stanord closer look series 3
The ResignaTion of DaviD sokol: MounTain oR Molehill foR BeRkshiRe haThaway?
details about Sokol’s holdings in Lubrizol when So-kol rst brought up the matter. Others criticizedBuett or not taking a harder line against Sokol’sactions. According to one commentator:
Even i the SEC concludes that Sokol did noth-ing illegal, the known acts suggest that what Sokol did was wrong.... Instead o condemning Sokol, Bufett gave him a pat on the back on the way out the door…. Bufett missed an opportu-nity to show moral courage, stand up or prin-ciple, reinorce to his employees what he expects rom them, and, not least o all, to live up to his own public reputation.
Another commentator was more blunt: “Mr. Bu-ett whitewashed Mr. Sokol’s blazingly obvious eth-ical lapse.”
A third asked, “Why hasn’t Mr. Buettbeen ruthless?”
Some blamed the corporate governance systemo Berkshire Hathaway or having lax internal con-trols. According to one journalist, “the unolding events are raising questions about controls andgovernance at the highest levels o his business.”
Another questioned whether, “Berkshire needsmore compliance programs and people to managethem.”
A third contended that Berkshire Hatha- way’s board was in part to blame: “Te BerkshireHathaway board is ull o independence issues. It’s just that no one seems to care.” She accused theaudit committee o being “passive” with regard toBuett and not “proactively probing management,internal auditors and external auditors to gain in-sight and to make oversight decisions that will holdup, i necessary, in court.”
Finally, Sokol’s resignation highlighted the suc-cession challenges at Berkshire. While Buett hadassured investors in the past that “the directors andI have thought through the succession questioncareully and that we are well prepared,” Sokol’ssudden resignation and in particular the commentshe made regarding the challenges o succeeding Buett were troubling.
why this matters
1. Given its size, Berkshire Hathaway has had a relatively clean record on governance-relatedmatters. Tis track record speaks to the quality o corporate governance and the ability o its“trust-based” model to work. Still, the Sokolmatter raises signicant issues or the board:
How much has the reputation o the rm su-ered rom Sokol’s actions? Is this a fash in thepan, or will there be long-term ramications?
Did Sokol violate the company’s insider trad-ing policy?
Did Sokol’s actions reveal shortcomings in thecompany’s governance system that need to beaddressed? Or were they instead an isolated in-cident?
Should the company add additional controlsto prevent similar events rom recurring? I so, what would be the cost o these controlsin terms o decision making, perormance, andculture?
Do potential successors need to be held to a higher standard o conduct so that their actionsdo not negatively impact the reputation o therm?2. Te Sokol matter also raises questions that aregeneral to all organizations. What events mustoccur beore a company decides that changes tothe overall governance system are required? How signicant must these events be, and how willthe board determine i they constitute a “system-ic ailure” or a “one-time event”? I the board de-termines that changes are required, how shouldit weigh the extent and cost o those changesagainst uture perormance?
For more on the governance o Berkshire Hathaway, see: David F.Larcker and Brian ayan, “Berkshire Hathaway: Te Role o rust inGovernance,” CGRP-02, May 28, 2010. Available at:http://www.gsb.stanord.edu/cldr/research/closer_look.html; and David F.Larcker and Brian ayan, David F. Larcker and Brian ayan, “TeManagement o Berkshire Hathaway,” GSB Case No. CG-16, Jan.01, 2009. Available at:https://gsbapps.stanord.edu/cases/.
As with all publicly traded companies, the acquisition o businessesrequires the approval o the board o directors. Acquisitions involv-ing the issuance o Berkshire shares require the approval o share-holders.
“A Conversation with Warren Buett,” Te Charlie Rose Show, Jul.10, 2006.
“Warren Buett, Chairman o Salomon, esties Beore House Sub-committee,”
, Sep. 4, 1991.
Wesco Financial, 2007 Annual Meeting, cited in: