Gustavo Ballvé on March 31st, 2011
Corporate Governance, Food for thought, Home, Portfolio Management, Risk management, Signal or Noise

We’d love to talk about something else today, but this subject can’t be avoided. In fact, several of our readers have sent us articles or the press release (thank you! we were all over it since last night but it’s great to have this much feedback). Dave Sokol, CEO of MidAmerican and Netjets (both Berkshire Hathaway businesses) and heir apparent to Buffett’s CEO role, has left Berkshire and one of the reasons doesn’t smell too good. In short, Mr. Sokol had bought some US$ 10mm in Lubrizol shares shortly before pitching (and insisting on) the deal to Buffett. Both now say Buffett was aware of his stake (although Buffett says he didn’t know the size of it or when he had built it), and in 2 months the deal was announced at a 30% premium, netting Mr. Sokol some US$ 3mm. Not good for either men: Sokol was in apparent conflict of interests (one can argue that US$ 3mm wouldn’t mean much to him, but it doesn’t matter – it looks terrible) and Buffett could have made the questions that mattered (how much? when? etc.). In fact, it’s so weird that it raises the possibility that Buffett actually did not know of the stake, which in some ways would be even worse.

Reading the letter from Buffett discussing the resignation (in itself a very rare event: a letter outside of the annual report), it’s clear that Sokol had to go: the mere appearance of a Berkshire “luminary” practically “front-running” Buffett and Berkshire would be unacceptable (we don’t like it but can’t call it, and we’d discount any strong opinion emanating from anyone other than Buffett or Sokol).

It’s obvious that it’s a strange event in a company that takes so much pride in its unique culture of ethics, governance and lifelong managers who “love what they do”, and who are supposed to stay forever and be masters of common sense. That is, a company and a culture that isn’t supposed to fail in any aspect. This episode is just another reminder that this assumption must never be used for any person or company. It’s amazing that a highly-paid leading global executive of a huge company, number one candidate for one of the most prestigious jobs imaginable, could jeopardize all this for lack of common sense – or, heaven forbid, character. Yet it’s all too human.

Finally: since Buffett says in the letter that Dave Sokol had talked seriously about leaving at least twice before, is it possible that the list of four candidates to succeed Buffett did not include Mr. Sokol?

LINKS:

CNBC interview with Dave Sokol – Link to the “live-blogging” text (the video is embedded below):

Financial Times – SEC investigation in the works…

Forbes blogs – strong opinion that Buffett did not know of the stake

CNBC’s Herb Greenberg compares Sokol’s conduct to Berkshire’s Code of Conduct – and finds obvious problems…

Former federal prosecutor discusses the legal aspects at Bloomberg (5:41)

Jeff Matthews (of RAM Partners and author of Pilgrimage to Warren Buffett’s Omaha) has some good points as well (6:43):

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