The Sokol Affair
Together with other regulars from Washington, DC who every year catch the single daily nonstop flight to Omaha, NE to attend the Berkshire Hathaway Annual Meeting, I shared opinions about the topic du jour and what Warren Buffett would say about it while waiting to board our plane.
I’m referring of course to the David Sokol scandal and the conflict of interest in putting his own personal investment in Lubrizol ahead of that of his employer. So what would Buffett have to say about his once favored and now disgraced potential successor? The news media hype about the need for Buffett to explain his previously issued inadequate press release on the subject had been intense.
It was topic number one at the meeting, and Buffett was well prepared. A video preceding the annual meeting featured Buffett appearing in 1991 before a Congressional committee inquiry into Salomon’s violation of US Treasury Bond bidding rules and showed him saying, “Lose money for my firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.”
Then came the meeting and the questions. Buffett described Sokol’s behavior as “inexplicable and inexcusable”: inexplicable in that Sokol made no effort to disguise his eventually disclosed improper purchase of $10 million of Lubrizol stock just before recommending its purchase by Berkshire, a trade almost certain to be questioned by the authorities; and inexcusable because Sokol never revealed his collaboration with Citibank which had been retained by Lubrizol for exploration of its purchase by Berkshire.
When the draft proxy statement from Lubrizol describing Sokol’s role with Citibank in seeking its acquisition by Berkshire was received, Berkshire’s counsel interviewed Sokol three times whereupon Sokol resigned before his involvement was to be reviewed by Buffett with Berkshire’s board.
Buffett acknowledged that his initial press release about Sokol’s Lubrizol stock purchase transgression had been inadequate. He said he had tried to both announce Sokol’s inappropriate Lubrizol behavior but also recognize Sokol’s positive contributions to Berkshire. Given his prior experience with Sokol, Buffett said he could not understand Sokol’s violation of Berkshire’s ethical standards.
In this writer’s opinion, Buffet acquitted himself well, but clearly this is not the last we will hear of the matter. Whether or not legal action will be taken remains to be seen.
Management Succession
Buffett is 80, and significant preparation for his succession is already in place. Plans call for a Chief Executive Officer to manage the operating subsidiaries, one or more Chief Investment Officers to manage investments and an independent Chairman with significant stock voting authority to provide oversight. Berkshire already has several excellent internal management candidates for the CEO position, has employed investment manager Todd Combs as a potential CIO, and named Buffet’s son Howard to succeed his father as Chairman. Meanwhile, Buffett continues to enjoy excellent health.
US Government Debt Ceiling
Buffett was outspoken about the need for Congress to raise the US Debt ceiling. Failure to do so would be “the most asinine thing Congress has ever done.” He also said, “There is no chance that the debt ceiling won’t be raised.”
Protection Against Inflation
For Buffett, investing in companies which can raise their prices and profits is the only sure way to protect against inflation. Their higher earnings will support higher values for their stocks in an inflationary environment.
He doesn’t think much of gold or foreign currency for inflation protection. Gold doesn’t produce anything and historically has not been a good inflationary hedge. Currency value is determined by the behavior of government which is too difficult to predict.
Berkshire Hathaway Stock
Buffett will not say what he thinks Berkshire’s stock is worth, but he does say that its current price is undervalued. As a result, he is only interested in purchasing other companies for cash and is not interested in using Berkshire shares for making acquisitions.
Nor does Buffett have any interest in Berkshire paying a dividend. He strongly believes that Berkshire can earn more by redeploying its cash flow to new investments than its stockholders could earn by reinvesting any dividends from Berkshire.
Conclusion
So in a nutshell, that’s the 2011 Annual Meeting of Berkshire, still well worth attending just like all that preceded it. The Sokol scandal will not be of lasting significance, and it’s a good thing that the unsuitability of Sokol as a CEO candidate is known now rather than later. Meanwhile, the fundamental strength of Berkshire Hathaway continues.
