hand, Berkshire’s unmatched capital resources and culture make it an investor of choice for those seeking financing. Whether for corporations needing liquidity amid distress, such as Goldman Sachs or USG in 2008, or private equity firms like 3G seeking partners to co-invest in large companies like Heinz in 2013, Berkshire is uniquely positioned to attract investment opportunities. Its chief investment officers—Combs and Weschler or others—will field them.
The job of chief executive officer—overseeing the subsidiaries, allocating corporate capital, and making new acquisitions—will be demanding. Oversight will be harder for a successor than for Buffett. It is one thing for the founder who was there at every acquisition to support and review the managers and distribute capital among them; for any other person, the task is daunting. Still, Berkshire subsidiary executives constitute a deep bench on the managerial side.