Berkshire doesn’t plan big changes after scandal
OMAHA, Nebraska—Berkshire Hathaway CEO Warren Buffett says he doesn’t think his reputation has been hurt much by a former top executive’s questionable investment in Lubrizol shortly before Berkshire announced plans to buy the chemical company.
Berkshire also doesn’t plan to change the way its managers are overseen because of the episode.
Buffett and Berkshire’s Vice Chairman Charlie Munger were asked about David Sokol’s actions Sunday at a news conference that concludes Berkshire Hathaway’s annual shareholder events.
The two also discussed the prospects for another financial crisis and the qualities of the holding company’s next CEO.
Sokol invested roughly $10 million in Lubrizol stock in January shortly before recommending that Berkshire buy the company.
Berkshire says Sokol was investigating Lubrizol as a possible acquisition target at the time he bought stock, and he offered incomplete information about his investment when Buffett and other Berkshire officials questioned him.
Buffett says Sokol’s behavior was inexcusable and clearly violated Berkshire’s ethics and insider trading policies.
Munger said Berkshire operates on a system of deserved trust, and it has had very few problems over the years, so he doesn’t see any reason to beef up oversight of managers.
“We have kind of a near-miss of a scandal every 25 years. I don’t think we’re going to get much lower than that,” Munger said.
Sokol, who resigned last month, denies any wrongdoing. His lawyer has disputed Buffett’s statements about the trading and he argues that Sokol never tried to withhold information.
On financial matters, Buffett said he’s more worried about the sovereign debt issues in Europe than the health of U.S. banks.
“My personal view is the chances of a banking crisis of any sort in the United States is very low,” Buffett said.
He said European banks could have problems if those nations are unable to resolve their debt problems.
Munger compared the situation in Europe to a business partnership with six productive partners who decide to add a seventh partner who then wants to do nothing but lay around, get drunk and live off the other six.
It’s a question of how long the six will tolerate the seventh.
Munger said Europe still faces a difficult problem with its sovereign debt, and thus far most of the measures taken so far have been inadequate.
“I think people are still thinking they can stop this elephant with a little bigger pea shooter,” Munger said.
Speculation about succession is common for Berkshire shareholders because Buffett is 80 and Munger is 87.
Buffett refuses to name the internal chief executive candidates Berkshire’s board will chose from after his death.
But Buffett talked a bit during this weekend’s annual shareholder events about the qualities he believes his successor will have. And he said his successor will likely do some things differently.
He says his successor will be an ethical leader who can act like an interested shareholder for Berkshire’s roughly 80 different subsidiaries, but Buffett said Berkshire’s CEO doesn’t need to know how to run the insurance, utility, railroad and other businesses it owns.
“The next CEO will do it his own way, and he will almost certainly change some of it,” Buffett said.
Berkshire is highly decentralized with just 21 employees in Omaha to oversee the company.
Buffett tells shareholders that he and Munger “delegate almost to the point of abdication” and let the managers of Berkshire’s subsidiaries run their businesses.
Buffett’s successor may not attract a crowd of roughly 40,000 to annual meetings like he did this weekend, but Buffett said he’s sure the Omaha firm will be in good hands.
The Berkshire managers who are believed to be possible chief executive successors are Ajit Jain, who runs Berkshire’s reinsurance division; Greg Abel, president and CEO of MidAmerican; Tony Nicely, chief executive of Geico; and Burlington Northern Santa Fe CEO Matt Rose. Sokol was also believed to be on the short list before his resignation.
Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry firms, but its insurance and utility businesses typically account for more than half of the company’s net income.
It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.
