How Does Warren Buffett Select and Evaluate Subsidiary CEOs? What Qualities Does He Value Most?

Approach to Selecting CEOs

When managing Berkshire Hathaway, Warren Buffett typically does not directly recruit external CEOs but instead "selects" them by acquiring outstanding companies. Specifically:

• Acquisition with Retention of Existing Management: Buffett prefers acquiring companies with exceptional management teams and retains the incumbent CEO. These CEOs are often founders or long-term managers who have proven their leadership within the industry. For example, he retained existing leaders when acquiring GEICO or See's Candies.
• Internal Promotion or Succession Planning: For existing subsidiaries requiring CEO changes, Buffett prioritizes internal talent or managers who have demonstrated loyalty and competence. He emphasizes "buying excellent managers" rather than trying to "reform" them.
• Non-Intervention in Daily Operations: Buffett employs a "decentralized" management style, intervening only when necessary to ensure CEOs can operate subsidiaries independently—as if running their own businesses.

Criteria for Evaluating CEOs

Buffett has repeatedly outlined evaluation criteria in his Shareholder Letters, focusing on long-term performance and personal qualities over short-term metrics:

• Performance Evaluation: Emphasis on long-term value creation, such as return on equity (ROE), business growth, and cash flow generation. He avoids complex KPIs, instead assessing whether CEOs think like owners and eschew short-termism.
• Regular Reviews: Evaluation through annual reports and meetings, without rigid bureaucratic processes. Buffett stresses trust but will decisively replace underperforming CEOs (e.g., replacing leaders at certain subsidiaries in the 1990s).
• Succession Planning: Buffett requires every subsidiary to have a succession plan. He personally evaluates potential successors to ensure smooth transitions.

Most Valued Qualities

Buffett prioritizes intrinsic qualities, citing the "Three I's" principle (Intelligence, Integrity, Energy) in his letters. Core qualities are ranked below (with integrity often considered primary):

• Integrity: The most critical quality. Buffett believes that without integrity, other qualities can lead to disaster. He seeks honest, transparent leaders who adhere to ethical standards and avoid fraud or manipulation for short-term gains.
• Intelligence/Ability: CEOs must be intelligent and professionally competent, with deep business understanding and rational decision-making skills. Buffett favors managers with an "owner's mindset" who treat the company as their own property.
• Energy/Passion: Values passion for the business and sustained drive. CEOs should love their work "like an artist," not view it as just a "job." For instance, he admires managers who "refuse to retire despite being wealthy."
• Independence and Self-Discipline: CEOs must operate autonomously without Buffett’s intervention, while exercising self-discipline to avoid greed or overexpansion.
• Long-Term Perspective: Buffett disdains short-term speculation, preferring leaders focused on sustainable growth.

In summary, Buffett’s philosophy is to "hire well and let them work freely." These qualities stem from his conviction that exceptional managers—not complex strategies—are key to Berkshire’s success.