Berkshire's Challenges

I sense great hypocrisy in how Buffett is judged regarding the Sokol affair. It is as though people in the financial industry are so fed up with underperforming Buffett in both monetary and ethical terms that they jump on this opportunity to proclaim Buffett is just as fallible as everyone else. Now the hedge fund managers and private equity gurus as well as hoards of mediocre money managers can have an excuse to over-charge customers relative to their performance. Jealousy is happy at work here.

The truth is no one can prevent anyone with a free will from doing something. Not even God could stop Adam and Eve from eating the forbidden fruit. No amount of compliance regulations and oversight committee meetings could have prevented Dave Sokol from doing what he did, especially when he felt it was not illegal. Whether it was ethical is a more subjective argument. The question is what Sokol and Buffett did after the acts came to light.

The fact is that Sokol was allowed to leave within a couple of weeks after Buffett learned of the trades. We may speculate as to the timing and motives behind Sokol's resignation, but it is likely Sokol was conscientious enough to realize these trades would not have pleased Buffett and sent in the resignation himself before actually getting fired. Clearly we all know Buffett likes Sokol very much. Is he wrong to try to portray Sokol in the best light possible? How many of us would not help our favorite son the best we can if he got into trouble?

As for Sokol, after resigning from Berkshire, is essentially on his own to defend himself from public opinion, and from possible formal investigations too. Berkshire will not pay for any legal fees nor provide insurance coverage for potential misconducts. After going through the financial crisis of the last several years, haven't we seen lots of examples of apparently legal but clearly unethical behaviors (or in their own terms stupid acts that somehow benefit the perpetrators while hurting other people, all perfectly legal of course) that are being defended or paid for using shareholder and tax payer money!

Would we be more forgiving had Sokol behaved more like other despicable financiers of the last few years, leaving with a huge golden parachute worth hundreds of millions, receiving indemnity protection by Berkshire, and transferring all his assets to his wife on the eve of potential litigation? Or would Berkshire be better served by Buffett firing Sokol with harsh and incriminating words, before Sokol is proven guilty of legal misconduct? How would the other managers feel about Buffett then? Or should we ask Berkshire to emulate AIG and put Sokol on leave while paying him a million a month as a consultant? Can anyone come up with a solution that is truly better than how Buffett and Sokol have handled it? I seriously doubt it.

Let the one who has not sinned throw the first stone. Yes, that means the perfect person who has never even gone over the speed limit once and always covers his mouth and nose with a clean handkerchief and immediately cleans his hands with ethanol sanitizer. The rest should abstain from passing judgment on Buffett and Sokol, two individuals who have behaved better than most.

REPLY: I agree with part of what you say. It irritates me when people hold Buffett to a standard of perfection as though, because he has high standards, he has to meet them perfectly 100% of the time himself. With that said, we're supposed to use our judgment to evaluate how people behave in full context (i.e., fairly), and we don't have to be blameless to do it. Discriminating good from bad behavior is not the same thing as throwing stones.

This isn't so much a revelation of new facts about Berkshire, rather a wake-up call with respect to how very unconventional Berkshire's corporate governance is. A healthy and young CEO can be granted unusual authority and power; shareholders can vote with their feet if they don't approve. Caveat Emptor in the purest sense.

None of this should be new to Berkshire investors. Buffett has been straightforward in this regard. Shareholders have known what they got into (or at least the sophisticated ones should have).

Recent events smash the notion of infallibility. Frankly this is good. Buffett is not immortal nor superhuman. His creation Berkshire is huge and moats are not eternal (World Encyclopedia and newspapers come to mind). Who is going to run and maintain this corporation going forward?

In respect to investing, I have learned more from Buffett than any other, but he needs to recognize that his responsibilities extend beyond making Berkshire a monument to his investment acumen and focus on how this behemoth carries forward after his passing from the scene. It is the mature and responsible thing for him to do.