Berkshire board tries cleaning up Buffett’s mess

April 28, 2011

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.

Comments

This goes to show that no matter what you do to institute rules and regulations ultimately you have to take your chances and trust certain people. The question remains how much trust? When you do verify? That answer is completely up to the individual who is trusting someone to do the right thing. There is no way you can protect yourself 100%
The bottom line is you look at the individual and ask yourself a simple question. Has this individual won more then they have lost? Warren Buffett certainly meets that benchmark so lets just move on and yes I will say it. Forget about it.

Posted by Janmara | Report as abusive
 

Well said. Here is my take on it:

http://alephblog.com/2011/04/28/regardin g-david-sokol-part-3/

Posted by DavidMerkel | Report as abusive
 

Buffet’s involvement with the financial collapse is thousands of times more significant than the shenanigans involving Sokol and Lubrizol. Buffet still defends Moody’s (one of his investments) triple-A rating of toxic mortgages, even though he had publicly remarked that he thought these financial instruments were dubious at best. This is well beyond gullibility or loyalty. He is personally responsible for the losses of thousands of investors who relied on these unearned ratings.

Posted by ptiffany | Report as abusive
 

You may trust in friends, but you still have to watch your wallet. Your friends can have a great time spending your money. Also remember its your wallet and your Good Name is also inside your wallet. Your good friends will also have a great time living off of your Good Name. Evey Buffet has to remember this.

Posted by Myche | Report as abusive
 

Rules? There are no rules.

[Harvey has challenged Butch to fight for control of the Hole-in-the-Wall gang]
Harvey Logan: Guns or knives?
Butch Cassidy: Neither?
Harvey Logan: Pick!
Butch Cassidy: I don’t want to shoot with you, Harvey.
Harvey Logan: [draws a big knife] Anything you say, Butch.
[Butch walks over to Sundance]
Butch Cassidy: [in a low voice] Maybe there’s a way to make a profit in this. Bet on Logan.
Sundance Kid: I would, but who’d bet on you?
Harvey Logan: Sundance, when we’re done and he’s dead, you’re welcome to stay.
Butch Cassidy: [low voice, to Sundance] Listen, I don’t mean to be a sore loser, but when it’s done, if I’m dead, kill him.
Sundance Kid: [low voice to Butch] Love to.
[waves to Harvey and smiles]
Butch Cassidy: No, no, not yet. Not until me and Harvey get the rules straightened out.
Harvey Logan: Rules? In a knife fight? No rules!
[Butch immediately kicks Harvey in the groin]
Butch Cassidy: Well, if there aint’ going to be any rules, let’s get the fight started. Someone count. 1,2,3 go.
Sundance Kid: [quickly] 1,2,3, go!
[Butch knocks Harvey out]
Flat Nose Curry: I was really rooting for you, Butch.
Butch Cassidy: Well, thank you, Flatnose. That’s what sustained me in my time of trouble.

Posted by libertadormg | Report as abusive
 

Whatever the historical value, Warren Buffet has returned to his stockholders, the time has come for him to step down relinquish control and retire while he still some dignity to take away.

Unfortunately, I do not believe that he has the capacity left to make such a wise decision. We do not know how or anyway we lack the courage, to tell the elderly that they no longer have the mental acuity to make important decisions for other people.

Posted by rwills | Report as abusive
 

buffet is a one trick pony. its shocking that so many people think he’s brilliant when speaking about taxes and other stuff he knows nothing about.

Posted by ActualTaxpayer | Report as abusive
 

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