For decades, succession plans have been a big question for Berkshire Hathaway (BRK-A, BRK-B) investors, especially given the high bar set by Warren Buffett. The death of the company's vice chairman, Charlie Munger, has again brought some of those concerns to the forefront. Who will take over? How will the company fare after years of Buffett's leadership? However, as Morningstar Senior Stock Analyst Greggory Warren explains to Yahoo Finance Live, Buffett has made changes at the company that could make the transition easier for whomever takes his place.
Warren expounds on the current structure of Berkshire Hathaway: "The fact that there are so few people at corporate and that Buffett's day-to-day duties have really just involved looking at potential capital allocation decisions, he spends far more time reading through Ks and Qs than he does sort of worrying about how one plant is running or another operation is running. He's left that down to the managers down the line, and that's kind of the beauty of the business model right now. It's sort of self-running and there's not a whole lot that the corporate is going to need to do going forward even without Buffet at the helm."
- Greg let me get over to you. And you're watching Berkshire Hathaway shares all day and-- follow me here. Do you think Berkshire shares are overvalued? That investors are underpricing the risk when Warren Buffett is no longer leading this company. There seems to be a lot of belief that the culture will live on, but that is a wildly untested thesis.
GREGGORY WARREN: Yeah I think it's kind of difficult to look at from that perspective. I mean relative to our fair value estimate right now the stock is about 10-12% undervalued. But I think-- over the past-- I mean, I've been covering Berkshire now for 15 plus years. And I'd say probably over the last 10 years or so I think investors have, sort of, discounted the fact that Buffett's not going to be there forever.
And I think that that's been sort of baked into how the valuation has, sort of, evolved over that time frame. And if you look at it from Buffett's perspective, he's really made a concerted effort over the past two decades to really focus investors, the shareholders, on the businesses, on what they have, sort of, built here this decentralized conglomerate that really takes care of itself.
I mean, the fact that there are so few people at corporate and that Buffett's day-to-day duties have really just involved looking at potential capital allocation decisions. He spends far more time reading through K's and queues than he does sort of worrying about how one plant is running or how another operation is running. He's really, sort of, left that down to the managers down the line and that's, kind of, the beauty of the business model right now. Is that it's sort of self-running and there's not a whole lot that the corporate is going to need to do going forward, even without Buffett at the helm.
Now I brought this up a few years ago at one of the annual meetings that having Munger having Buffett both there always gave Berkshire sort of an edge. And we saw that during the financial crisis, we saw it during other periods of time where people that were in need of capital and need of Buffett seal of approval would come to Berkshire and be willing to pay 10-11% on the amount of capital they were getting from Buffett and company just to have that seal of approval attached to them.
And I think that Berkshire will continue to play that role in the future because they're always going to have a lot of capital, a lot of excess capital on the books. But I think that premium that they've been able to garner with Buffett at the helm is probably going to be less than it was in the past. And when I asked that question actually at the meeting, Charlie actually agreed with me and said that that's probably likely to be the case that he could see a 1 or 2% percentage reduction.