Buffett says mistakes were made in handling Sokol

By Josh Funk

Associated Press

Published: Saturday, April 30 2011 11:05 a.m. MDT

Berkshire Hathaway Chairman and CEO Warren Buffett poses with University of Nebraska cheerleaders in Omaha, Neb., Saturday, April 30, 2011, prior to presiding over the annual Berkshire Hathaway shareholders meeting.

Nati Harnik, Associated Press

OMAHA, Neb. — Warren Buffett believes David Sokol clearly violated Berkshire Hathaway's ethical standards when he bought stock in Lubrizol before recommending that Berkshire buy the chemical company.

Buffett told an arena full of Berkshire Hathaway shareholders at the company's annual meeting Saturday that he doesn't think he will ever understand why the former Berkshire executive did what he did.

"It's a situation that's sad for Berkshire and sad for Dave," Buffett said.

Buffett acknowledged that he made a mistake by not asking Sokol more about his Lubrizol stock when they first discussed the company in January. But Buffett says he didn't have reason to think Sokol had just bought the stock the week before.

Buffett and Berkshire Vice Chairman Charlie Munger spend nearly six hours answering questions at the annual meeting, which was expected to attract about 40,000 people.

One of the early questions asking why Buffett wasn't tougher with Sokol drew mild applause from the audience because Buffett has always promised to be ruthless with anyone who hurts Berkshire's reputation.

Buffett said the reason he wasn't harder on Sokol when he announced the former MidAmerican Energy chairman's resignation in March was because he didn't have all the information at that point.

Sokol, who resigned earlier in April, denies any wrongdoing. Before his departure, Sokol had served as chairman of Berkshire's MidAmerican Energy, NetJets and Johns Manville units.

Sokol's roughly $10 million Lubrizol investment turned into about $13 million after Berkshire announced its $135 per share offer for the company. The $9 billion deal also includes Berkshire assuming about $700 million in Lubrizol debt.

Buffett said he learned about the role investment bankers played in the Lubrizol deal only after it was announced, and when questioned by Berkshire's chief financial officer, Sokol initially failed to say that he had met with the investment bankers.

Buffett said Sokol's resignation letter showed up unexpectedly on March 28 just as he was preparing to call a board meeting to review the matter.

Berkshire's audit committee said Wednesday that the board may consider legal action against Sokol to recover his trading profits and compensate Berkshire for any damage it sustained.

Shareholder Kevin Gednalske said the report on Sokol's actions was troubling, especially if he was acting on Berkshire's behalf when he bought Lubrizol stock for himself.

"Whether it was lawful or not, it wasn't ethical," Gednalske said.

But Gednalske and other shareholders said the hands-off way Buffett runs Berkshire's subsidiaries means that there will occasionally be problems within the company.

Berkshire is highly decentralized with just 21 employees in Omaha to oversee about 260,000 employees worldwide. Buffett tells shareholders that he and Munger "delegate almost to the point of abdication" and let the managers of Berkshire's subsidiaries run their businesses.

Buffett sends a letter to his managers every two years reminding them to "zealously guard Berkshire's reputation." And Buffett encourages his managers to avoid any behavior that comes close to being unethical.

Brad Kinstler, CEO of Berkshire subsidiary See's Candy, said he doesn't expect Berkshire to impose new controls on executives because of Sokol's actions. Kinstler said there is a level of trust required in any business.

"You have to always have a watchful eye, but you can't watch everything," Kinstler said.

Kinstler said adding more layers of compliance checks may be ineffective, and more oversight wouldn't affect his desire to comply with Berkshire's policies.

"If anybody really wants to violate the policy, they'll find a way," Kinstler said.

Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry firms, Its insurance and utility businesses typically account for more than half of the company's net income. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.

Online:

Berkshire Hathaway Inc.: www.berkshirehathaway.com

Berkshire report on Sokol: http://bit.ly/iOdpq5

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