Corporate America Will Miss Munger-As-Mencken by Alice Schroeder

Here is an excerpt from Bloomberg “Corporate America Will Miss Munger-As-Mencken” by Alice Schroeder,

“A man who speaks this way is going to make enemies. Buffett, 80, has made his share, but Munger has a higher tolerance than Buffett for being disliked. He has come to play a role in the business world not unlike that once played by the critic H.L. Mencken, who stabbed the puffed-up preservers of the status quo with the sharp needle of searing, unforgettable prose.

I’ve heard Munger called hypocritical, heartless and pompous. Munger describes himself as imperious, irreverent and arrogant. It’s good to have somebody like that around. The business world is better off with a Munger to point out how far it has strayed. The people who control the world’s commerce need to hear it from one of their own.

Raisins and Turds

Besides, nobody else would say a lot of the entertaining things that

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.]

Berkshire Hathaway Annual shareholders meeting #BRK2011

Check out NYT DealBook Live-Blogging of the Meeting. Here is an excerpt (with emphasis added),

“2:54 p.m. A love-fest for Ajit Jain

Buffett always keeps his list of potential advisers close to the vest, even after Sokol resigned. But earlier today, the billionaire mentioned that the he would lay money down on the current leading candidate’s being a real straight-arrow.

And a few minutes ago, Buffett has expressed yet more admiration for his reinsurance guru, Ajit Jain. Jain’s mind is a machine, and he puts Berkshire first and foremost, Buffett gushes.

10:33 A.M. The effect of this year’s natural disasters

Buffett says that it’s hard to estimate the cost of the Japanese earthquakes. Same with the antipodal flooding.

Here’s what he has to say about the tornados that tore through the South, killing more than 300 people: “Incidentally, the tornados in April, just at Geico, and all we’re talking about here is automobiles we estimate that 25,000 cars will get automobile claims. That’s a lot of automobiles. Our market share is about 9 percent. But it’s been an extraordinary tornado season. That doesn’t hit the reinsurance business, I don’t think.” […]

Berkshire Audit Report: David Sokol’s Trading Violated Company Insider Trading Policies and Procedures

Today Berkshire Hathaway‘s Audit Committee released its report, “Trading in Lubrizol Corporation Shares by David Sokol” (PDF file). Have a read. Here is a notable paragraph,

“Mr. Sokol’s answer to Berkshire Hathaway’s CFO, Mr. Hamburg, concerning the investment bankers similarly fell short of the degree of candor required of a corporate fiduciary, and suggests his answer to Mr. Buffett’s earlier inquiry noted above was intended to deceive.“

Check out what Alice is saying in “World Learns New Facts Showing Buffett Was Misled” (here is an excerpt),

“However, upon several readings of this release, there do not appear to be *any* new significant facts that were unknown to Berkshire on March 30th when its initial press release was issued. These facts are only *new* to those of us who are reading the audit committee report “

and “Sokol Fights Back Round 1“.

Here are some notable media reports.

Bloomberg (Alice Schroeder), “Buffett Disciples Want ‘Oracle’ to Come Clean” [Apr 28 update] Highly recommended reading. Have a watch of Alice’s Bloomberg video interview. Here is an excerpt from the article (emphasis added),

“The problem isn’t the about-face. It is the missing explanation for why Berkshire went so easy on Sokol in the first place. Whatever the detailed reasons, ultimately it boils down to Berkshire’s reliance on Buffett’s personal judgment about his managers and his ability to delegate to them to the point of abdication. When this one-man infrastructure makes a mistake, it’s hard to admit that Buffett is at fault. Changes in the way the company is managed are personal, not corporate. Under the circumstances, the temptation is high to blame everything on a single rogue employee. That doesn’t excuse Sokol’s behavior, but the failure of oversight needs to be acknowledged and corrected. […]

Worth Reading: Michael Douglas headlines fundraiser for McGill, Berkshire Hathaway Insider Trading/Shareholder Suit, Herzog/McCarthy/Krauss talk science & art

* CBC News, “Michael Douglas began cancer journey in Canada – Star will headline Montreal fundraiser for head and neck cancer”

* Alice Schroeder, Berkshire Hathaway Insider Trading, Shareholder Suit [Here is a link to the shareholder suit filing http://www.scribd.com/doc/53362856/kirby-v-sokol]

* Filmmaker Werner Herzog, novelist Cormac McCarthy, and physicist Lawrence Krauss talk about the connection between science and art (NPR Science Friday).

Barrage of questions for Warren Buffett at this month at Berkshire Hathaway’s annual meeting?

Have a read of Alice’s “Annual Meeting“,

“> Becky Quick. Has put away the pompoms. Taking a sober, detached and traditionally journalistic stance toward Berkshire/Sokol/Buffett.”

and Andrew’s “Buffett’s Ruthlessness Is Oddly Absent on Sokol” (here are two questions Andrew has, emphasis added).

“¶You have said that Mr. Sokol did not do anything “unlawful.” But Mr. Sokol bought shares of Lubrizol a day after he told Citigroup to indicate Berkshire’s interest in buying the company.

Why don’t you consider that “material” information, a crucial component of insider trading? Do you not believe that a Lubrizol shareholder would have considered such information important to their investment decision? Clearly Lubrizol felt that Mr. Sokol’s inquiry was material enough to hold a board meeting on Jan. 6, one day before Mr. Sokol bought almost $10 million of shares.

If Mr. Sokol was aware of Lubrizol’s board meeting, would you consider that material information? And if a news outlet had reported Mr. Sokol’s inquiry or Lubrizol’s decision to meet, do you not think that the price of Lubrizol’s shares would have risen?

Here is another way to think about it: If a Citigroup banker had bought shares of Lubrizol at the same time as Mr. Sokol, would you have considered that insider trading? Isn’t that the definition of insider trading? What did Mr. Sokol do that was different?

¶Berkshire has always been a very decentralized institution with only 21 of its 257,000 employees working at headquarters and each subsidiary left to its own devices. “Most of these managers are happiest when they are left alone to run their businesses, and that is customarily just how we leave them,” you recently wrote in the annual letter.

This structure might seem like a bastion of efficiency. But given Mr. Sokol’s possible transgressions, do you now think Berkshire needs more compliance programs and people to manage them?“

P.S. I have never thought I would be tagging a post about Warren with “ethics” where I question if it is sadly missing.

Update: “Bloomberg Columnist Schroeder on Berkshire Holdings” (with video)

Warren Buffett’s (PR) nightmare – David Sokol’s surprise resignation and Buffett’s “unusual” statement

Update 1:07am MST, Apr 1, 2011: “CNBC TRANSCRIPT: David Sokol Defends His Controversial Lubrizol Stock Purchases”

Update 8:57pm MST, March 31: Bloomberg, “Buffett Misses Chance to Show Moral Courage: Alice Schroeder”

Update 9:17am MST: CNBC, “Sokol to CNBC: I Shouldn’t Have Told Buffett I Liked Lubrizol” (with extensive video interview of Sokol)

NYT DealBook entry after Sokol CNBC appearance, “The Perception of the Sokol Situation”

Watch the CNBC Sokol interview first, Bloomberg TV interview, “Jeffrey Matthews Interview on Sokol, Buffett”

CNBC, “LIVE BLOG – David Sokol’s Live Interview on CNBC’s Squawk Box”

***

Today is not a good day for Warren Buffett or Berkshire Hathaway shareholders.

* Here is the unusual statement/official news release “Warren E. Buffett, CEO of Berkshire Hathaway – Announces the Resignation of David L. Sokol” (PDF file)

Paradoxically, the most damaging bit may be the second last paragraph, “I have held back nothing in this statement. Therefore, if questioned about this matter in the future, I will simply refer the questioner back to this release.” To me, this is in full prep mode to fight with lawyers (SEC lawyers, et al). A totally silence after issuing such an “unusual” statement is asking for serious headline news trouble! (see more excerpt at the end) I hope I am wrong here.

* NYT DealBook, “Abrupt Exit for a Top Deputy to Warren Buffett”

* CNBC Warren Buffett Watch, “Surprise Resignation of Leading Buffett Successor Raises Unanswered Questions” (with video)

* More excerpt from the official news release,

“Finally, Dave brought the idea for purchasing Lubrizol to me on either January 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its CEO, James Hambrick, I quickly warmed to the idea. Though the offer to purchase was entirely my decision, supported by Berkshire’s Board on March 13, it would not have occurred without Dave’s early efforts.

$1 billion of free cash flow a month

Warren Buffett made a point in 2010 letter to Berkshire Hathaway shareholders,

“Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.“

Alice Schroeder, biographer of Buffett, wrote this about the letter,

“It goes without saying that historically, capital management has long been the single greatest creator of value at Berkshire. The company has been built from a series of capital transactions and asset/liability matching and capital allocation decisions over many years. Therefore it is not really surprising to see Buffett acknowledge this as the third pillar. Yet one could almost see Buffett salivating as he wrote that Berkshire is now generating $1 billion of free cash flow a month, a threshold it crossed this year. That’s an astounding figure. Wal-Mart, the world’s largest company, does not even come close to generating cash flows like this.

Buffett was speaking of free cash flows. In another part of the letter, he wrote about how happy he to be committing enormous amounts of capital to regulated businesses like BNSF and utilities. This is *not* coming out of the $1 billion! Berkshire will either be making acquisitions or buying securities to the tune of $1 billion or more a month for the foreseeable future. By way of comparison, the cash expended for the enormous BNSF acquisition took Berkshire about 16 months to accumulate (at today’s run rate). Imagine Berkshire buying the equivalent of more than two BNSFs every three years.”

More from Alice, “Who Will Create the Third Pillar of Value?“, “How to Run a Bank“, “New Info on NetJets“, “NetJets Europe”

WSJ, interesting excerpts of facts & figures, “Warren Buffett’s 2010 Report: The New Beige Book Guide to the U.S. Economy”

Carol Loomis, Fortune, “Buffett, Simpson and a mountain of Berkshire investments“

Todd Combs to join Warren Buffett’s Berkshire Hathaway

A few interesting articles,

– Carol Loomis, “Meet the leading contender to manage Berkshire’s billions”

– Alice Schroeder, “What I Know About Todd Combs (Updated 2)”

– Alice Schroeder,”Todd Combs — Monthly Returns”

– Alice Schroeder,”Todd Combs Historical Performance — Long/Short”

– NYT, “Buffett Opens Up on Succession Planning”

““He’s [Todd Combs] got the best chance of being the successor, but if we find the right guy or gal, we’d take that person, too,” he said, adding that the matter hasn’t been decided.

Mr. Buffett also told The Times that Li Lu, a Chinese hedge fund manager considered one of the other top candidates, has decided to stay in his fund.“

– WSJ, “Warren Buffett and Todd Combs: What Do We Know?”

– NPR, “Hedge Fund Manager To Take Over From Warren Buffett”

– WaPo, “Warren Buffett taps Todd Combs as leading candidate to succeed him”

– CNBC, “Berkshire’s Hiring of Hedge Fund Manager Creates Instant Leading Contender for Warren Buffett’s Investment Role”

– Bloomberg, “Berkshire Names Fund Manager Combs to Help Steer Investments”

Latest update: Oct 31st

– Alice Schroeder, “What a Difference a Few Days Makes”

– Alice Schroeder, “And What About That CEO Job?“