Ready, willing and Abel?

A media-shy accountant from Alberta is one of the top-three contenders to fill Warren Buffett’s $300-billion shoes — assuming, of course, he wants the job.

In 2000, Berkshire Hathaway chairman and CEO Warren Buffett, the world’s most storied investor, left a handwritten note with the firm’s board of directors. The unassuming document addressed a pressing question for Buffettologists: who would succeed the Oracle of Omaha? According to The Wall Street Journal, the note, to be mailed to shareholders upon his death, laid out his succession plans. "Yesterday," the missive began, "I died. That is unquestionably bad news for me, but it is not bad news for our businesses."

The theorizing about who would step into the CEO’s job (Buffett’s son Howard would become Berkshire’s chairman, while a third person would be named chief investment officer) went into overdrive. David Sokol, CEO of MidAmerican Energy Holdings Co., emerged as the most likely heir apparent among the small group of high-level executives then running Berkshire’s various subsidiaries. Sokol had transformed CalEnergy Co. Inc., a little-known developer of geothermal energy reserves that Berkshire acquired in the late 1990s, into a powerhouse with 4,200 employees globally and annual revenues of US$2 billion. "He has the combination of relative youth, managerial experience and a deal-maker’s drive that distinguishes him from the other possible candidates," Barron’s reported in 2004, describing Sokol as Buffett’s protégé. "It will take someone with a big ego to replace Buffett and Sokol has that."

A decade later, the Buffett succession chatter has become steadily noisier, especially in the wake of the 84-year-old billionaire’s 2012 prostate cancer diagnosis. But Sokol is no longer with the firm, having left following an embarrassing revelation about his handling of an acquisition.

Sokol’s replacement is one Greg Abel, an Edmonton-born accountant who joined CalEnergy in the early 1990s. He worked for years as Sokol’s second-in-command until stepping in as MidAmerican’s chairman in 2011. Positioned at the helm of one of Berkshire’s largest and fastest-growing divisions (now called Berkshire Hathaway Energy), the 52-year-old executive is one of three candidates on the short-short list to replace Buffett, who is said to have privately informed the Berkshire board of his choice, but has yet to reveal the decision to either the winner or the markets.

Abel’s "competition" is Ajit Jain, 63, who runs Berkshire’s extensive insurance holdings, and Matthew Rose, 55, who oversees BNSF Railway, another sprawling Berkshire subsidiary. University of Maryland finance professor David Kass, a Buffett watcher, notes that Jain has said he doesn’t want the top job, and speculates Abel will get the nod if Jain says no. But, Kass concedes, the closely scrutinized succession at the Omaha conglomerate simply has no precedent. "It’s as unique as Warren Buffett is."

By most accounts, Greg Abel is a hard-working executive who has acquitted himself exceedingly well in his post atop Berkshire’s energy subsidiary in Des Moines, Iowa. That division today owns 284,000 km of energy transmission assets and distribution lines, owns or contracts more than 28,000 megawatts of electricity generation and is cumulatively worth US$70 billion. A year ago, in recognition of Abel’s growing managerial importance within the Berkshire empire, Buffett put him on the board of ketchup manufacturer H.J. Heinz, which Berkshire acquired together with another investor group for more than US$12 billion.

Perhaps not surprisingly, Abel isn’t talking about the daunting prospect of filling Buffett’s US$300-billion shoes. That meticulous reserve is a hallmark of Buffett’s top executives, say Buffettologists. "He really is a Berkshire man," observes Jeff Matthews, who runs a Florida investment firm, Ram Partners LP, and has written extensively about Buffett and his potential successors. "It’s not about himself. In the old days, you’d have called him a company man." Abel graduated from the University of Alberta in 1984 with a BCom and soon began pursuing his accounting designation. He liked hockey and numbers. As he recalled in a recent interview with U of A’s news service: "I started with a stronger interest in finance, but accounting took over when I came to realize how critically important it was to understand things such as income and cash flow statements."

After a stint with Price Waterhouse’s San Francisco office, he joined CalEnergy as controller. Abel rose quickly, with Sokol dispatching him to the UK to run a utility CalEnergy had purchased. Abel also owned a stake in the company. "While I was happy to join them on the financial side, in a short time I wanted to become more involved in the operational side," he told the Edmonton Journal last year. "I was an accountant who wanted to be in the field and I spent a year at their geothermal power plant at Ridgecrest, two hours east of Los Angeles."

Since taking over from Sokol three years ago, Abel has found himself in charge of a division of Berkshire that has garnered an ever-growing portion of Buffett’s prodigious attention, as well as the company’s vast reserves of capital. Last year, for example, Abel oversaw the acquisition of NV Energy Inc., a giant Nevada utility worth US$5.6 billion; Buffett described it as one of his "elephant" deals.

Moreover, Abel is charged with delivering on Buffett’s desire to make a serious foray into renewable energy: the company has invested US$15 billion in solar and wind power to date, and Buffett — who is one of US President Barack Obama’s most prominent supporters — said earlier this year that he intends to double his investment in low-carbon energy production. "We’re going to keep doing that as far as the eye can see," he told Bloomberg. "We’ll just keep moving."

In the interim, Berkshire has turned its attention to Alberta in a serious way. In 2012, MidAmerican and TransAlta set up a 50-50 joint venture known as TAMA Power to build large-scale gas-fired generating plants across Canada. The deal, say company officials, was finalized by Abel and TransAlta CEO Dawn Farrell, who met at the Calgary Stampede a dozen years ago and have stayed in touch ever since. Last year, they created a transmission joint venture (TAMA Transmission), which is pursuing a contract to build a 500-km power corridor between Edmonton and Fort McMurray. (Recently TransAlta sold its 50% stake in CE Generation to Berkshire Hathaway Energy.)

Those joint ventures are hardly Berkshire’s only Alberta plays.

Last year, Buffett snapped up $620 million in Suncor shares. Earlier this year, Berkshire offered $3.2 billion for AltaLink, the utility that owns more than half of Alberta’s grid. With assets of $5.9 billion, the utility, which is controlled by SNC-Lavalin, operates 12,000 km of transmission lines serving 85% of the province’s customers. It didn’t come cheap; Berkshire’s share price actually dipped slightly after the announcement. As SNC’s CEO Robert Card told the Calgary Herald, "It was a very robust bidding environment."

Abel, who still travels back to Alberta regularly to visit family, described the proposed acquisition as a "beachhead" in a May 2014 interview with The Globe and Mail. "We invest in hard assets, so it can be transmission lines, distribution lines, generation assets ... and we’re sort of a unique owner, because we really intend to own those assets forever," he said.

But first, Abel has to persuade federal and provincial regulators to give the deal their blessing. The acquisition has yet to pass muster with Alberta’s utilities commission and federal competition regulators. And there’s already evidence that the approval won’t be a rubber stamp. Shortly after the company made its offer public, critics from across the political spectrum condemned the deal, warning of the impact of an international investment giant controlling something as fundamental as the electrical grid.

Jeffrey Jones, an Alberta-based Globe and Mail business columnist, also noted the widespread ambivalence: "The deal has sparked heated debate about foreign ownership of ‘critical infrastructure’ in a place where new transmission projects get embroiled in battles over property rights even when demand drives the grid close to the breaking point," he wrote.

All these deals, says Matthews, reveal that Abel is practiced in the art of Buffett-style value investing. "He’s willing to bet big and move faster, and that’s what Buffett likes."

Warren Buffett is by far the world’s best known exponent of value investing, an approach he learned from one of his Columbia University business professors, Benjamin Graham, and one that is now emulated by countless portfolio managers. But unlike the legions of self-styled Buffett disciples pledging stable returns to clients, Abel’s job is to translate Buffett’s laser-like sense of value investing into profitable action.

After graduate school, Buffett, the son of a Nebraska congressman, went to work for Graham. He soon began setting up investing partnerships that earned him his first millions. In the mid-1960s, he acquired the shares of Berkshire Hathaway, a textiles firm, and later took over the insurance company GEICO, which proved to be a foundation of Berkshire’s subsequent growth (and is still a core asset).

Over the years, Berkshire evolved into a publicly traded investment pool that owns a portfolio of private companies, many of which approached Berkshire about a takeover. The company also owns almost US$120 billion in other firms’ stocks. Buffett’s investing strategy, famously, is to buy and hold — forever. He owns some or all of Dairy Queen, Fruit of the Loom, Coca-Cola Co. and The Buffalo News. Notwithstanding Buffett’s friendship with Microsoft founder Bill Gates — both have pledged to give away most of their fortunes before they die — Berkshire has generally avoided the tech sector.

Part of Buffett’s investing mantra has to do with the way he sources deals: Berkshire never pursues hostile takeover deals, nor, as with private equity firms, does it load up its acquisitions with debt and then sell off the assets to make a profit. Instead, Buffett relies on a highly research-driven approach to investing, as he and his team monitor companies for long periods until an opening to buy presents itself.

After acquiring control, he leaves senior management in place, giving the executives of his subsidiaries permission not to obsess over short-term results. He measures results for Berkshire overall by tracking the growth of the book value per share. As Matthews explains, "Buffett tells the guys who run his businesses, ‘Treat it like a family business that’s going to be in the family for a hundred years.’ Buffett doesn’t fixate on quarterly earnings."

The formula transformed Buffett, who still lives in the modest Omaha home he bought in the 1950s for about US$30,000, into one of the world’s four richest men. Yet the past few years have shown that even Buffett is not infallible. Since the 2009 recession, Berkshire Hathaway — though undeniably profitable and loaded with cash to spend — has underperformed the S&P 500, a track record that takes some of the lustre off the company’s $190,000 class A shares.

In the annals of corporate governance, Berkshire Hathaway’s succession process has absolutely no precedent. Even Buffett has mused that he doesn’t see himself as replaceable. As Matthews puts it, "This isn’t your typical CEO bake-off."

Among the legions of Berkshire watchers, there’s no shortage of speculation about a field that includes Abel, Jain and Rose. In recent years, Buffett, who serves as Berkshire’s chief investment officer, has said that role will be spun off from the CEO position and delegated to his two top portfolio managers, Tony Combs and Ted Weschler. As for the leading contenders for CEO, he’s lavished praise on Rose, Jain and Abel, likely frustrating the oddsmakers and handicappers.

Buffett’s coy positioning, of course, hasn’t silenced the theorizing. Matthews, for example, argues that Jain is the most likely choice. For years, Buffett is reported to have called Jain every day and has described him as an "ideas machine." Matthews reasons that Jain, as head of Berkshire’s insurance assets, is a pivotal figure in Berkshire’s constellation because he is the top risk manager in a sprawling investment company that has made a mission out of driving out investment risk. "What Buffett worries about," says Matthews, "is that Berkshire Hathaway will be able to pay its insurance liabilities over the long haul without any risk whatsoever." Organizational behaviour expert Hugh Arnold, a former dean of the University of Toronto’s Rotman School of Management, points out that some multinationals, such as General Electric, are well known for demanding long service from their CEOs. Given the length of Buffett’s own tenure, as well as his buy-and-hold-forever investment strategy, Berkshire’s board, which includes Buffett’s son, is almost certain to be looking for not just philosophical continuity but rock-solid stability in its choice of new CEO. (Buffett himself is famously reluctant to oust CEOs.) All those factors seem to favour a younger candidate such as Abel.

But there are other crucial considerations as well, not least of which involves the nature of the job itself. Arnold points out that there’s a big difference between actively managing an acquisition-oriented subsidiary, with far-flung divisions and thousands of employees, and running a far smaller investment company, such as Berkshire Hathaway, which is said to employ only about two dozen people. "It’s a very different job with very different skills," says Arnold. "There are some real questions about how those skills will translate."

Then there’s the not inconsiderable matter of personal style. Buffett and his long-time wingman Charlie Munger, 90, are the undisputed classic rock stars of the investment world. Each year, thousands of shareholding devotees make the pilgrimage to Omaha to attend Berkshire’s legendary annual general meetings, which can run up to six hours. These events feature Buffett and Munger cheerfully fielding scores of questions on a stage in a packed stadium, offering up their distinctively homespun brand of investment wisdom. It’s the toughest of all acts to follow, no doubt.

Abel has a congenial personality, much like his boss, says Matthews, although little of that is on public display at the moment. If Abel is selected as the successor, he will have to open up and become a much more public figure. But, as Kass warns, whoever succeeds Buffett is "probably not going to be as entertaining and humorous as Warren Buffett and Charlie Munger are."

Quite apart from the performance skills of Buffett’s successor, the narrative about Berkshire’s transition to the post-Buffett era has a potentially darker side. The company runs "quite a high risk" of seeing top-flight executives such as Abel or Rose decamping if they don’t get the nod from the board, says Arnold. He cites GE’s decision to appoint Jeffrey Immelt to succeed Jack Welch as CEO: some executives who’d been on the short list left and took CEO jobs elsewhere.

Matthews, however, doesn’t think Abel poses a flight risk if Berkshire names Jain or Rose to replace Buffett. "I’d say [it] is extremely low, given that he’s got such a wonderful platform to work with and an almost unlimited chequebook." He adds that Abel’s decision will also be informed by the fact that he owns millions of dollars worth of Berkshire Hathaway Energy’s equity.

For now, Buffett is not going anywhere. And no one can say how much time Abel spends pondering the prospect of taking over from the world’s most famous investment guru. In all likelihood, he’s focused, Buffett-like, on more important long-term goals, such as reeling in the AltaLink deal and scanning the horizon for more acquisitions, including some in Canada, that will help his still-robust boss get Berkshire back into tip-top shape. "Even if Abel is not the successor," says Matthews, "he’s extremely important to the future of Berkshire."

About the Author

John Lorinc


John Lorinc is a freelance writer based in Toronto.

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