Home Leadership Warren Buffett's Succession Planning Is a Business Template for Success
Warren Buffett's Succession Planning Is a Business Template for Success

Warren Buffett's Succession Planning Is a Business Template for Success

Learn more about management degrees at American Public University.

By Dr. Marie Gould Harper
Program Director, Management at American Public University

All too often, we make things more difficult than they need to be. In the past, for example, business leaders’ succession planning often consisted of complex techniques and best practices.

It’s no wonder that many business leaders and HR practitioners believe that succession planning is a complicated process. They also think that succession planning is a method restricted only to the largest organizations with the most sophisticated organizational development departments.

What Warren Buffett has done is to make the process simple and customized. This way, Buffett feels more comfortable passing the torch to someone who is a proven leader, rather than to someone who has successfully mastered the art of climbing the corporate ladder.

What Is Succession Planning?

Different people define succession planning differently. The definition depends on to whom you are speaking. The Society for Human Resource Management defines succession planning as “a focused process for keeping talent in the pipeline. It is a 12- to 36-month process of preparation, not pre-selection.”

Succession planning can go in two main directions. For instance, a successor may be chosen by the position or by the person.

Sometimes, the necessary expertise resides in a particular individual who has numerous skill sets that would be valuable in some positions. Other times, certain positions themselves serve as excellent “training grounds” for future roles. A training program that includes both elements ensures the highest likelihood of successfully addressing the primary purpose — keeping talent in the company pipeline.

The 2015 State of Succession Planning Report describes succession planning as, “Any effort designed to ensure the continued effective performance of an organization, division, department, or workgroup by making provisions for the development, replacement, and strategic application of key people over time.”

According to this report, succession planning is a part of an organization’s talent management program. You could argue that the process belongs in this branch of the organization because its purpose is to attract, retain and develop the best employees.

Why Is Succession Planning Essential?

The primary purpose of succession planning is to ensure the organization has enough talent in the pipeline to replace people who:

  • Leave the company for another job
  • Receive a promotion and move on
  • Retire

The key is to have the individuals ready when needed. Unfortunately, we cannot always predict when one of these three reasons will come into play. As a result, creating a long-term succession planning program may not be in the best interests of the organization.

Buffett Notes that Organizational Changes Are an Important Part of Succession Planning

Warren Buffett has always struck me as a transparent man of character. Of all of the articles written about Berkshire Hathaway’s recent moves, Forbes Magazine’s Antoine Gara sums up the situation best.

Buffett explained how recent changes in the organization were a part of its succession planning.   Key points that should be noted include:

  • The decisions made have board support.
  • Greg Abel and Ajit Jain have been promoted to Vice Chairs and Charlie Munger will head up key functions of the business. All three will have seats on the board, creating three potential successors.
  • Buffett has publicly acknowledged that all the gentlemen are key figures at the company and have “Berkshire Hathaway in their blood.”
  • Buffett is increasing his allocations of Berkshire funds to lieutenants Todd Combs and Ted Weschler – another step to put rising stars in their proper positions.
  • Although the board has a designated successor prepared, that person could change over time.

Unlike most organizations, Buffett and the board of directors have already put several key people in place. This arrangement:

  • Allows each man to “show what he’s got” and determine how much he can handle
  • Allows the board to see how well they work together
  • Does not rely on one person being the designated successor

What Processes Are Considered Best Practices?

Writing in Ivy Exec, Dan McCarthy, the director of Executive Development Programs at the University of New Hampshire, recommends that companies follow these best practices for succession planning:

  • Have the commitment and involvement of the CEO and Board. Succession planning should not be an HR-driven paperwork exercise. The CEO should own it and have regular reviews with the entire Board or a Board subcommittee. Board members would contribute to the process by providing feedback, asking great questions and holding the CEO accountable.
  • Have regular talent reviews. The Board reviews talent with the CEO, the CEO reviews talent with the executive team, each executive team member reviews talent with their groups and the process cascades down throughout the organization. A wide net is cast for rising stars, and poor performers are dealt with.
  • Only identify viable successors for a handful of key C-level positions. Then, the CEO and the Board should identify “pools” of high-potential employees for the top levels of the organization. Those individuals could be developed to hold future positions, even some that may not even exist currently.
  • Take a ‘pipeline’ approach to development. Talent at ALL levels of the organization should be identified and developed.
  • Hold the executive team accountable. This team is responsible for measuring key activities and results. Those actions should be tied to executive compensation.
  • Align with business strategy. The Board of Directors and the executive team “connect the dots.” They can articulate the business case for doing succession planning (or the consequences of not doing it).
  • Manage the irrational, political and emotional dynamics of succession. Ask anyone who’s ever been in the middle of a succession planning program or talk to any CEO who’s faced with the prospect of “letting go.” It’s not for the faint of heart and can’t be overlooked. This type of action cannot be found in a textbook, but comes with experience and emotional intelligence.
  • Assess performance and potential. Don’t gamble on past performance as a predictor of future success in a new role. That’s a high-risk bet. Use different ways to assess the potential of successors with relevant, consistent criteria.
  • Integrate succession planning with performance management, recruitment, selection, development and rewards. Succession planning is not some super-secret process done in isolation in a smoke-filled room.
  • Make a serious commitment to succession development (time and resources). Succession planning without investing in development is nothing but a useless exercise in futility. The best companies spend more time developing candidates than they do creating lists.

Another perspective, based on a reaction to Merrill Lynch and Citigroup losing their CEOs unexpectedly, comes from Stephen A. Miles, a managing partner in the Leadership Consulting Practice at Heidrick & Struggles, and Nathan Bennett, a professor of management at Georgia Tech. Their perceived process, published in Forbes, is more concise. There are only four steps:

  • Analysis – Step back and evaluate the situation from an organizational perspective versus looking at the individual. Do this by identifying the most significant challenges the organization will face during the next four to six years and the skills an individual will need to overcome them. The goal is to see what is best for the company versus focusing on the characteristics and top skills of individuals.
  • Development – Identify both internal and external candidates who may fit the bill as a successor. You can find internal candidates by seeking “ready now” candidates who can be ready to take over within two to four years. External candidates could be solicited with the assistance of an executive search firm.
  • Selection – Once top candidates have been identified, bring them in and ask them to present a five-year plan to the Board of Directors and search committee. The decision could be made on the merits of what someone states he or she can do.
  • Transition – During the first year, develop a plan of action and milestones to achieve for the successor. Conduct an evaluation after the designated period to see if things are working out.

If we compare what Warren Buffett has put in place with the two perspectives above, I would say that Buffet’s actions fit well with McCarthy’s presentation of the situation.

Up to this point, each potential successor may have been a success at what he or she did. However, each one is about to start from scratch when it is determined where they will fit into the future of Berkshire Hathaway.

The Berkshire Hathaway Board also has a successor plan if Warren Buffett suddenly decides to leave. However, that individual is not guaranteed the spot, and the decision could change over time. That scenario supports the analysis stage of Miles and Bennett.

Remember: The obvious and groomed successor may not be the right answer for an organization, especially if disruptors are on the horizon.

Learn more about management degrees at American Public University.

About the Author

Dr. Marie Gould Harper is the Program Director of Management at American Public University. She holds an undergraduate degree in psychology from Wellesley College, a master’s degree in instructional systems from Pennsylvania State University and a doctorate in business from Capella University. She is a progressive coach, facilitator, writer, strategist and human resources/organizational development professional with more than 30 years of leadership, project management, and administrative experience. Dr. Gould Harper has worked in both corporate and academic environments.

Dr. Gould Harper is an innovative thinker and strong leader, manifesting people skills, a methodical approach to problems, organizational vision and ability to inspire followers. She is committed to continuous improvement in organizational effectiveness and human capital development, customer service and the development of future leaders.