Experts: Buffett's Image Could Be Damaged by Sokol Saga

Friday, 01 Apr 2011 01:50 PM

 

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Just last week the "Oracle of Omaha" was greeted in India as if he spoke on behalf of a god like the oracles of old.

Attendees at an event in a plush hotel in New Delhi raced for front row seats to hear Warren Buffett talk. At a conference in Bangalore on March 23, a crowd including investors gathered to heap praise upon him.

"I really am extremely thankful on behalf of all Indians that you have showered so much wisdom on us," one Indian investor told the 80-year-old billionaire.

That kind of reaction to Buffett is common around the world and not just limited to India.

His reputation as a perspicacious investor, philanthropist and a principled man has been carefully cultivated over decades. Buffett and Berkshire Hathaway — the company he has run since the 1960s — are admired across the globe.

Which is why the revelation that his heir apparent David Sokol owned shares of a company that he persuaded Buffett to buy has created a headache for the Oracle. Experts said it could tarnish the public's perception of him.

"Warren Buffett has a reputation second only to the Lord himself," said Michael Robinson, senior vice president at Levick Crisis Communications. "The very reason this is such big news is that it's Berkshire Hathaway that's involved."

Buffett said he knew that Sokol owned shares of Lubrizol even as he was deciding whether to buy the company, and that neither he nor Sokol believe any laws were broken.

Some lawyers say the Buffett lieutenant may well have broken laws. According to crisis communications experts, Buffett now has a limited window of opportunity to explain openly what happened and why investors should not be concerned.

"The question for Buffett is whether this event has any long-term legal or regulatory implications," said Jonathan Bernstein, president of Bernstein Crisis Management Inc and author of "Keeping the Wolves at Bay."

"We've seen from past examples that the court of public opinion matters and if this issue is not dealt with it could do more damage in the long term," he added. "If Mr. Buffett wants to prevent that he should speak about this in a transparent, honest and humble way."

The Sokol episode recalls a famous piece of Buffett investing wisdom: "You only find out who is swimming naked when the tide goes out."

As Berkshire Hathaway moves closer to identifying a successor to Buffett, it may turn out that the Oracle himself is not as clothed as investors thought.

To be sure, nobody is arguing that Buffett the investor has lost his trunks. He is giving away his multi-billion dollar fortune, and has pushed other wealthy people to do the same. And there's no question that he has generated massive returns for shareholders, having grown his company more than 490,000 percent since 1965.

But he is famous for his hands off management style, which means his business may lack many of the controls that other companies of Berkshire's size take for granted.

 

BUFFETT'S GLASS HOUSE

Part of the problem facing Buffett is of his own making, having spent many years working to cement his company's reputation as ethical and beyond reproach.

In his most recent biennial letter to his company's managers on July 26, 2010, Buffett gave the following warning:

"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."

Alice Schroeder, a former Morgan Stanley insurance analyst and author of "The Snowball, Warren Buffett and the Business of Life", said that in announcing something "obviously unethical but hiding behind the fact that technically it's not illegal" Buffett has done himself no favors.

"Buffett has been aggressive for years in portraying himself and Berkshire Hathaway as moral exemplars," she said. "In effect he moved into a glass house."

"He had an opportunity to solidify his reputation and he blew it completely."

This is not the first revelation about Buffett that goes against his public image.

He has derided derivatives as "instruments of mass destruction" yet owns a large portfolio of them. He says he doesn't invest in businesses he doesn't understand, yet bought into Chinese car maker BYD despite admitting he knew nothing about its business.

Howard Bragman, founder of public relations agency Fifteen Minutes, however, said that Sokol's resignation was being overblown by the media and Buffett would emerge unscathed.

"It's a classic case of a guy who's run a really clean life and all of a sudden there's a little something, let's call it murky, and the media is doing a little piling on," he said.

But crisis communications experts say a public incident like this requires that Buffett head off further trouble.

"It certainly mars Warren Buffett's image, at least in the short term, and whether it has long-term consequences or not depends on how Buffett and Berkshire Hathaway respond going forward," said Lew Phelps, a partner at Sitrick & Co., one of the top crisis communications shops on the West Coast.

Phelps said part of the problem is Buffett's response appears too casual and adds to the perception of "something not really clean and certainly not in keeping with the image that Berkshire and Buffett have spent a lot of years developing and cultivating."

Darren Robbins, a class-action lawyer and partner at Robbins Geller Rudman & Dowd, said some investors have already contacted him over the Buffett announcement.

"The timing and the facts surrounding the transaction have justifiably raised an interest and concerns from three of my clients," Robbins said.

Levick's Robinson said speed is now of the essence and Buffett needs to get out in front of the issue and do damage control.

"Berkshire Hathaway has taken care of the first step by hitting the ejector button and getting him (Sokol) out the door, fast," he said. "You know there is going to be litigation coming down the pipeline."

"So Warren Buffett needs to be very proactive in talking about exactly what happened," he added. "And he needs to start doing it quickly."

© 2014 Thomson/Reuters. All rights reserved.

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