Gustavo Ballvé on April 27th, 2011
Corporate Governance, Food for thought, Home, Industries, Insurance, Mental models, Portfolio Management, Risk management, Signal or Noise

Just released: the Audit Committee of Berkshire Hathaway has just concluded its report (in PDF, but also embedded inside). According to NYT’s Dealbook, “The audit committee found that Mr. Sokol’s conversations with Mr. Buffett and others at Berkshire Hathaway were ‘intended to deceive’ and ‘its effect was to mislead.’ ”

Now that the “hype” is unprecedented in terms of a Berkshire “conflict”, and that the noise levels are bound to get even higher, it’s important to try and separate what’s relevant.

Separating signal and noise: Buffett is at fault for not asking the right questions at the right time, and for allowing controls to be too loose – but that’s it. The ethical fault is entirely Sokol’s. Remember the “seamless web of deserved trust” image Buffett once used? The keyword in that sentence is “deserved“, and Mr. Buffett apparently trusted one person too much. The whole hysteria surrounding Buffett – we’ve even read calls for his resignation – seems like another instance of the ages-old issue of “the more successful you are, the bigger the target”.

We can’t quantify the amount of “reputation” lost with this whole episode, which is sure to drag on for much longer (the ball is now on Dave Sokol’s court). By the way, by “reputation” we mean Buffett’s reputation as a manager and as an astute judge of character, because – we insist – there was no ethical line crossed by Buffett in this episode. So apart from the “reputational risk”, Berkshire’s business model remains intact and the Warren Buffett + Charlie Munger duo remains the best pairing in global business available for US$ 100,000 apiece per year – by a long shot. Last but not least, Mr. Buffett remains extremely well aligned with minority shareholders.

The net effect of all this mess may have been positive for Bekshire: 1) It has probably made the company’s Board, Mr. Buffett and Mr. Munger smarter/ readier; 2) It has cleared an “ethically challenged” person from the succession slate.

Here are the three summary points of the Audit Committee:

1) “His purchases of Lubrizol shares while serving as a representative of Berkshire Hathaway in connection with a possible business combination with Lubrizol violated company policies, including Berkshire Hathaway’s Code of Business Conduct and Ethics and its Insider Trading Policies and Procedures.

2) His misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the Company.

3) These events should serve as an opportunity to reinforce to all officers, directors and employees of Berkshire Hathaway and its subsidiaries the importance of adhering to those policies and avoiding conduct that comes close to, or strays over, the line of propriety. To that end, we authorize Warren Buffett to release this report.”

The report itself:

Berkshire Hathaway audit report

Read the other Buysiders posts on the Dave Sokol/ Lubrizol/ Berkshire mess:

Updates: Carl Icahn and Dave Sokol – April 25th. Stanford 11-page article that was, up to that time, the best account of this story.

Update on Sokol – April 5th. Series of short updates and links, including a video.

Dave Sokol resigns from Berkshire – March 31st. The original post, the same day the news first broke.

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