Monday, March 8, 2010

Berkshire's Future Management Tool?

Projected Successor to Buffet Uses Termination List to Motivate

Every year, speculation increases as to who will one day succeed Warren Buffet as CEO of Berkshire Hathaway.  According to an article in the February 27th issue of the Wall Street Journal, the most likely heir apparent at present is David Sokol, chairman of MidAmerican Energy Holdings Company and chairman/CEO of NetJets, Inc. (both are units of Berkshire Hathaway).

Mr. Sokol's record at MidAmerican has been impressive.  He took over the company in 1993 and, since Berkshire Hathaway began investing in the company in 2000, earnings have increased from roughly $109 million to $1.7 billion.  Results like this, along with Sokol's reputation as a deal-maker, and his close relationship with Buffet have increased the speculation that he will be the next Berkshire Hathaway CEO.

Many people wonder how the company will change when someone other than Buffet is in charge.  The fact that he ahs been running Berkshire Hathaway since the mid-1960s and has built it from a small, unknown textile manufacturer to the 18th largest company in the world with 250,000+ employees makes discussion and debate about its future very interesting.

Leading Via a Termination List

With Sokol, we do get a glimpse into his leadership style through the book, Pleased But Not Satisfied, that he authored in 2007.  The book presents his philosophy on a variety of business issues, including leadership.  On the topic of managing people, he wrote that he maintains a notebook of the successes and failures of each person on his team.  He uses the information to evaluate and rank each person in terms of whom he would terminate at any given time.

Although I've seen a number of different approaches to leadership over the years, I've never seen one that makes use of a termination list.  In previous blog posts, I've written about the importance of being people-oriented when leading a company.  I believe that an often forgotten responsibility of a CEO is to continually motivate, develop, and focus the efforts of people.  If the leader is not fundamentally people-oriented, attempts to create the type of culture that motivates and unleashes the potential of team members will be a constant struggle.

Keeping a list of successes and failures for coaching purposes is potentially an effective way to develop people.  Ranking people, based on the list, in order of expendability turns the list from a development tool into management by fear.

I'm sure that Mr. Sokol has some very talented people on his team.  I can't help but think, though, that the fear created by the termination list results in burying some of the talent and motivation, discourages people from taking chances or setting aggressive goals for fear of failure, and has resulted in the loss of some potentially excellent workers.

In some way, the results Sokol has achieved at MidAmerican makes it difficult to argue with his approach.  I believe a more open, servant leadership style, however, would lead to even greater results because when people are relaxed and secure in their positions, they are more innovative, less competitive with each other, and willing to strive for the impossible.

The Draw of Berkshire

It is Warren Buffet's reputation as a leader that gives Berkshire Hathaway first shot at many acquisitions - sometimes before anyone else even knows a company is for sale.  Many companies actually approach Buffet when they are ready to sell because they feel comfortable with the way Berkshire treats companies (and the people working in them) after the acquisition.  This gives Berkshire Hathaway the ability to target strong, well-run companies, while avoiding desperate and troubled organizations.

I'm not sure a CEO with a termination list will give an acquisition by Berkshire the same level of desirability.

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