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Why David Sokol Quit Berkshire Hathaway -- You Don't Mess With Warren Buffett's Rep

By Alain Sherter

Updated on: March 31, 2011 / 12:52 PM EDT / MoneyWatch

Theories abound about why David Sokol, Warren Buffett's heir-apparent at Berkshire Hathaway (BRK), abruptly resigned from the company. But there's consensus on one thing: The two executives' explanation for the departure doesn't pass the smell test. As my colleague Jill Schlesinger over at CBSMoneyWatch says:

The Oracle of Omaha said that the resignation was a "total surprise."

As much as I admire Mr. Buffett, this statement seems as thin as his FCIC testimony defending the business practices of ratings agencies.

Start with Buffett's curious announcement of the move last night. First, and most obviously, key executives don't usually just bolt for the exit, especially not when they're in line to take over one of the biggest, most prestigious companies in the world. Everything about Sokol's professional rise suggests a dogged determination to succeed. It's impossible to peer into a person's mind, of course, but he doesn't seem like a quitter.

Second, Buffett's new release is oddly discordant, as if the billionaire investor himself doesn't quite believe his own story. He devotes only a paragraph or two to discussing Sokol's professed reasons for leaving Berkshire, which amounts to a vague (if arguably commendable) notion about doing something philanthropic.

Apart from a perfunctory comment about Sokol's contributions, Buffett devotes the rest of the announcement to detailing certain facts about Sokol's investment in Lubrizol (LZ), which Berkshire agreed to buy earlier this month for $9.7 billion. Buffett says Sokol's purchase last year of shares in the chemicals company only a few months before its acquisition by Berkshire was in no way "unlawful." But note Buffett's careful phraseology here:

He has told me that they were not a factor in his decision to resign.

Does that sound like Buffett is convinced that Sokol's financial interests in Lubrizol played no part is his resignation? No, not to me, either.

Tell-tale heart?
Third, on CNBC this morning Sokol all but admitted that his involvement with Lubrizol prior to Berkshire's purchase put him in a decidedly awkward position. Asked whether it had been a mistake to approach Buffett in January about buying Lubrizol, Sokol said:

Knowing today what I know, what I would do differently is I just would never have mentioned it to Warren, and just made my own investment and left it alone. I think that's a disservice to Berkshire, but if that's what people want to do in the future, that's fine. You can't -- or at least I don't think you can [ask] executives to not invest their own family's capital in a company that Berkshire had no interest, or even knowledge of, and somehow police that. The only thing you can do is just say if you invest your own money, don't ever mention it to anyone at Berkshire. That doesn't make sense to me either, but that's certainly what it sounds like.

Translation: The optics are bad here. Whether Sokol made or lost money is immaterial. What casts a cloud isn't his stake in Lubrizol so much as how that investment came about and that Berkshire disclosed it in such a roundabout way.

Volatile mix
The NYT's Andrew Ross Sorkin has an intriguing hypothesis about why Sokol had to go -- the executive overstepped his authority. Sokol reportedly met with Citigroup (C) bankers last fall to discuss potential acquisition targets for Berkshire. At the meeting he not only mentioned Lubrizol, but also asked the bankers to communicate his interest to the company's CEO. The next day Sokol bought 2,300 shares of Lubrizol.

As Buffett and Sokol have sought to emphasize, however, under his brief at Berkshire Sokol had no power to initiate deals. That's the exclusive domain of Buffett and his long-time partner Charlie Munger. Worse, Sokol improperly mixed Berkshire's business with his own.

That's a cardinal sin for Buffett, whose gold-plated reputation for integrity (justified or not) is literally worth billions to Berkshire's value. Sokol had apparently tried to resign twice before. Each time, Buffett talked him down off the ledge. But Sokol's investment in Lubrizol would always raise questions about Buffett's tolerance for conduct by his executives that has even the merest whiff of insidery funny business. So this time Buffett may have given him a little nudge, or at least didn't object when Sokol threatened to jump.

Whatever his talents, Sokol is replaceable. Buffett's credibility isn't.

Thumbnail from Wikimedia Commons; Sokol image from Flickr user mikebaudio
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