April 17, 2024

DealBook: Berkshire Gets Tough With Sokol as Meeting Nears

David L. SokolMario Anzuoni/ReutersDavid L. Sokol is now facing a hard line from Berkshire Hathaway.

After Warren E. Buffett disclosed last month that David L. Sokol was resigning from Berkshire Hathaway amid the revelation that he had bought a $10 million personal stake in Lubrizol while promoting a takeover of the company, Berkshire was quiet for weeks. Now, on the eve of Berkshire’s annual shareholders meeting, the company has come out fighting.

The company’s directors on Wednesday issued a scathing report that accused Mr. Sokol, once a star manager and potential candidate to replace Mr. Buffett atop the Berkshire empire, of violating the company’s ethics and insider trading policies.

When Mr. Sokol’s lawyer publicly protested that the directors had failed to question Mr. Sokol for the report, a Berkshire lawyer and director quickly retorted that Mr. Sokol had declined to make himself available.

The sharp rebuke — and the company’s aggressive attempts to distance itself from Mr. Sokol — could temper some of the harsh scrutiny bearing down on Berkshire as Saturday’s annual meeting approaches, analysts said on Thursday.

“I think this was aimed at pre-empting a lot of the harder questions at the meeting,” said Greggory Warren, a senior stock analyst with Morningstar. Mr. Warren, who is going to the annual meeting in Omaha, said he eliminated “six or seven questions” he had planned to ask Mr. Buffett “because of the report.”

Still, Berkshire has yet to quell completely the controversy surrounding Mr. Sokol, public relations experts say.

“What’s so surprising to me is how little strategy there has been,” said Paul A. Argenti, professor of corporate communication at the Tuck School of Business at Dartmouth.

Mr. Buffett, he noted, is fond of saying: “Lose money for my firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.” But he has yet to publicly take Mr. Sokol to task.

“Why isn’t Warren Buffett being ruthless?” Mr. Argenti asked. “The report was a good thing to get out there, but the real question is how he handles it this weekend. This is his moment.”

In a brief interview on Fox Business Network on Thursday night, Mr. Buffett said he would not duck any questions about Mr. Sokol at the meeting. “We can answer any question that gets asked,” he said. “You will not hear ‘no comment.’ If our lawyer gets up and wrestles me to the ground I will still talk.”

Corporate governance experts said Berkshire was taking a step in the right direction.

“I thought they laid out the details in a very transparent and clear way,” said David F. Larcker, an accounting professor and director of the Corporate Governance Research Program at Stanford’s graduate business school. “They were tough, and I think that’s a good thing.”

Still, others added that the new approach was unlikely to lead to changes in the company’s hands-off management style.

“How intrusive are you going to be into your employees’ personal lives? If you don’t trust the guy, you should fire him,” said Jonathan R. Macey, a professor of corporate law and corporate governance at Yale University.

And the report does not necessarily spell an end to Berkshire’s problems. For a company that has carefully cultivated a pristine image — a rarity in modern corporate America — one black mark could threaten to tarnish years of good will.

The report also does not excuse Mr. Buffett from addressing lingering questions about his handling of the Mr. Sokol affair — and the future of the company.

Until now, Berkshire had been careful not to criticize Mr. Sokol, the former star chairman of NetJets and MidAmerican Energy. When Mr. Buffett announced Mr. Sokol’s resignation on March 30, he said, “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful.” He also praised Mr. Sokol’s tenure at the company, saying his ”contributions have been extraordinary.”

The report appeared intended to distance Berkshire from Mr. Sokol as regulators and shareholders are scrutinizing Mr. Sokol’s trading, said Bradley Simon, a former federal prosecutor and now a defense lawyer.

“The complete about-face seems a little suspect to me,” he said. “Their position seems somewhat self-serving and self-protective.”

Mr. Sokol, 54, resigned from Berkshire after it emerged that he had bought about 100,000 Lubrizol shares shortly before bringing the company to Mr. Buffett’s attention in January. Berkshire later agreed to buy Lubrizol for $9 billion, causing Lubrizol’s shares to surge and increasing the value of Mr. Sokol’s holding by about $3 million.

The Securities and Exchange Commission is investigating Mr. Sokol’s trading, people close to the inquiry have said. Mr. Sokol and Mr. Buffett, meanwhile, face a lawsuit from a Berkshire shareholder who wants Mr. Sokol to forfeit his trading profits in Lubrizol because of the damage done to Berkshire’s reputation.

Berkshire could be vulnerable to other claims that Mr. Sokol’s share purchases drove up the purchase price of Lubrizol, lawyers said. “The report was intended to stymie any lawsuits and give plaintiff lawyers pause,” Mr. Simon said.

Berkshire does have another remedy at its disposal: suing Mr. Sokol. Berkshire’s board is considering whether to pursue “possible legal action against Mr. Sokol to recover any damage the company has sustained, or his trading profits,” the report said.

Article source: http://feeds.nytimes.com/click.phdo?i=f2259a53e39a8b43ff6a9ac79fdf847a

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