2011: How can you ensure that there are no more Sokols in Berkshire's management?

BECKY QUICK: I’d like to ask a question that comes from Ron Taracant (PH) from Sugar Land, Texas.

He says, “Good morning, Mr. Buffett and Mr. Munger. You have always put great emphasis on hiring and retaining managers that not only have exceptional talent but also adhere to the higher standards of corporate ethics and behavior.

“Recent events surrounding Mr. Sokol’s actions have demonstrated that we were not very far from a situation where someone running Berkshire Hathaway had great talent, but lacked the other quality that has made Berkshire the envy of the business world.

In some ways, we are relieved these events happened when you were still at the helm.

But coming back to the succession plan that you have in place, how can you ensure that there are no more Sokols in the lineup of successional managers that you have.

WARREN BUFFETT: Yeah, he made an assumption there about Sokol being the next in line, which I’m not sure was warranted.

But he certainly was entitled to think that he was a candidate. And there are — that is, one of the reasons that I think it’s a good idea if my son, Howard Buffett, who would have no — get paid nothing, and have no activities in the company, be the chairman after I’m not around, because you can make a mistake in selecting a CEO.

I mean, I think the odds of us making a mistake are very, very low. And certainly the candidate that I think is the leading candidate now, I wouldn’t — I would lay a lot of money on the fact that he is straight as an arrow.

But mistakes can be made. You know, the — the Bible says the meek shall inherit the earth, but the question is, will they stay meek? (Laughter)

The idea of having an independent chairman, who would be voting a lot of stock — because even at my death, because of the concentration of A stock and so on, the executors would have a very significant block of stock — and if some mistake were made, it would be easier to change if not only a very large block of stock were available to express an opinion, but also if the chairmanship was not locked in with the CEO.

It’s gotten less tough to change CEOs at companies where either their moral or their intellectual qualities are found lacking, but it’s still difficult.

If — you know, it’s particularly difficult if they turn out to be a mediocre CEO. If the person is really bad, you know, people will rise up sometimes and — particularly if they have meetings without the CEO present.

But it’s not an easy job to displace a sitting CEO who also holds the chairman’s position and controls the agenda and all of that.

So I think an independent chairman, particularly one that represents a very large block of stock, and has no designs himself on taking over the place, is a safety measure for the possibility, however remote, that the wrong decision is made.

But I will tell you that the directors at Berkshire will be thinking every bit as much about the quality of the person as a human being as they will be thinking about their managerial skills, because it’s vital that you have somebody at Berkshire, in my view, that is running the place that really cares more about Berkshire than he does about himself, in terms of advancement.

And I think we have multiple candidates that fulfill that. And the idea of an independent chairmanship is a — is, you know, part of the belt and suspenders.

Charlie?

CHARLIE MUNGER: Well, you know, your idea about the Buffett family has a precedent.

The Rockefellers left the management of Standard Oil many, many decades ago, and they — but they did intervene once, and that was to throw out, what was it, the head of Standard of Indiana, and it was on moral grounds.

So that sort of thing can happen and you have put another string in our bow.