Perception: Warren Buffett is a business icon and media favorite. There is no appetite to hold him to the same ethical standard as, for example, oil executives, let alone those espoused by his own company.
Reality: True. Being an elderly white Midwestern supporter of the first African-American president buys you a lot of understanding.
A James Stewart column details how Buffett blatantly ignored his own company’s ethical standards and possibly insider trading laws. The column is copied at end of post.
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Common Sense by James B. Stewart — Why Is Buffett Whitewashing Sokol’s Exit?
I’ve always admired Warren Buffett’s advocacy of the highest ethical standards in business. As a journalist, I especially applaud his rule of thumb that employees consider whether they would be “willing to have any contemplated act appear the next day on the front page of their local paper.” This is a far higher standard than simply adhering to the letter of the law. But does Buffett have a blind spot when it comes to implementing his own policy?
That question needs to be asked after the abrupt resignation this week of David Sokol, whom many viewed as the top contender to succeed Buffett at the helm of Berkshire Hathaway. In a press release on Wednesday announcing the resignation, Buffett said that Sokol had bought approximately $10 million in shares of chemical company Lubrizol in January — not long before Berkshire Hathaway agreed to acquire the company at Sokol’s urging.
Despite these highly suspicious and troubling actions, Buffett went out of his way to praise Sokol and stress that he didn’t feel the Lubrizol trading was “in any way unlawful.” He also said he had not asked for Sokol’s resignation and that it came as a “surprise” to him. Mr. Sokol himself told The Wall Street Journal that his resigning had “absolutely nothing” to do with the Lubrizol situation. Buffett said that Sokol was resigning for family reasons.
Let’s put aside for the moment that little if any of this seems credible. If Sokol was indeed contemplating resigning for the past three years, as he now maintains, why do so just days after Lubrizol provided details on the acquisition in a filing with the Securities and Exchange Commission – and then insist Lubrizol had nothing to do with it?
Let’s also defer the question of whether Sokol may have engaged in insider trading. According to Lubrizol’s SEC filing and Buffett’s statement, the company was one of several possible acquisitions Citigroup bankers discussed with Sokol on Dec. 13. Sokol promptly bought shares, and then pitched Buffett on the idea of acquiring the company in mid-January, according to the Buffett statement. Buffett confirms that Sokol told him at this juncture he owned Lubrizol shares, and according to Buffett, he didn’t ask Sokol when he bought them or how much he owned. Buffett initially rebuffed the idea of an acquisition, then reconsidered. The Berkshire Hathaway board approved the deal March 13. Buffett learned the extent of Sokol’s holdings “shortly before” he left for a trip to Asia on March 19, according to his statement.
Whether this constitutes insider trading, it is a shocking ethical lapse, a blatant conflict of interest and a breach of Sokol’s duty of loyalty to his employer. The moment Sokol owned a major stake in a potential target of Berkshire Hathaway, he had a significant personal financial interest in seeing a deal consummated, one that would conflict with offering the best disinterested advice to Buffett. Was Lubrizol the best possible acquisition target for Berkshire Hathaway? Shareholders will never know for sure.
The Berkshire Hathaway Code of Ethics states explicitly: “A conflict of interest exists when a person’s private interest interferes in any way with the interests of the Company. A conflict can arise when a Covered Party takes actions or has interests that may make it difficult to perform his or her work for the Company objectively and effectively…. All directors and executive officers of the Company, and the chief executive officers and chief financial officers of Berkshire Hathaway’s subsidiaries, shall disclose any material transaction or relationship that reasonably could be expected to give rise to such a conflict to the Chairman of the Company’s Audit Committee.”
Based on what is now known, Sokol may have violated these policies. Buffett should have followed up on Sokol’s disclosure in mid-January, and once he determined the circumstances, he should have ordered Sokol to sell the shares and rescind any gains. And if this conduct did break company policies, appropriate disciplinary steps should have been taken, as well as a determination whether such information should be disclosed to the SEC.
Berkshire Hathaway did not respond to requests for comment. Sokol declined to comment for this column.
Let’s assume Sokol’s revelations failed to make much of an impression on a busy Buffett, caught up in the excitement of a potential new deal. But why would Buffett now go out of his way to whitewash Sokol’s departure? In my view, Sokol should have been fired for the simple reason that he violated Buffett’s “front page” standard. However painful, Buffett should have come clean to send a message to employees, investors and regulators that Berkshire Hathaway adheres to the highest ethical standards and enforces its own stated code of behavior.
Read more: Why Is Buffett Whitewashing Sokol’s Exit? – SmartMoney.com http://www.smartmoney.com/investing/stocks/why-is-buffett-whitewashing-sokols-exit-1301690748602/#ixzz1LloDfRC9
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