Berkshire board tries cleaning up Buffett’s mess
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Agnes T. Crane
Berkshire Hathaway’s directors are cleaning up after their chairman. The audit committee’s findings that David Sokol, one-time heir apparent to Warren Buffett, misled the company and violated its ethical standards should help restore confidence in Berkshire’s corporate governance. But just days before the annual shareholder meeting in Omaha, Nebraska, it raises even more questions about how Buffett handled the matter.
Sokol’s purchase of shares of Lubrizol in the months before Berkshire bought the company never looked good. And the trickle of information in the ensuing month, including Sokol’s odd TV appearance and Lubrizol’s subsequent timeline of events, has only made it worse. But Buffett, the model of commonsense investing, abandoned his signature skepticism when it came to his own deputy. When Sokol told his boss he owned Lubrizol shares, according to the audit committee’s report, Buffett didn’t inquire further.
Worse, when Sokol resigned, Buffett not only praised him, but even allowed the former chief of NetJets and chairman of MidAmerican Energy Holdings, both Berkshire companies, to sign off on the press release before it was issued.
The committee’s report is damning for Sokol. In addition to making clear he violated any number of the company’s ethical standards, it says he did not satisfy the duty of loyalty required under Delaware law. The board is considering possible legal action against Sokol, whose attorney disputed the board’s report, saying Sokol is “a man of uncommon rectitude and probity.”
Though it is Sokol being thrown under the bus, Buffett gets sideswiped, too. By taking a much tougher stance on the scandal, the directors leave the Oracle looking incredibly naïve. Buffett may not have known when Sokol had bought his $10 million of shares before deciding to pull the trigger on the $9 billion Lubrizol deal, but he had a fairly detailed chronicle of events by the time he cobbled together his now daft-looking statement on the matter.
Berkshire’s assessment of the affair is a move in the right direction but hardly will put it to rest. Buffett will face some 40,000 shareholders on Saturday. An apology will be in order for making a muddle of Sokol’s serious transgressions. And investors should demand additional explanations for Buffett’s deeds and his words. Folksy aphorisms just won’t do.