Oxstones Investment Club™Warren E. Buffett, to his credit, dived right into the David L. Sokol affair early at the Berkshire Hathaway annual shareholders meeting on Saturday. Mr. Buffett compared his onetime deputy’s dealing in Lubrizol shares to the scandal that rocked Salomon Brothers two decades ago. He called both events “inexcusable” and “inexplicable.”
Yet Mr. Buffett overlooked the more significant link to Salomon, the Wall Street bank he once partly owned and led as chairman. The rogue trading there exposed poor controls.
Charles Munger, Mr. Buffett’s longtime investing partner, diagnosed part of the problem. He told the packed Qwest Center in Omaha that hubris can sometimes cause irrational behavior. Mr. Munger could just as easily have been describing some of Mr. Buffett’s actions, including praising Mr. Sokol in the news release that disclosed his questionable trades and resignation. Mr. Buffett at the time said nothing of the apparently glaring violations of Berkshire’s codes of conduct.
Though Mr. Buffett seemed unwilling, or unable, to dwell on his own failings when addressing Berkshire shareholders, he joked that Mr. Munger would handle future news releases and pleaded guilty to not expressing any outrage.
Mr. Buffett also stumbled onto something. Evoking Salomon Brothers was right on the nose. Then, the violation of Treasury trading rules by Paul W. Mozer was only a major symptom of a bigger internal ailment, which led all the way to the top. Mr. Buffett and Mr. Munger would learn belatedly, for example, that senior management, including John H. Gutfreund, then the chairman and chief executive of Salomon Brothers, had neglected to inform the board and regulators about the full extent of the trading misdeeds.
Mr. Sokol’s actions do not seem to be exposing anything quite as sinister at Berkshire. In fact, the company is generally, and rightly, admired for a strong ethical focus. But this recent blind spot — with an audit committee report about it — reveals a lack of appropriate governance and controls.
AGNES T. CRANE and ROBERT CYRAN
Tags: Warren Buffett