End of 'The Berkshire Way'? Combs' departure isn't only big change as Buffett transition nears

(This is the Warren Buffett Watch newsletter, news and analysis on all things Warren Buffett and Berkshire Hathaway. You can sign up here to receive it every Friday evening in your inbox.)

Todd Combs’ surprise departure from Berkshire Hathaway got most of the attention when it was announced this week.

There were also, however, several additional personnel changes in Monday’s three-page news release that signal the company is moving toward a more conventional structure as Warren Buffett prepares to transfer his CEO title to Greg Abel in less than three weeks.

Todd Combs in 2014 CNBC interview

Combs is going to JPMorgan Chase next month to head a $10 billion “Strategic Investment Group” for the company’s new $1.5 trillion “Security and Resiliency Initiative” to help “companies enhance their growth, spur innovation and accelerate manufacturing, primarily in the United States.”

Combs has been on JPM’s board since 2016 but is leaving that post as he takes the new job.

In its news release, JPM’s Chairman and CEO Jamie Dimon called Combs “one of the greatest investors and leaders I’ve known.”

In Berkshire’s announcement, Warren Buffett is quoted as saying “JPMorgan, as usually is the case, has made a good decision,” praising Combs for making “many great hires at GEICO.”

Combs, who is 54 years old, joined Berkshire in 2010 as a portfolio manager.

In 2020, he got an additional role as CEO of Geico, Berkshire’s auto insurer, adding to speculation he might become Buffett’s future successor.

At May’s annual meeting, insurance Chief Ajit Jain said Combs “has done a great job for us in terms of turning around” Geico’s operations, citing improvements in “matching rate to risk” and incorporating telematics, the electronic monitoring of how policyholders drive, in setting rates.

But Jain added, “I still think we need to do more in technology.”

Berkshire insurance chief encouraged by GEICO's turnaround

The task of doing more in technology at Geico now belongs to its new CEO, Nancy Pierce, who moves up from chief operating officer. She’s been at the insurer since 1986, when she started as a claims associate.

The question of who will be assuming Combs’ duties as portfolio manager, however, is still open.

Changing the ‘Berkshire Way’

Buffett has been saying Abel will have overall responsibility for the portfolio, but it’s not clear how much of that responsibility will be delegated to the other portfolio manager, Ted Weschler.

Berkshire could also hire one or more additional portfolio managers and Buffett himself, in his role as chairman, could help fill the gap left by Combs.

Traditionally, Berkshire has been opaque about who’s been responsible for the smaller holdings in its portfolio and hasn’t said much about the portfolio managers’ track records.

In an email to Buffett Watch, Hudson Value Partners’ Christopher Davis urges Berkshire to “become more transparent about the roles and responsibilities of Abel and Wechsler in managing the public equity portfolio.

“We all love the ‘Berkshire way’, but there needs to be some concessions to the fact it is now a trillion-dollar enterprise undergoing its first leadership transition.”

Todd Combs walks to the morning session of the annual Allen and Co. Sun Valley media conference in Sun Valley, Idaho, U.S. July 7, 2021.

Brian Losness | Reuters

Several facets of that transition are moving the company away from the famously decentralized “Berkshire way.”

Greg Abel has already been exercising more management oversight over the non-insurance operating companies than Buffett ever did.

Now some of them are getting an additional layer of management.

Adam Johnson, the chairman and CEO of NetJets, has been appointed to the newly created role of “President of the Consumer Products, Service and Retailing businesses of Berkshire Hathaway.”

Calling him an “accomplished leader with a proven ability to deliver long-term shareholder value,” Abel says in Monday’s news release that Johnson will “support the outstanding CEOs of our 32 consumer products, service and retailing businesses, and uphold Berkshire’s culture and values.”

The remaining non-insurance subsidiaries, including BNSF, Berkshire Hathaway Energy, and Pilot, will still be reporting directly to Abel.

NetJets CEO Adam Johnson. (NetJets.com)

Berkshire is also getting its first general counsel.

Michael O’Sullivan served in that role at Snap Inc. since 2017 after practicing law at Munger, Tolles & Olson for more than two decades.

Up until now, Berkshire has turned to outside law firms to handle its legal matters.

(I wouldn’t be surprised to see Berkshire add investor, media, and government relations departments to its notoriously low-overhead Omaha HQ at some point next year.

I don’t think, on the other hand, that Berkshire will be paying a dividend as long as Buffett continues to come into the office.)

Finally, in a more traditional transition, Chief Financial Officer Marc Hamburg will retire next June after 40 years at Berkshire.

In the news release, Buffett said Hamburg has been “indispensable” and “has done more for this company than many of our shareholders will ever know.”

His successor will be Berkshire Hathaway Energy CFO Charles Chang.

It’s a lot of change for a company that hasn’t changed much over the years.

Keefe, Bruyette & Woods analyst Meyer Shields told the Wall Street Journal, “There’s so much emotional investment in the persistence of Berkshire as a culture that when you have decent-sized changes, that’s going to cause more worry than jubilation over the company’s dynamism. That’s not why people own Berkshire Hathaway.”

KBW downgraded Berkshire shares to “underperform” earlier this year, in part due to Buffett’s impending departure.

Both the A and B shares weathered the storm pretty well this week, falling almost 1%, although they are still down more than 7% from their all-time highs in May, just before Buffett revealed he would step down as CEO at the end of the year.