By Jonathan Stempel
Dec 11 (Reuters) - Warren Buffett has embodied Berkshire Hathaway for six decades, building a mighty conglomerate with a bevy of shareholder fans and making himself arguably the world's most revered investor.
As he prepares to pass the torch to Vice Chairman Greg Abel, the CEO-designate for 4-1/2 years, investors face the reality that Buffett's aura, in part reflected in Berkshire's stock price, will fade.
The change is likely to usher in more hands-on leadership from the top over
Berkshire's dozens of businesses. Some investors may demand that Berkshire follow a more traditional corporate path, such as by paying dividends.
Abel, 63, will become CEO on Jan. 1, and have one of the toughest acts to follow in corporate history. Buffett, 95, who has led Berkshire since 1965, will remain chairman.
"There is a huge halo effect (from Buffett)," said Lawrence Cunningham, a George Washington University law professor and author of several books on Buffett and Berkshire.
He said Abel must convince skeptics that Berkshire will thrive without Buffett making final decisions on which companies and stocks to buy, or providing guidance and wisdom in annual shareholder letters and meetings.
"I don't expect him to start cracking jokes and eat peanut brittle at the annual meeting," said Cunningham. "His biggest challenge is to say, I'm not Warren Buffett - and you shouldn't care."
Berkshire has already made some adjustments, announcing a management shakeup just three weeks before Abel takes over.
Abel will hand direct oversight of Berkshire’s 32 consumer products, service and retailing businesses to Adam Johnson, who will continue running the NetJets luxury plane unit. Berkshire also elevated Nancy Pierce to run Geico, where she had been chief operating officer.
She replaces Todd Combs, who had also been one of Buffett’s portfolio managers and moves to JPMorgan Chase, where he has been a director. Berkshire also named a new chief financial officer, and its first-ever in-house general counsel.
Abel is positioning “trusted lieutenants and fresh talent to balance continuity with modernization at Berkshire,” said Michael Ashley Schulman, chief investment officer at Running Point Capital in El Segundo, California.
BERKSHIRE TRANSFORMED OVER SIX DECADES
Buffett transformed Omaha, Nebraska-based Berkshire from a failing textile company into a $1.07 trillion conglomerate that is the corporate equivalent of a Sherman tank.
Its sprawl of close to 200 businesses, including the BNSF railroad, Geico car insurance, Berkshire Hathaway Energy and retail brands such as Brooks and Duracell, makes Berkshire a reasonable proxy for the U.S. economy.
Buffett also built his reputation picking stocks, including long-term investments in Apple and American Express.
Abel joined Berkshire in 2000, and led Berkshire Hathaway Energy for a decade before becoming a Berkshire vice chairman overseeing non-insurance businesses in 2018.
"Greg Abel may be more hands-on than Warren Buffett," said Cathy Seifert, an analyst at CFRA Research in New York who covers Berkshire. "He may sharpen his pencil as it relates to companies improving operating expenses and finding strategies to grow. A tighter hands-on strategy is more of a needle-moving strategy than Berkshire leads us to believe."
Berkshire, through Buffett's assistant, declined to comment, saying Buffett addressed some of Berkshire's future in his Nov. 10 letter to shareholders. Buffett and Abel were not available for interviews.
HOW BERKSHIRE MAY EVOLVE
While Berkshire’s stock has gained nearly six million percent since 1965, far above the Standard & Poor’s 500’s 46,000% gain, in recent years it has performed similarly to or lagged that index.
Buffett has long tempered investor expectations, telling shareholders in November that while Berkshire’s businesses overall have “moderately better-than-average prospects," the company's size "takes its toll."
Abel must contend with that size. While armed with $381.7 billion of cash that throws off lots of income, that can drag down overall performance because it isn't invested elsewhere.
Shareholders accept that returns won't match what they once were.
"We're not expecting the 23% that Buffett earned for decades," said James Armstrong, president of Henry H. Armstrong & Associates in Pittsburgh, who has invested in Berkshire for 40 years. "You can't do that with $1 trillion of assets. But if Greg Abel earns 8% to 10% a year, I'll be satisfied."
Even with Berkshire’s cash, Abel’s playbook may be restricted, with Berkshire lamenting the surfeit of private equity money that helps push takeover valuations higher.
"There's a chorus of people banging the table and saying 'invest that cash,'" Armstrong said. "I don't want Berkshire to invest that cash until it sees a good opportunity at a good price."
Many investors have long demanded that Abel begin paying dividends, which historically contribute 31% of the S&P 500’s return. Berkshire hasn’t paid one since 1967, and even a 2% dividend would cost Berkshire only about $21 billion annually.
"I expect more shareholders will clamor for paying a dividend, a better articulated shareholder buyback, and a more formal capital allocation strategy," Seifert said.
There may also be demands that Berkshire improve disclosures that many analysts see as impenetrable or incomplete. Berkshire devotes only a few sentences or paragraphs in its financial reports to some large subsidiaries, with no specific mention of overall profitability.
Still, as Abel balances such demands, many shareholders don't want Berkshire to lose what makes it Berkshire.
"We don't want to change Berkshire's culture," said Steve Check, president of Check Capital Management in Costa Mesa, California, which invests 30% of its assets in Berkshire stock and options.
VOTING POWER REMAINS
Some questions remain over Berkshire’s bench.
It isn’t clear how long Ajit Jain, 74, who leads Berkshire’s insurance operations and has been by Buffett's side for 40 years, will stay on.
The fate of Ted Weschler is also unclear. He, like Combs, has helped Buffett invest in stocks. It was once thought they would take over Berkshire’s equity portfolio, but Buffett has in recent years said Abel could handle it.
Buffett still controls 29.8% of Berkshire's voting power, and he or his estate will have outsized influence for at least several years. That could impede activist shareholders who may want a greater role.
"As long as Warren Buffett is still going to work and still chairman, Berkshire will have his fingerprints on the business," Check said.
Still, Abel is young enough to stay in charge long enough to see Berkshire evolve, even if it's hard to reinvent.
"Greg will have a little bit of a runway," Cunningham said.
(Reporting by Jonathan Stempel in New York; editing by Megan Davies and Nick Zieminski)
