David Sokol’s Resignation from Berkshire Hathaway Doesn’t Pass the Smell Test
Full disclosure: I have been a long time shareholder of Berkshire Hathaway. Therefore, I’m particularly disappointed with the current episode of bush league antics from corporate America. I expected more from Berkshire, Warren Buffet and Charlie Munger.
I want to set aside the legal analysis of whether Sokol’s action constitute insider trading or a breach of a duty to the corporation, shareholders or anyone else. No doubt, talented lawyers will line up arguing both sides of these issues. Irrespective of the final legal assessment, these facts stink.
As reported in yesterday’s New York Times, by Reuters, Sokol learned about Lubrizol because Citigroup had an investment banking assignment from Berkshire to bring potential acquisition targets to Berkshire’s attention. In effect, Sokol learned about the Lubrizol opportunity in his capacity as an employee and officer of Berkshire. He then took that information and used it for his own benefit.
This egregious behavior was then compounded by the fact that he turned around and pitched the Lubrizol deal to Buffet. He also attended a meeting with Lubrizol’s CEO in the process — no doubt that he scored this meeting because of his position at Berkshire, it was not in his personal capacity as an investor of $10 million in Lubrizol’s stock. (Although a lot of money, $10 million investments don’t typically afford an investor a one-on-one meeting with a CEO).
Simply put, Sokol abused a position of trust. Buffet and Munger’s failure to call him out on it only exacerbates these inexcusable actions. In fact, Munger makes the tired excuse: “Few people understand how good he is, how really good he is”. In other words, he’s so good that he is above the rules. The ultimate rationale of elitism; members of the club can’t possibly do anything wrong.
Corporate governance experts are explaining that Berkshire’s internal policies (Code of Conduct, Insider Trading Policy, Conflict of Interest Policy, etc) need to be reviewed and possibly re-vamped. As a fiduciary, I am a huge proponent of rigorous policies and procedures. However, policies and procedures are only as good as the judgment of the people who enforce them. Nothing replaces strong business ethics. And, as anyone who has worked at in a large organization knows — a culture of strong business ethics starts at the top.
Buffet and Munger’s staunch support of Sokol sends a strong message not only through the capital markets, but also throughout the entire Berkshire entity. Just possibly, there are two sets of rules: one set for the rank and file and one set for those who are “really good”. In large organizations everyone sniffs out these double standards and the integrity of the culture begins to erode.
Our financial system has survived a near death experience. Congress attempted a legislative fix through Dodd-Frank which is now mired in a political and regulatory morass. As I have stated before, real reform will never occur until behavior is reformed. We need business leaders with the courage to proclaim that conflicts of interest are intolerable and unacceptable. Failure to do so undermines the integrity of our financial system.
Warren Buffet use to be such a leader. For decades, he has only taken a minimal salary from Berkshire for the stated reason that he wanted his interests to be aligned with shareholder interests. A noble and unique position in corporate America. Somehow David Sokol missed this message. Maybe he and Buffet should pull out some of the old Berkshire annual reports. They provide an exemplary primer on corporate ethical behavior.