Warren Buffett spoke at length about the David Sokol-Lubrizol affair during Berkshire Hathaway's 2011 annual meeting this past weekend. But at the same time what he said didn't seem to jibe with his famous promise made nearly twenty years ago -- amid the Salomon Treasury bid-fixing scandal -- to be "ruthless" in dealing with any employee who sullied Berkshire's reputation.
Buffett did in fact echo the very words he used during the Salomon episode, calling Sokol's actions "inexcusable" and "inexplicable." And Buffett said point blank that he "obviously made a big mistake" in not questioning Sokol further about the timing of his personal purchases of Lubrizol. But what we didn't hear from Buffett was much in the way of how this affair might change Berkshire's way of conducting business. And that seemed just fine with shareholders.
Shareholders Give Buffett a Free Pass
To be sure, there were plenty in the media clamoring for some detailed explanation of how the Sokol mess would change BRK's governance process. Former Morgan Stanley managing director Alice Schroeder, who wrote the biography "The Snowball: Warren Buffett and the Business of Life," wasn't mollified by the report from Berkshire's audit committee released three days before the annual meeting that excoriated Sokol, accusing him of insider trading. As Schroeder noted in a Bloomberg column, the problem isn't the about face in the audit report versus Buffett's initial press release a month earlier insisting that Sokol's actions were not unlawful. What rankled Schroeder was "the missing explanation for why Berkshire went so easy on Sokol in the first place.... Why did Berkshire fail to condemn his behavior initially, and instead praised his 'extraordinary' contributions to Berkshire? And what will Berkshire do to improve its corporate governance?"
In his Saturday New York Times Op-Ed column Joe Nocera chimed in with his own list of questions:
"For starters, the report doesn't explain why Buffett let Sokol walk out the door with a pat on the back instead of a kick in the rear. What moved him to pre-emptively clear Sokol, who had so clearly violated Berkshire's code of conduct, of wrongdoing? What does that tell us of possible flaws in Buffett's character?... Just as importantly for shareholders, there are questions about his management style -- questions that were once easy to ignore but no longer are."
Before Buffett and sidekick Charlie Munger began to answer shareholder questions, Buffett indeed addressed the controversy head on, offering two reasons for why he never suspected Sokol of insider trading.
- I never thought he'd be so dumb. Buffett explained that after any takeover deal is announced, the Financial Industry Regulatory Authority scours trading records of all interested parties to see if there was any front-running. "So the odds that if you're trading in your own name and you're on that list of people who know of a deal ahead of time, the odds that it's not going to get picked up seem to me are very much against you," Buffett told shareholders. He then went on to explain the fact that all of Sokol's trade was, in fact, made "right out in the open."
- I'm dumbfounded given the guy I once knew. Echoing the same praise of Sokol that was in the ill-fated original press release, Buffett once again went out of his way to paint Sokol as a great guy. Buffett shared a story from the time Berkshire acquired a majority stake in MidAmerican in 1999 and Buffett decided to put in place a bonus plan for Sokol and Greg Abel, who were overseeing the show. Buffett's plan was to give Sokol $50 million and his junior partner Greg Abel $25 million if they hit very aggressive performance targets. Yet Sokol insisted that he and Abel each receive $37.5 million if they succeeded. Buffett told the shareholders: "I think 20 years from now I will not understand what causes a man to voluntarily turn away 12 and a half million dollars to an associate without getting any credit for it in the world and -- and then ten or so years later buy a significant amount of stock the week before he talked to me."
A very public mea culpa was all it seemingly took to mollify shareholders. Buffett and Munger patiently fielded four very pointed questions about the Sokol mess. (You can download a 39-page transcript of Buffett's opening remarks and every Sokol-related Q&A on the Berkshire Hathaway website. ) But the bulk of the meeting was spent peppering Buffett not on Sokol, but on his insights about the investing landscape these days.
The media can be indignant, but investors who've made a fortune off of Buffett were quick to move on. Let's remember that Buffett wasn't exactly walking into the lion's den. The vast majority of folks who attend Berkshire's annual meeting are financially set because of Buffett. That's worth plenty of goodwill and forgiveness. Throw in the Medal of Freedom Buffett won earlier this year, and you've got yourself a pretty thick coat of teflon.
And it's not just mom and pop individual investors who were quick to want to forgive and move on; institutional investors surveyed by the Wall Street Journal after the meeting were just as eager to want to focus on anything but Sokol.
Besides, Buffett and his audit committee did a masterful job painting themselves as victims of Sokol, and they can now pawn off the meting of punishment to the SEC. He's the bad egg, our laissez-faire approach to central management works pretty well, we told the SEC everything we knew, let's move on. Buffett even made a point to slide in a mention of how his handling of the affair had actually preserved value for shareholders: Given that Sokol resigned, rather than be fired, there's no severance to pay.
Nor is this the first time Berkshire shareholders chose to look past a misstep. As MoneyWatch's Jane Bryant Quinn explained exactly one year ago, Buffett spent time at the 2010 Berkshire Hathaway annual meeting defending the indefensible: the actions of both Goldman Sachs and Moody's, yet shareholders again didn't really seem to care.
So are Berkshire Hathaway investors naÃ¯ve? Anything but. This is cold-hearted capitalism at play. Buffett has made a ton of money for his shareholders. And compared to the likes of Angelo Mozillo and Bernie Madoff, he is a saint. Investing is a messy and often dirty business. Hiring Warren Buffett to do your bidding for you -- and that's what every Berkshire shareholder is after -- is still seen as one of the best deals out there. Mistakes and all.
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