October 28, 2021

Warren Buffett, Delegator in Chief

That is Warren Buffett’s management style, as described in a biography by Roger Lowenstein. Mr. Buffett delegates; he empowers his executives. Mr. Buffett, the 80-year-old chief executive of Berkshire Hathaway known as Uncle Warren, has been praised as one of the world’s greatest business managers. He has racked up average annualized returns of more than 20 percent for four decades. Yet in a potential case study for business schools, the question is now being asked: Does Mr. Buffett delegate too much?

Just in time for his company’s annual meeting with 35,000 investors next weekend, Mr. Buffett’s management style is coming under scrutiny.

His heir apparent, David L. Sokol, resigned last month after it emerged that he had bought $10 million worth of stock in Lubrizol, a chemical manufacturer, a day after he began orchestrating a merger with Berkshire, which later acquired Lubrizol for $9 billion — increasing the value of Mr. Sokol’s holding by $3 million.

Although Mr. Sokol mentioned that he was a shareholder in Lubrizol to Mr. Buffett when he suggested that Berkshire buy the company, Mr. Buffett said he did not ask about “the date of his purchase or the extent of his holdings.” The controversy exposed a paradox: Mr. Buffett may be considered one of the world’s best managers, but he doesn’t actively manage the hundreds of businesses that Berkshire owns.

“Did Sokol’s actions reveal shortcomings in the company’s governance system that need to be addressed?” asked Stanford University’s Graduate School of Business in a paper titled “The Resignation of David Sokol: Mountain or Molehill for Berkshire Hathaway?”

Unlike Jeffrey R. Immelt, the chief executive of General Electric, who spends much of his time on airplanes traveling the world to visit the company’s 287,000 employees and oversees a giant campus and management team in Fairfield, Conn., Mr. Buffett “manages” Berkshire’s 257,000 employees with just 21 people at his headquarters in a small office in Omaha.

Mr. Buffett’s business partner, Charles Munger, once described Mr. Buffett’s day. He spends half of his time just sitting around and reading, Mr. Munger said. “And a big chunk of the rest of the time is spent talking one on one, either on the telephone or personally, with highly gifted people whom he trusts and who trust him.”

And that trust has advantages. “Part of his genius is that he’s created a hands-off culture that encourages entrepreneurs to sell their private companies to Berkshire,” said Larry Pitkowsky, managing partner of GoodHaven Capital Management and a longtime Berkshire shareholder, “and, critically, that they keeping showing up for work every day without worrying that they are going to get a call from headquarters telling them how to run things.” How hands-off is Mr. Buffett? When questioned once about why Berkshire didn’t take a more active role in fixing Moody’s, the troubled credit rating agency, in which he was the largest shareholder, he declared: “I’ve never been to Moody’s. I don’t even know where they’re located.”

“If I thought they needed me I wouldn’t have bought the stock,” he added.

He sees himself less of an activist than as a passive investor, a stock picker with a nose for a good deal. “We don’t tell Burlington Northern what safety procedures to put in or AmEx who they should lend to,” he said at his annual meeting two years ago. “When we own stock, we are not there to try and change people.”

His management approach may be as much a function of his own philosophy as it is a practical preference. He likes to make his investments dispassionately, based on the numbers, rather than let emotions get involved.

Mr. Buffett’s investing antennas may be genius, but some of his critics have suggested that his trust-based management style may have left him too farsighted to quickly spot operational problems. As reported by Carol Loomis of Fortune magazine, when Mr. Buffett was first told in 1991 about indications of a possible scandal at Salomon Brothers that later nearly took down the company (Berkshire was its largest shareholder), he initially did not detect any reason to be particularly alarmed, “so he went back to dinner.” Only after speaking several days later about the matter with his partner, Mr. Munger, “did Buffett get a sense of real trouble.”

Article source: http://feeds.nytimes.com/click.phdo?i=4dce6e2007a10e462899c2a34c2f890d

DealBook: Fresh Details on Berkshire’s Lubrizol Deal

David L. SokolDaniel Acker/Bloomberg News David L. Sokol resigned from Berkshire Hathaway on March 30.

Whether regulators bring an insider trading case against David L. Sokol — a former top deputy of Warren E. Buffett who was central to Berkshire Hathaway’s decision to buy Lubrizol — will hinge in part on whether he bought stock based on nonpublic, material information.

Now, fresh details are emerging about what Mr. Sokol knew, and when.

A preliminary proxy filed on Monday by Lubrizol indicates that Mr. Sokol was aware in mid-December that Lubrizol’s chairman and chief executive, James L. Hambrick, planned to talk with his board about a possible acquisition by Berkshire. Mr. Sokol was informed about the discussions by Citigroup on Dec. 17. In early January, Mr. Sokol bought nearly 100,000 shares of Lubrizol, a manufacturer of specialty chemicals.

It was previously unknown whether Mr. Sokol, who abruptly resigned last month, knew that Lubrizol’s chief had discussed a potential deal with his board.

The revelation casts a new spotlight on Mr. Sokol’s decision to take the nearly $10 million stake in Lubrizol as he worked behind the scenes on a potential deal to acquire the company. Some legal experts have questioned whether Mr. Sokol traded on inside information unavailable to the public, namely that a possible bid for Lubrizol was in the works.

The Securities and Exchange Commission is looking into Mr. Sokol’s stock purchases, according to people close to the agency.

Mr. Sokol has said that he did nothing wrong, and Mr. Buffett has agreed.

“Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” Mr. Buffett said in a statement last month, noting that Mr. Sokol made the trades before pitching the Lubrizol deal to Berkshire.

Mr. Sokol first expressed interest in a Lubrizol deal in December, shortly after meeting with Citigroup bankers who recommended the industrial manufacturer as a possible takeover target.

On Dec. 17, a Citi banker called Mr. Hambrick to inform him of Berkshire’s possible interest in the company, the Lubrizol regulatory filing said. Mr. Hambrick told Citi that he would inform his board about Berkshire’s possible interest.

“Later on December 17, 2010, Citi informed Mr. Sokol that Mr. Hambrick had indicated that he would discuss Berkshire Hathaway’s possible interest with the Board,” the filing said.

Mr. Sokol bought more than 96,000 Lubrizol shares on Jan. 5, 6 and 7. On Jan. 6, the Lubrizol board held a “special meeting” to discuss Berkshire Hathaway’s possible interest in the company, according to the Lubrizol filing. The board agreed right away to hire lawyers to advise on a possible deal.

“On or about January 10, 2011, Mr. Hambrick requested that Citi contact Mr. Sokol to inform him that he should expect a call from Mr. Hambrick and thereafter Citi so informed Mr. Sokol,” according to another addition in the Lubrizol filing.

On Jan. 14, Mr. Sokol and Mr. Hambrick talked on the phone about the “corporate cultures and philosophies” at their respective companies, according to the filing. They agreed to meet in person later in the month.

Mr. Sokol first mentioned a possible Lubrizol deal to Mr. Buffett on Jan. 14 or 15, according to Mr. Buffett. Mr. Sokol made a “passing remark” to Mr. Buffett about his stake in Lubrizol, Mr. Buffett said.

“Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea,” Mr. Buffett wrote in his letter announcing Mr. Sokol’s resignation. “In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest.”

Although Mr. Buffett was originally skeptical of the deal, he later became convinced. Berkshire ultimately agreed on March 14 to acquire Lubrizol for $9 billion.

Mr. Sokol resigned on March 30 as disclosures emerged about his stake in Lubrizol. The company said in the filing on Monday that it “first learned” of Mr. Sokol’s share purchases at the time of his resignation.

Article source: http://feeds.nytimes.com/click.phdo?i=d41e17c9caaabe0156e3296449892324