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Sokol's Berkshire Departure Leaves Questions, Tarnish

Sokol's resignation clouds Berkshire's succession plan, while his Lubrizol trades tarnish to some extent the firm's legacy of strong ethical behavior.

Drew Woodbury, Morningstar Stock Analyst, 03/31/2011

In a surprising announcement, Berkshire Hathaway BRK.A BRK.B said Wednesday that David Sokol, chairman of MidAmerican Energy, chairman and CEO of NetJets, and the presumed heir apparent to Warren Buffett's CEO position, has resigned. Considering the concern for some time about the longevity of Buffett and managing partner Charlie Munger, both octogenarians, as well as the lack of full disclosure about Berkshire's succession planning, Sokol's resignation creates even more uncertainty for the firm.

If that weren't enough, Buffett's disclosure that Sokol had purchased upward of $10 million worth of Lubrizol LZ common stock before pitching an acquisition of the firm to Buffett raises serious questions about Berkshire's internal controls and tarnishes to some extent the firm's legacy of strong ethical behavior.

It wasn't even nine months ago that Buffett was calling on his managers to "zealously guard Berkshire's reputation." In his biennial letter to Berkshire's managers, Buffett said, "We can afford to lose money--even a lot of money. But we can't afford to lose reputation--even a shred of reputation."

It looks as if Sokol didn't get the memo, because his purchase of Lubrizol shares in early January, while not necessarily illegal, does give the appearance of impropriety. With Berkshire paying $135 per share for Lubrizol earlier this month, Sokol probably made more than $3 million on the 96,000 shares he purchased at the start of the year. This was something that was likely to raise serious questions when Berkshire's proxy came out, potentially landing the story of how one of Berkshire's key lieutenants profited handsomely from Berkshire's purchase of Lubrizol on the front page of a national newspaper (something that Buffett had cautioned his managers to avoid on countless occasions). Perhaps this is why Buffett accepted Sokol's resignation, which was apparently his third attempt to leave Berkshire over the past couple of years.


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