Warren Buffett talks about David Sokol and the Lubrizol deal at BRK Annual shareholders meeting

Check out NYT DealBook Live-Blogging of the Meeting. Highly recommended. I’ve excerpted a few sections related to David Sokol that is important to read (with emphasis added),

“12:50 p.m.  Buffett’s message on compliance: Trust me

DealBook’s Andrew Ross Sorkin asks: Given what’s happened, why doesn’t Berkshire institute stricter controls for employees’ trades?

Buffett’s answer hinges on trust. The company lays out what he says are clear rules about what is and isn’t permitted. Berkshire isn’t an investment advisory firm, and it isn’t a mutual fund, he says, suggesting that it’s not obligated to have a big compliance department.

He also cites the expansiveness of Berkshire — some 260,000 employees — and how subsidiaries handle most of the issues with their workers.

To Buffett, his view appears to boil down to this. People determined to break the rules will do so, regardless of compliance policies. How can the company stop someone from trading in his cousin’s name?

“If there’s anything we can do in the rules that will make it even more explicit that rules are not made to be danced around … we want to make sure we do it,” he says.

Munger adds that having a big compliance department doesn’t necessarily preclude problems. Wall Street banks have armies of compliance officers and still suffer huge numbers of scandals. (His exact words were “the most scandals.”) [note: True but this means another scandal can happen.]

“This general culture of trust is important,” Munger says. “And you know, Berkshire hasn’t had that many scandals of consequence.”

That may not sate critics of Berkshire’s legendarily hands-off management style. Bankers, lawyers and other advisers DealBook has spoken to since the Sokol affair came to light have been puzzled as to how the executive was able to make his trades without much oversight. (In fact, Buffett was first tipped off about the Sokol trades almost by chance, as John Freund of Citi happened to mention the bank’s role in putting the Lubrizol deal together.)

11:24 A.M. Howard Buffett, Berkshire’s future independent chairman

CNBC’s Becky Quick reads a shareholder question about how to prevent someone like Mr. Sokol — talented but apparently lacking in intangible qualities that Mr. Buffett prizes — from succeeding him as the head of Berkshire.

Buffett says that his son Howard will take over as an independent, unpaid chairman of the Berkshire board. That would ensure that the possibility of making a mistake would be very low.

Buffett also tosses out this intriguing nugget: “The guy who’s the leading candidate now, I would lay a lot of money on the fact that he’s straight as an arrow.”

He expounds a bit on the benefits of separate chairman and chief executive roles, noting that it’s more difficult to remove a leader if he holds both posts. And it’s even harder if the leader is performing at only a mediocre level, as opposed to being bad.

Munger adds that keeping some of the leadership in the family has some precedent, citing the Rockefellers and Standard Oil.

11:14 A.M. Munger weighs in on Sokol

“The facts were complicated, and we didn’t foresee appropriately the nature of the reaction. But I feel like you don’t want to make important decisions in anger.”

The ever-blunt Munger adds: “You can always tell a man to go to hell tomorrow.

11:13 A.M. Buffett on his Sokol response

First question is read by Fortune’s Carol Loomis. The shareholder asks why Buffett wasn’t angry when he first disclosed the Sokol trades.

Referencing the now-famous Salomon quote, the shareholder wrote: “Being ruthless would have meant firing sokol on the spot.” The letter concluded: “Why were you not incensed? Why did you not express your anger?”

There’s some clapping from the crowd.

Buffett begins his answer by talking about a conversation he had with John Freund, his longtime equities broker at Citigroup (which as you’ll recall first identified Lubrizol to Sokol as an acquisition target).

He then runs through a lot of what we know: Berkshire’s chief financial officer interviewed Sokol about the trades, and the company’s law firm, Munger Tolles & Olson, conducted interviews regarding the matter.

Here’s where Buffett directly addresses the issue of his response to the matter.

“So from my standpoint, Dave was gone, there was minimal severance costs and we had turned over some pretty damning evidence in my view to the public and to the S.E.C.

What I think bothers some people is that there wasn’t some big sense of outrage in the release. I plead guilty to that. This fellow had done a lot of good.

10:53 A.M. Buffett on Sokol’s previously undisclosed generosity

Buffett has related what he says is an anecdote he’s never spoken about publicly.

When Berkshire bought MidAmerican Energy Holdings in late 1999, bringing Sokol on board, Berkshire director Walter Scott told Buffett that the company should put together a special compensation practice for the new rising star. Buffett devised a payout that would have paid Sokol more than $25 million.

In a private meeting to discuss the plan, Sokol told Buffett that he was happy with the proposal, but suggested one change: Give half to his lieutenant, Greg Abel.

Here’s what Buffett’s takeaway is: “So I witnessed, and Walter witnessed Dave voluntarily — Greg had nothing to do with it, he wasn’t there — transferred $12.5 million with no credit to his junior partner. I thought that was rather extraordinary.

And yet who would have known that $3 million, ten or so years later, would have led to the kind of troubles that it has led to. That really is the fact that I find inexplicable.

10:36 A.M. Buffett speaks on Sokol

The moment we’ve been waiting for.

Buffett refers back to the clip of the Salomon Brothers testimony he gave, 20 years ago this August. He recalled being elected the chairman of Salomon and then heading to his first press conference in that role. He was asked, just how did this happen?

Buffett recalls his response: “The phrase that came out of my mouth then was that what had happened was inexplicable and inexcusable.”

More: “I think that for reasons that are laid out in the audit committee report, I don’t think there’s any question about the inexcusable part. He violated the code of ethics. He violated our insider trading rules. He violated the principles i lay out every two years.”

“The inexplicable part I’ll tell you what goes through my mind when I think about it. He made no attempt to disguise the fact that he was buying the stock.””

Comments are closed.

%d bloggers like this: