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Buffett’s Ruthlessness Is Oddly Absent on Sokol

Warren E. Buffett has a favorite 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 as speculation of insider trading swirls around Mr. Buffett’s onetime heir apparent, David L. Sokol, it has to be asked: Why hasn’t Mr. Buffett been ruthless?

Warren Buffett
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Warren Buffett

Mr. Buffett is likely to face a barrage of questions this month at Berkshire Hathaway’s annual meeting in Omaha, often described as “Woodstock for Capitalists.” This year, it could be called “The Great Inquisition.” Every year, Mr. Buffett and his partner, Charlie Munger, take questions from shareholders and a panel of journalists — including me — in front of 35,000 people for five hours.

When Mr. Buffett announced Mr. Sokol’s resignation last week in a detailed announcement, he stated, “If questioned about this matter in the future, I will simply refer the questioner back to this release.”

But given the scrutiny that Mr. Sokol’s behavior is now under, it will be hard for Mr. Buffett to dodge the inquiries.

Here are some of the questions that deserve answers from Mr. Buffett.

In the statement announcing Mr. Sokol’s resignation, you acknowledged that he had made “a passing remark” that he owned shares in Lubrizol in January, two months before Berkshire announced a deal to buy the chemical maker. What, exactly, did he tell you? Do you feel he misled you? If not, why, given your penchant for straight talk, did you not come out later and say, “I should have asked more questions.”

If it was only a passing remark, why did you tell Mr. Munger about Mr. Sokol’s investment? Did you tell the rest of Berkshire’s board about Mr. Sokol’s Lubrizol holdings before it voted on the deal? What prompted you to ask Berkshire’s chief financial officer for Mr. Sokol’s trading records just days after announcing the acquisition of Lubrizol?

David Sokol Interview
David Sokol Interview

During Mr. Sokol’s interview on CNBClast week, he said, “I guess knowing today what I know, what I would do differently is that I wouldn’t have mentioned it to Warren and just made the investment and left it alone. I think that’s a disservice to Berkshire. But if that’s what people want to do in the future, that’s fine.”

Do you believe Mr. Sokol — to whom Citigroup floated the Lubrizol deal in his capacity as officer of Berkshire — had a fiduciary duty to run the idea past you? Or was he free to make a personal investment, without discussing a potential acquisition with you? What is Berkshire’s policy on such trading?

Mr. Sokol also compared his investment with one that Mr. Munger, vice chairman of Berkshire and one of your best friends, previously made — that is, buying a 3 percent stake in BYD, the Chinese electric carmaker, before Berkshire took a big share in the company. Was it an apt comparison?

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?

In your statement, you said Mr. Sokol “told me that” the trades in Lubrizol “were not a factor in his decision to resign.” Many Buffett watchers, including myself, noticed that you did not unequivocally say that his resignation was unrelated to the trades — just that Mr. Sokol said it was.

If you believed Mr. Sokol, why didn’t you just say it was unrelated? And if you didn’t believe Mr. Sokol’s explanation, why did you relay his story?

You have long followed the mantra of Dale Carnegie: “Praise by name, criticize by category.”

But in recent years, you have been criticized, for example, as being too soft on companies like Moody’s, in which you had invested. You often publicly lambaste certain industries or practices, but rarely specific companies or people.

Given your stature in the business world, do you think you have a broader responsibility to call out wrongdoing?

Finally, how has this scandal changed your evaluation of potential successors?