Sokol's Stock Deal Casts Shadow on Buffett's Style

Thursday, 31 Mar 2011 03:21 PM

 

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So much for Warren Buffett's philosophy of leaving his managers alone.

A key Buffett lieutenant resigned this week, and said he bought shares in a company he later pitched to his boss. While Buffett said his employee, David Sokol, did nothing unlawful, governance experts said the entire episode was a black mark for a company that has long prided itself on its rectitude.

"It's the kind of behavior that, as a matter of corporate governance, sophisticated companies try to avoid," said John Coffee, a law professor at Columbia University.

Experts said that part of the problem may be that Buffett's company, Berkshire Hathaway, has few of the internal controls that other major companies have, and instead banks on the honor of its senior employees.

"The key is the people. That's been his playbook ever since he's started. He knows the rules, and he expects the people he works with to know them too," said Michael Holland, chairman of Holland & Co, which oversees $4 billion in assets and owns Berkshire shares.

Changing the way he runs his business would sting for Buffett, who stakes everything on his reputation — something he made crystal clear in a July 2010 memo to his managers that he released this past February.

"We can't be perfect but we can try to be. As I've said in these memos for more than 25 years: 'We can afford to lose money — even a lot of money. But we can't afford to lose reputation — even a shred of reputation."'

He added: "We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter."

'MANAGE LITTLE'

Buffett likes to brag about the way he runs companies — by not running them, leaving them instead in the care of what he considers capable executives who do not need his oversight.

"There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A 'hire well, manage little' code suits both them and me," Buffett said in his annual shareholder letter in February.

Ultimately, by his own admission Buffett is not an operational leader, but a sort of inspirational one. He contents himself to let others run the businesses.

Experts suggest that may have created a hole in the way Berkshire polices itself internally.

"The fact that this could happen does raise questions as to the effectiveness of the company's controls to prevent something like this from happening," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

Elson said it was the kind of thing that could put at least a little tarnish on Buffett's squeaky-clean image.

Others concurred that there may be flaws in Berkshire's control structure but said on the whole the company was still better behaved than many.

"Every company is different. My sense of the Berkshire process is that it gets corporate governance right," said R. Edward Freeman, academic director of the Business Roundtable Institute for Corporate Ethics. "Berkshire is a well-managed, well-led company with good governance. They're not perfect."

© 2014 Thomson/Reuters. All rights reserved.

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