It’s always refreshing, and a bit entertaining, to read Warren Buffett’s annual letter to Berkshire Hathaway’s shareholders. His willingness to talk candidly about his and the company’s performance over the past year—both good and bad—is a stark departure from many CEO communications.  This year’s letter was particularly interesting because it celebrates Berkshire Hathaway’s fiftieth anniversary by chronicling its history since inception.

Invariably, I am rewarded with some memorable tidbits for taking the time to wade through the letter’s typical lengthiness (38 pages this year). My takeaway this time relates to Berkshire Hathaway’s efforts to identify Mr. Buffett’s successor as CEO. In particular, he offers the following insights into the identifying the right candidate, some of which I quote below. His thoughts are apropos not only to proper succession planning, but also to the importance of tone at the top.

• “Choosing the right CEO is all-important and is a subject that commands much time at Berkshire board meetings.”
• “These duties require Berkshire’s CEO to be a rational, calm and decisive individual who has a broad understanding of business and good insights into human behavior. It’s important as well that he knows his limits.”
• “Character is crucial: A Berkshire CEO must be ‘all in’ for the company, not for himself. (I’m using male pronouns to avoid awkward wording, but gender should never decide who becomes CEO.)”
• “He can’t help but earn money far in excess of any possible need for it. But it’s important that neither ego nor avarice motivate him to reach for pay matching his most lavishly-compensated peers, even if his achievements far exceed theirs.”
• “A CEO’s behavior has a huge impact on managers down the line: If it’s clear to them that shareholders’ interests are paramount to him, they will, with few exceptions, also embrace that way of thinking.”
• “My successor will need…the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency.”
• “If our non-economic values were to be lost, much of Berkshire’s economic value would collapse as well.”
• “…the structure our future CEOs will need to be successful is firmly in place.”
• “Our directors believe that our future CEOs should come from internal candidates whom the Berkshire board as grown to know well.”
• “Our directors also believe that an incoming CEO should be relatively young, so that he or she can have a long run in the job. Berkshire will operate best if its CEOs average well over ten years at the helm.”
• “…it is important that our counterparties be both familiar with and feel comfortable with Berkshire’s CEO.”
• “To a large degree, both good and bad cultures self-select to perpetuate themselves.”

There is wisdom in these quotes, much of which we all learned (in a somewhat different context) in kindergarten. Nevertheless, succession planning continues to be underemphasized (see this Doug’s Note) and tone at the top has become even more important as risk management gains visibility. It doesn’t hurt, therefore, to be reminded of their importance.