The first thing that strikes me in the scathing report of the Berkshire Hathaway audit committee on David Sokol, the senior executive who resigned last month, is that the thin defence of his conduct offered by Warren Buffett at the time has evaporated.
The second is that it makes Warren Buffett’s initial press release on Mr Sokol look distinctly economical with the truth. It will make for an interesting question and answer session at Berkshire’s annual shareholders’ meeting this weekend.
Here is my column at the time on the subject of Mr Sokol’s trading in Lubrizol shares before the company was acquired by Berkshire:
Mr Buffett provided a pre-emptive judgment on Mr Sokol’s behaviour last year in a memo to Berkshire’s managers and directors, including Mr Sokol. “If you see anything whose propriety or legality causes you to hesitate, give me a call,” he wrote. “If it’s questionable whether some action is close to the line, just assume it is outside and forget it.”
That is clearer than the mealy-mouthed half-defence of Mr Sokol offered by Mr Buffett in the statement announcing his departure. “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign.” Not unlawful? When Mr Buffett fails to mention ethics, something is up.
And here is a gratifyingly similar extract from the Berkshire audit committee report:
Every two years, Mr Buffett writes to the CEOs of all Berkshire Hathaway companies “to reemphasize Berkshire’s top priority”: “to zealously guard Berkshire’s reputation.” The letter instructs the CEOs: “If it’s questionable whether some action is too close to the line, just assume it is outside and forget about it.”
Even if it were assumed that Mr Sokol’s trading could be reconciled with the precise language of the provisions of the Trading Policy and the Code discussed above, it could not be reconciled with the obligation to stay well within the lines. By engaging in such questionable conduct, Mr. Sokol threatened Berkshire Hathaway’s reputation–or would have done so had he remained with the company.
The committee report is brutally frank in its accusations that Mr Sokol violated “the highest standard of business ethics” and may have breached Delaware law on the fiduciary duty of executives. Mr Sokol has strongly denied any misconduct.
Mr Buffett’s initial press release of March 30, however, was less candid, despite his statement in that release that “I have held back nothing in this statement. Therefore, if questioned about this matter in the future, I will simply refer the questioner back to this release.”
That could not stand, and it has not. Berkshire is now promising to post a full account of questions and answers on the topic at the annual meeting.
I suppose it depends on one’s definition of what “nothing” is, but there is quite a lot of detail in the audit committee report – including the fact that Mr Buffett first learned of how Mr Sokol had acquired Lubrizol shares from a Citigroup banker – that did not find its way into the release.
The audit report describes the process of preparing the release thus:
At Mr Sokol’s request, Mr Buffett deleted from the release the one passage Mr Sokol said was inaccurate: a passage that implied that Mr Sokol had resigned because he must have known the Lubrizol trades would likely hurt his chances of being Mr Buffett’s successor. Mr Sokol told Mr Buffett that he had not hoped to be Mr Buffett’s successor, and was resigning for reasons unrelated to those trades. Except for that deletion, Mr Sokol concurred in the accuracy of the press release. For example, Mr Sokol left unchanged the statement that when Mr Sokol made his purchases, he “did not know what Lubrizol’s reaction would be” if Mr Buffett developed an interest in a transaction. Mr Sokol also left unchanged Mr Buffett’s statement that he had “held back nothing in this press release.”
The statement that Mr Buffett was holding nothing back looked pretty unconvincing at the time and looks even more so now.