Take me to a leader

Corporate headhunters are more powerful than ever

The benefits of using them are hard to measure. They may be most useful as diplomats




FOR A FEW months last year Matthieu (not his real name) was on the most important team in finance. SWIFT, a global payments-messaging service owned by 11,000 banks, was looking for a new chief. So was CLS, an institution that settles four-fifths of worldwide foreign-exchange turnover. Each had hired Matthieu’s firm to find one.

He was aware of the stakes. Both outcomes were going to “impact everything” that money touches, he told The Economist at the time. His voice barely rose over the mellow music of a Manhattan hotel’s bar but nonetheless it carried a bass note of self-importance.

The firm got the job done. Javier Pérez-Tasso, SWIFT’s former Americas head, took over as boss in July. Marc Bayle de Jessé, an official at the European Central Bank, started at CLS in December. The placements testify to the brokering brawn of executive-search firms. The industry’s top tier is busier than ever. The bosses of 311 of America’s 3,600 listed firms left their jobs in 2019—the highest share on record. Someone needs to find their replacements.




Like Matthieu, the search industry is secretive, and numbers are hard to pin down. Estimates from AESC, a trade body, suggest that the business has enjoyed strong growth for much of the past 30 years—with the exception of slumps after the dotcom bust in 2000 and the financial crisis of 2007-09 (see chart 1). AESC reckons global executive-search revenues grew by 12% in 2018 and that many firms had their best year ever in 2019 (for which it is still crunching the numbers).

Today, the biggest search firms hold sway over who rules many of the world’s most potent organisations. The best deserve their hefty fees, clients say. But the industry is facing increased scrutiny, amid suspicions that it may be holding back performance and diversity at the top.

Executive search—headhunting, in the vernacular—emerged in the post-war boom, when fast-growing firms in Europe and America began fighting over experienced leaders. The battle intensified in the 1970s as the internationalisation of business turned a consulting backwater into a mainstream profession. One recruiter’s ex-boss recalls opening 30 outposts that decade, from Singapore to Sydney.

Just as quickly, the business earned a reputation for sloppiness. Recruiters were “golf-course, back-slapping sales guys”, as one veteran admits. Candidates in their Rolodexes were lazily recycled. Criteria for drawing up shortlists were often a mystery, says Angeles Garcia-Poveda of Spencer Stuart, a search firm.
Fifty years later they have become tightly woven into the fabric of corporate life, and are seen by most multinationals as indispensable. Five giants—Spencer Stuart, Heidrick & Struggles, Russell Reynolds Associates, Egon Zehnder and Korn Ferry—dominate CEO search. This quintet, known as the “Shrek” firms, earned fees of $4.8bn in 2018, 14% more than the year before and 43% more than in 2014, according to Hunt Scanlon Media, a trade publisher. Spencer Stuart places an executive in a leadership role or boardroom 11 times a day, says Ben Williams, its boss. (The Economist Group has recently employed Egon Zehnder and Heidrick & Struggles to fill senior roles, including CEO and chairman.)

Interviews with more than 50 insiders suggest that 80-90% of Fortune 250 or FTSE 100 companies pay headhunters to find their CEO, even when the successful candidate is likely to come from within a firm’s own ranks. Among the next tier of companies, perhaps half do. Universities, sports clubs and officialdom enlist them, too. Last year their clients included English football’s Premier League and the International Paralympic Committee.

As the big headhunters have grown bigger, boutique firms have struggled to keep up. Nonetheless, some with deep expertise in specific industries or corporate functions have thrived, says Nancy Garrison Jenn, who helps multinationals headhunt the right headhunters. True Search, a tech-focused outfit, saw its revenues jump by 64% in 2018. Lower down the scale, the rise of online social networks has clobbered recruiters specialising in mere mortals like department heads and middle managers—since, as one puts it, “anyone can buy a computer, get a LinkedIn licence and call themselves a search expert”.

The big headhunters have benefited from the confluence of four forces. First, boards are looking for an ever broader skillset in modern CEOs. Bosses should be physically fit to withstand the brutal workload, comfortable dealing with the media and, increasingly, woke. They must grapple with complexity as big firms get bigger and industries converge—giants like Apple or Amazon are at once retailers, consumer-goods companies and tech firms—and with new threats, such as cybercrime.
Second, the rise of private equity (PE) means greater management churn at firms subject to buy-outs. America has some 8,000 PE-backed companies, double the number in 2006. Headhunters hustle in the hope of supplying bosses for PE firms’ entire portfolios. A partner at a buy-out giant says it works with just three providers because it wants VIP treatment.

The third reason for the headhunting boom lies in emerging markets. Scions of business dynasties in places like India increasingly want to devolve control of subsidiaries to professional managers, says Dinesh Mirchandani of Boyden, one of the oldest search firms. Startups like Ola, a ride-hailing firm, are looking for executives to help them conquer foreign markets. China, too, has champions keen to expand abroad but lacks managers with international expertise.

Lastly, boards and regulators are increasingly urging firms to plan for succession years in advance—and not, as in the past, to rely on a name in an envelope, to be unsealed should the boss be hit by a bus. Headhunters gladly help by benchmarking internal stars against potential external candidates. The pressure to plan ahead has led to the growth of all sorts of other ancillary services too, from leadership development to board-effectiveness assessment. Those now account for 43% of revenue at Korn Ferry, the largest Shrek.

Growth in demand has affected headhunting’s supply-side. Nobody has ever studied to become a headhunter but the profession is becoming more diverse. Those serving in its ranks include ex-engineers, a former Olympic gymnast and an erstwhile neuroscientist. The big five are big employers of former McKinsey consultants. New recruits like the fast pace and the opportunity to interact with boards.
They also enjoy the money. A median partner at the Shrek five typically earns $600,000 a year, according to industry veterans. The top 1% get $3m-4m, most of it bonus. Those hiring for finance usually earn the most.

Seven-figure slice

Generous pay comes courtesy of eye-watering fees. For decades headhunters charged one-third of the chosen candidate’s first-year compensation (including any bonus). Caps became more common over the past decade as CEOS’ salaries climbed into the stratosphere, fees more often exceeded $1m—and clients started to rebel. Now fees at the top end are typically limited to between $500,000 and $1m, though the boom in ancillary fees means overall revenues continue to grow fast.

The search for a CEO takes anywhere from 90 days to a year. The board forms a committee to oversee the process, which the headhunter helps shape. It then helps directors crystallise what they want the new boss to achieve, such as boosting profits or expanding into new markets, and draws up a list of required competencies.

Once the actual headhunting begins, recruiters hire armies of researchers to comb through databases containing millions of profiles; gone are the days when a cabinet full of CVs and organograms of superstar firms like IBM would suffice. Lists of candidates who look good on paper are then compared against tips from informants, who are typically former colleagues or chatty middlemen.
To whittle down a longlist of 15 or so people, consultants quiz candidates’ suppliers, clients, ex-bosses and subordinates. They check Glassdoor, a website which lets workers rate employers. The phone is fine, but visits are better—valuable information can emerge in the last minutes of a meeting, or on the way to the lift.




It is often only at this point that candidates are contacted. Since the most desirable hires typically already hold plush posts, and are constantly wooed by rival recruiters, headhunters must fight hard for their attention. They look to breakfast regularly with high-fliers, and mark their job anniversaries and dates when bonuses are due—discreet inquiries may elicit news of a disappointing payout, and signal that an executive may be looking for a change. They offer a shoulder to cry on when the going gets tough. Denis Marcadet of Vendôme Associés, a search firm in Paris, remembers humbled financiers weeping for hours in his office during the subprime meltdown.

In interviews headhunters deploy their charms to get candidates to lower their guard. But face-to-face assessment can be “a bit of voodoo”, says one. (It can also go awry if the chemistry is wrong. In his memoir, Robert Iger, Disney’s boss, recalls his interview for the job with Gerry Roche of Heidrick & Struggles as “one of the most insulting experiences of my career” because he viewed the questions as irrelevant and, worse, there was no food.) So recruiters have acquired tools to make it more scientific. They administer psychometric tests. Questionnaires gauge candidates’ norms and values. Synthesis, an advisory firm inspired by the recruitment of elite units in the Israeli army, even has shrinks dissect candidates’ answers to seemingly innocuous questions about their life stories.

Boards or headhunters sometimes outsource deeper probing to specialists such as Hakluyt or StoneTurn, two British firms staffed with former spies, journalists and cops. (Paul Deighton, The Economist Group’s chairman, also chairs Hakluyt.) These corporate sleuths aim to tease out how bosses do deals, how they behave under pressure and whether they have ever crossed any ethical lines.
Simulations are also becoming increasingly popular with clients (if not with candidates). Frontrunners might, for instance, be sent reports about an imaginary company, then asked to run mock board meetings, calm down emotional managers of troubled divisions or weather earnings calls with aggressive analysts.

In the end, though, closing a big deal still often requires the human touch. Jill Ader, the chairwoman of Egon Zehnder, recalls taking an ideal but hesitant candidate off-site for three days to discuss the purpose of his life.

For the headhunters, their candidate’s signature on a new contract equals success. For their clients, it’s more complicated. Plenty of data exist on would-be CEOs. Korn Ferry estimates that 87% of all executives aspire to become bosses; over one-third of applicants had career blow-ups before winning a top role, reckons ghSMART, an advisory firm; and so on. Yet it is trickier to measure the wisdom of choosing one candidate over another; it is impossible to know whether one of the rejected candidates might have done the job better.

Getting it wrong can be costly. The Conference Board, a think-tank, finds that the costs of changing bosses (severance, search, lost productivity during the transition, and so on) are generally equivalent to 5% of annual profit.
Lacking objective measures on which to judge headhunters’ performance, board members often rely on their own impressions. And although some praise the service they receive, among others frustration is mounting.

Plenty of the things that hamper the industry are no fault of its own. Many companies make exasperating demands of headhunters and candidates. Some, for instance, want would-be CEOs to have a tête-à-tête with each member of the board, which in America and Britain typically numbers at least ten people.

They may also demand regular testing of in-house candidates, which can poison a firm’s internal politics. Others request assessments that seem bizarre to candidates. After being asked to take a graphology test, one contender for the top job at Alstom, a French engineering giant, asked sarcastically if he would also be subjected to an intrusive medical examination, recalls a recruiter.

Another problem stems from contracts that bar headhunters from poaching people from firms they have previously recruited for, usually for at least a year. As the Shrek firms grow, in other words, their hunting-ground shrinks. It is clients who demand such clauses, but it does not stop those shortchanged by them from getting irate. “They tell me the candidates aren’t there,” fumes an executive who has chaired several companies. “Then I find there’s an ideal candidate at PepsiCo, but they already work for PepsiCo so they can’t touch it.”

Some of the big recruiters’ problems, though, are of their own making. Growth, especially at the Shreks, also leaves senior partners with less time for any one client. They jet around to sign contracts, but leave underlings who have less access and experience to do most of the heavy lifting. Moreover, since the rainmakers pocket the largest cut of the fee, their subordinates have less incentive to do a fine job. “Clients pay for haute couture but they get prêt-à-porter,” says a former chief of a Shrek firm.
And although headhunters have grown less languorous since the easy-going 1970s, in one way they remain as lazy as before: many still seek to score easy wins by rehashing past work. A PE partner recounts being sent the same shortlist for two different finance-chief searches. A disproportionate share of CEOs are old-timers from a handful of blue chips, not all of which have had a stellar run (think of GE, several of whose past executives went on to Boeing).




Senior headhunters admit the industry is sometimes too quick to recommend the safe option when boards are reluctant to gamble on unconventional candidates. Despite progress in recent years, just 38 of the bosses of America’s 675 largest listed firms are women, and 59 non-white. It has grown harder for bright young things to get a look in. The average age of incoming CEOs has risen sharply, to 58, since 2005 (see chart 3). A survey by AESC, which represents 16,000 search professionals, ranks “attracting diverse talent” as the seventh-most-pressing issue for their firms in 2019, behind such things as “attracting digital talent” or “creating a culture of innovation”.

The search within

Growing doubts about the value headhunters bring has led some clients to take the work in-house. An expanding list of corporate titans, including all of the tech giants, are building private squads of headhunters—often by poaching from the Shrek firms. Having focused at first on junior hires, these are working their way up to the C-suite, says Ms Garrison Jenn.




Some company chairmen may wonder why they need an outside recruiter at all, when the ideal candidate is often staring them in the face. A recent Conference Board survey of executives and corporate secretaries found that 73% thought there was no need for a firm with a strong internal candidate for CEO to conduct an outside search. There appears to be no shortage of such talent within. Last year almost four-fifths of new S&P 500 bosses came from inside the firm, including that of Intel, a chipmaker. IBM recently picked the head of its cloud division to replace Ginni Rometty.

Yet most large companies will continue to use search firms—even if they do not fully buy the science, or harbour other doubts. That is because external validation has a value all of its own. Recruiters can be crucial in helping build consensus when, as is so often the case, boards are split. It is as diplomats that the best headhunters earn their keep.

How to avoid a corporate zombie apocalypse

Investors must put pressure on weak companies when interest rates do not

Robert Armstrong

web_Zombie industries
© Ingram Pinn/Financial Times


JC Penney has been stuck for years in permanent twilight, with changes in retail and the weight of its own balance sheet blocking out the sun.

Department stores are relics of the past. Malls, where many of the US chain’s stores sit, are fading too. JC Penney had 1,100 stores a decade ago; now it has 850. Its shares recently slipped under a dollar. For several years, operating profit has not covered the interest on its $5.3bn in leases and debt.

Yet JC Penney staggers on. Economists and occultists have a word for things that walk the earth, dimly aware that they are no longer alive: zombies. After a decade of central banks pushing liquidity into the global economy, there are a lot more of them. And they may be eating the brains of the corporate world.

In a competitive market, some economists warn, the zombies would be at rest in their graves. 

Instead they walk abroad, reanimated by cheap money. They depress prices while crowding out productive investment and new entrants. With no JC Penney there would be — in theory — more room for young retailers with new ideas, or for Amazon’s ultra-efficient platform to sell still more for still less.

Across the developed world, according to a study from the Bank for International Settlements, the proportion of listed companies unable to cover their interest costs from operating profit, and with weak growth prospects, doubled from 3 to 6 per cent between 2007 and 2016. 

Other studies find a similar trend, especially in Europe, and conclude that zombie companies are associated with lower investment, lower productivity and lower inflation — the opposite of what central bankers aim for.

In 2018, already in dire straits, Penney was able to raise $400m in debt at a coupon of under 9 per cent. It’s hard to imagine that infusion would have been available if US Federal Reserve policy had not left investors desperate for yield. The point is not that JC Penney can avoid bankruptcy forever. It may not, or may yet pull off a turnround. But the Fed has extended the process, as it has for thousands of other companies. 

Ryan Banerjee and Boris Hofmann of the BIS point to a trade-off for central banks: they may increase demand with easy money, but only at the cost of misallocated resources. Viral Acharya of New York University says “it is hard not to entertain the thought . . . that Europe is following the path of Japan”, where low rates and banks’ refusal to write off bad debt sapped growth for decades.

The risks of monetary accommodation are usually framed in terms of asset bubbles, but zombies — the bubbles’ dark flipside — may be just as important. Just as low yields on risk-free assets lead to fevered bidding for speculative assets, from WeWork to Tesla, so ample liquidity allows weak companies to push hard choices into the hazy future.

If rates jump, bubbles and zombies will go from being a negative but manageable policy side effect to a pressing threat to stability. The bubbles would burst just as the zombie hordes were forced into a rush of disorganised reorganisations and liquidations. 

Rates may remain low and stable forever. Such seems to be the current consensus of the market. But higher rates are a contingency to be prepared for, not least because of the most precious capital zombie companies hold: their staff. Penney has 95,000 employees. They are the living, not the undead.

Policymakers can help by requiring banks to write off loans to companies without a realistic path to profitability. But that might not be enough. Businesses that go through Chapter 11 (in the US) or administration (in the UK) need not disappear, so long as the price of their product is higher than the cost of producing it and the business is worth more in operation than sold for parts. 

Many marginal businesses keep operating after a reorganisation, often with the help of yet more cheap financing. JC Penney’s competitor Sears, after years among the undead, declared bankruptcy in 2018. Many of its stores remain open. 

Eliminating the tax advantage of debt over equity, and requiring robust unemployment insurance and retraining programmes, would lower the risk and limit the damage. But both would require a political realignment. 

In the meantime, it is up to investors to protect their companies from the zombie virus. Activist investors set an example. The German conglomerate Thyssenkrupp, while not a fully fledged zombie, has been lurching in that direction. Operating cash flow barely covered debt service last year. 

Activists Cevian and Elliott have come in and pushed for the most profitable division, elevators, to be split off. They may lose their bet; the point is just that they can apply pressure when rates do not. Similarly, the UK’s Punch Taverns, zombified by a debt-funded acquisition spree, was beset by hedge funds. It broke itself up, and agreed to sell a large block of its pubs to Heineken. 

Is it too much to hope that more investors, in the days of passive investment and management-controlled boards, will demand that executives make hard choices instead of slipping into zombiehood? We are in trouble if it is. 

The most frightening side effect of central bank policy may not be zombie companies, but rather zombie investors.


The Approaching Debt Wave

The World Bank has warned that a massive debt wave is building worldwide. There is no telling who will be hit the hardest, but if vulnerable countries, from the United Kingdom to India, do not act soon, they may face severe economic damage.

Kaushik Basu

basu52 graphic


NEW YORK – Over the last decade, the world economy has experienced a steady build-up of debt, now amounting to 230% of global GDP.

The last three waves of debt caused massive downturns in economies across the world.

The first of these happened in the early 1980s. After a decade of low borrowing costs, which enabled governments to expand their balance sheets considerably, interest rates began to rise, making debt-service increasingly unsustainable.

Mexico fell first, informing the United States government and the International Monetary Fund in 1982 that it could no longer repay. This had a domino effect, with 16 Latin American countries and 11 least-developed countries outside the region ultimately rescheduling their debts.

In the 1990s, interest rates were again low, and global debt surged once more. The crash came in 1997, when fast-growing but financially vulnerable East Asian economies – including Indonesia, Malaysia, South Korea, and Thailand – experienced sharp growth slowdowns and plummeting exchange rates. The effects reverberated worldwide.

But it is not only emerging economies that are vulnerable to such crashes, as America’s 2008 subprime mortgage crisis proved. By the time people figured out what “subprime” meant, the US investment bank Lehman Brothers had collapsed, triggering the most severe crisis and recession since the Great Depression.

The World Bank has just warned us that a fourth debt wave could dwarf the first three. Emerging economies, which have amassed a record debt-to-GDP ratio of 170%, are particularly vulnerable. As in the previous cases, the debt wave has been facilitated by low interest rates. There is reason for alarm once interest rates begin to rise and premia inevitably spike.

The mechanics of such crises are not well understood. But a 1998 paper by Stephen Morris and Hyun Song Shin on the mysterious origins of currency crises, and how they are transmitted to other economies, shows that a financial tsunami can make landfall far from its source.

How the source of financial trouble can vanish, leaving others stranded, was illustrated in the delightful short story “Rnam Krttva” by the celebrated twentieth-century Indian writer Shibram Chakraborty. In the story – which I translated into English and included in my book An Economist’s Miscellany – the desperate Shibram asks an old school friend, Harsha, to lend him 500 rupees ($7) on a Wednesday, to be repaid the following Saturday.

But Shibram squanders the money, so on Saturday, he has little choice but to ask another school friend, Gobar, for a loan of 500 rupees, to be repaid the next Wednesday. He uses the money to repay Harsha. But when Wednesday rolls around, he has no way of repaying Gobar. So, reminding Harsha of his excellent repayment record, he borrows from him again.

This becomes a routine, with Shibram repeatedly borrowing from one friend to repay the other. Then Shibram runs into both Harsha and Gobar one day at a crosswalk. After a moment of anxiety, he has an idea: every Wednesday, he suggests, Harsha should give Gobar 500 rupees, and every Saturday, Gobar should give the same amount to Harsha. Shibram assures his former school friends that this will save him a lot of time and change nothing for them, and he vanishes into Kolkata’s milling crowds.

So who are the likely Harshas and Gobars in today’s debt wave? According to the World Bank, they could be any country with domestic vulnerabilities, a stretched fiscal balance sheet, and a heavily indebted population.1

There are several countries that fit this description and run the risk of being the conduit that carries the fourth debt wave to the world economy. Among advanced economies, the United Kingdom is an obvious candidate. In 2019, the UK narrowly avoided a recession, with a growth rate a shade above zero – the weakest growth in a non-recession period since 1945. The country is also about to undertake Brexit. Conservatives in Britain have promised that a “tidal wave” of business investment will follow. This is unlikely: if there is a tidal wave, it will probably be one of debt instead.

Among emerging economies, India is especially vulnerable. In the 1980s, India’s economy was fairly sheltered, so the debt wave back then had little impact. At the time of the East Asian crisis in 1997, India had just begun to open up, and it experienced some slowdown in growth. By the time of the debt wave in 2008, the country had become globally integrated and was severely affected. But its economy was strong and growing at nearly 10% annually, and it recovered within a year.

Today, India’s economy is facing one of its deepest crises in the last 30 years, with growth slowing sharply, unemployment at a 45-year high, close to zero export growth over the last six years, and per capita consumption in the agricultural sector decreasing over the last five years. Add to this a deeply polarized political environment and it is little wonder that investor confidence is rapidly declining.

It is not too late for countries to build seawalls to protect against debt tsunamis. While India’s political problems will take time to solve, the Union budget – to be presented on February 1 – is an opportunity for preemptive action. The fiscal deficit needs to be controlled in the medium term, but the government would be wise to adopt expansionary fiscal policy now, with money channeled into shoring up infrastructure and investment.

Managed properly, this can boost demand without increasing inflationary pressures, and strengthen the economy in order to withstand a debt wave.


Kaushik Basu, former Chief Economist of the World Bank and former Chief Economic Adviser to the Government of India, is Professor of Economics at Cornell University and Nonresident Senior Fellow at the Brookings Institution.

George Friedman's Thoughts: Deep Geopolitics

By: George Friedman


Geopolitics is, on the surface, about the relationship between nations and geography. At a deeper level, it is about nations and necessity and predictability. But the fundamental question is what we mean by geography.

Geography is about place; it is about the forces that converge on, shape and compel the individual to act, and to do so with other individuals likewise constrained. Physics asserts that the action of any given atom is unpredictable, and that the actions of a mass of atoms are predictable statistically.

The question is what permits that predictability. In the same sense, geopolitics makes no claim about what the individual will do. It makes a claim as to what we as a group will do.

Geography may be the pivot, but as I have tried to show in the past two weeks, a broader definition of geography is needed. It is of course about oceans, rainfall and grain production, but this provides us what I will call a flat geography, a geography of the moment generalized over time.

There is also a deep geography that sees the transformation of place over time, and with it the history of the place that explains the statistical – and individual behavior over time.

In the past two weeks, I presented two stories. One was of individuals, about my father and his half-brother. The other was of the way the American Revolution was influenced by the English Civil War between Catholics and Protestants.

I told the story of the great grandfather of George Washington and the way his father, a Royalist, lost everything to the Puritans, causing his son to come to North America to try to recreate the life he had lost in England.

The story flowed into the discovery by George Washington that he was not English but American, and how that led both to the revolution and the division between New England and the South that fueled the American Civil War.

The rise of Protestantism was itself deeply embedded in European geography. The Protestant Reformation touched most European countries, but its success centered on the North Sea. Christianity was European but divided between Orthodoxy and Catholicism.

Protestantism was the revolt of the Catholics centered on the North Sea against the European Peninsula. The issue was expressed theologically in terms of the relationship between the papacy and its priests to God. But it was also about who dominated the Atlantic.

Catholic Iberia discovered and exploited the Western Hemisphere. France then joined and as wealth surged, power flowed to the south. Maritime Germany rebelled. Bavaria did not. Britain became the center of the northern bloc and could not evolve with the power of forces loyal to the Pope and therefore under the control of the heirs of the Roman Empire.

Religious Divisions in Europe 1520-1600


There is a constant debate in the United States over the place of Christianity and Protestantism in the American regime. There is an argument that the American regime was intended to be a Christian regime, and a further argument that it was meant to be Protestant. There was great hostility to Catholic immigrants in the United States.

The United States emerged from the wars that created a Protestant North Sea basin. It follows, given that the founder was overwhelmingly Protestant, that this notion is correct.

But when you look at the two founding documents, there is no mention of Christ at all, although there is the implication of God. The answer was I think that the ancestors of the founders to a great extent were escaping from the brutal wars of the religion. They did not want to import the wars between Christians and even between Protestants to the United States.

This was not because the founders weren’t Christians and Protestants, even devout ones, but because they were all in some way fleeing Europe.

The point here is not to consider the American founding, but rather to use it as an example of what I mean by deep geopolitics. Geopolitics is not simply the physical makeup of a place, although it is that as well. It is layers of geopolitical reality interfacing in radical ways. The rising of the North Sea nations set in motion a new geopolitical reality in North America.

Geopolitics becomes chess at any moment in time. But when used to produce the broader history of humanity, it becomes three-dimensional chess, with geopolitical layers emerging.

It might have been expected that the Iberian discovery of America would have led the North Sea nations to respond, and that the wars and civil wars would create refugees who would populate North America, and given North America’s geography, that it would emerge as a great Atlantic and Pacific power.

But for that, the dynamism of geopolitics must be layered.

2019 Berkshire Hathaway Letter To Shareholders: 3 Key Takeaways

by: Get Rich Brothers

 
Summary
 
- Buffett's Letter to Shareholders was released today.

- Succession planning is of the utmost importance.

- Share repurchases are actively being pursued.
 
 
It’s that wonderful time of year again when Warren Buffett releases his annual Letter to Shareholders.
 
I view this as the single most important document published on an annual basis for investors.
 
As with the letters from 2014, 2015, 2017, and 2018, I will once again share what I see to be the three vital components of this year’s Letter.
 
Key Takeaway No. 1
 
Succession planning is one of the hottest topics at Berkshire Hathaway (BRK.A), given the advanced ages of both Warren Buffett and Charlie Munger, the current and long-standing leaders of the company. Two of the leading candidates to succeed Buffett and Munger are Ajit Jain and Greb Abel.
 
Jain effectively manages the insurance operations at BRK while Abel runs the non-insurance business. In this year’s Letter, Buffett revealed (though this had been floated previously) that Jain and Abel would be joining Buffett and Munger for the Q&A period at the shareholder meeting in Omaha this May.
 
While this does not guarantee that these two will be next in line to run the company, it is a strong endorsement of their value to the company and suggests they will indeed be with us for the long term. Given their strong track record over the past years in their respective areas of the business, I view this is as a hugely positive development.
 
Beyond succession planning directly—though with an eye to future governance at BRK—Buffett also detailed the importance of having a strong, devoted Board of Directors, devoid of conflicts of interest. As part of this discussion, he assured investors that BRK will continue to pursue directors who are also shareholders of the company as a result of making purchases out of their own savings.
 
As always, this assurance comes as no surprise given Buffett has always emphasized the alignment of interests between investors and management.
 
Finally, Buffett outlined the details of how his BRK stock should be managed after his death. A portion of his A-Class shares are to be converted into B-Class shares, which will then be distributed to a number of foundations with the directive to “deploy the grants” shortly thereafter.
 
Buffett estimated that it will take 12-15 years for all of his shares to make their way into the market. Given Buffett’s huge position in BRK, this provides assurance that the stock itself will not be impacted directly through a large sale in the time after his passing.
 
Key Takeaway No. 2
 
One of Buffett’s key tenets to successful investing is to be able to approximate the intrinsic value of a prospective company. When it comes to BRK itself, Buffett has often noted that even between himself and Munger, they would arrive at different numbers if they were to value the company independently.
 
When it comes to repurchasing shares of BRK itself, they will consider this course of action only if they believe the company is selling for considerably less than it is worth and that following the purchase, the company will still have plenty of cash on hand (the ultimate financial strength of BRK is among Buffett’s top priorities).
 
Through 2019, Buffett revealed that $5 billion of BRK was repurchased, representing ~1% of the company. Furthermore, he actually urged shareholders with $20 million or more of stock to give the company a call directly if they are looking to sell. This suggests that Buffett may still be interested at current prices.
 
While he doesn’t quote an actual amount that he would view as the intrinsic value for BRK, the actual share repurchases and call-to-action from prospective sellers speaks volumes.
 
Key Takeaway No. 3
 
There has been plenty of commentary over the past month in terms of speculation as to how Buffett might address the large outperformance of the S&P 500 in comparison to BRK stock.
 
From Page 2 of the Letter, BRK’s market value clocked in with 11.0% growth while the S&P 500 shows a whopping 31.5% (with dividends) through 2019.

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While he didn’t tackle this topic explicitly, Buffett went to great lengths throughout the Letter to highlight the power of retained earnings and the differentiation of BRK from other companies given its huge combination of controlled and non-controlled businesses all housed under a single roof.
On Page 5, he detailed the importance of recognizing the retained earnings within the huge portfolio of marketable securities owned by BRK. Under GAAP accounting, only the dividends are reported as earnings, yet Buffett outlines how the retained earnings will in most cases either be used to further grow the companies themselves or, through share repurchases, passively increase BRK’s ownership stake (and thus its future claim on dividends and earnings).
 
I believe Buffett’s intent with this theme was to again emphasize that BRK is a different beast altogether when it comes to effectively valuing it. Its real strength comes from the diversity of its high quality businesses, most of which are able to effectively retain their earnings to compound for long-term growth.
 
Though he didn’t restate it in this Letter, Buffett has never been shy about recognizing that the S&P 500 is likely to outpace BRK on the upswing. The strength of BRK is to persist and succeed through all market conditions.
 
On that note, it is worth digging up a Buffettism from the 1992 Letter to Shareholders:
It’s only when the tide goes out that you learn who’s been swimming naked.

Conclusion

The theme I detected with this year’s Letter was around assuring investors that BRK will be healthy and growing well into the future, regardless of market conditions and the eventual change in leadership.
 
Giving us a view into his will is just one example of how extraordinarily devoted Buffett is to ensuring shareholders truly do feel they have all of the information they need to make informed decisions. It is, once more, Buffett walking the walk in terms of giving us the information he would want if he were in our shoes.
 
Reading through the Letter this year was particularly enjoyable for me as I took the opportunity to attend the Berkshire Shareholder weekend last May in Omaha. Seeing Buffett in the flesh and observing first-hand the community he has built on the back of timeless investing principles was inspirational and something I will never forget.

This year’s Letter once again provided plenty of food for thought as we move forward into a new decade.