Why David Sokol Traded

    Live From Omaha: Berkshire Hathaway Shareholders’ Meeting:

    Sitting this morning at Berkshire Hathaway’s annual meeting, I heard my great friend Warren Buffett report that it remains inexplicable to him why top Berkshire officer, David Sokol, violated corporate policy by buying shares in a company he was about to propose that Berkshire acquire. 

    Here is my theory, pieced together based on all the available evidence: Sokol desperately wanted to resign from Berkshire and eschewed succeeding Buffett as CEO, but the board would not let him resign.  So Sokol, by calculation or subconscious action, did something egregious enough that his resignation would be accepted, but not criminal enough to land him in jail.

    Elements of the theory: Sokol has sought to resign from Berkshire on several occasions the past two years.  Each time, the board urged him to stay, making it impossible to refuse.  There may be compelling reasons, as one of several rumored as potential successors to Buffett, to wish to resign.  The strongest?  Following Warren Buffett will not only be difficult, it may inevtiablly result in comparative failure. 

    Further circumstantial evidence: when Dave reviewed for accuracy a press release announcing the objectionable trading that finally induced the board to accept his resignation, he told Warren to delete a sentence Warren had written that the resignation stemmed in part from a sense that Dave was no longer in the running to succeed him.  On the contrary, in this theory, he absolutely did not want to be in that running and was having a very hard time getting the board to understand that.

    Without some theory such as this, it is difficult to explain why an executive who had enormous wealth and amazing stature, along with considerabe generosity to business partners that Buffett described this morning , would do something so dumb, obvious, and obviously wrong–but not obviously illegal.

    As a student of Warren Buffett’s business and investment philosophy, a long-time shareholder of Berkshire Hathaway, and proud compliler of the book, The Essays of Warren Buffett: Lessons for Corporate America, I see potential explanations in this strange event, along with lessons from the lament.

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7 Responses

  1. David R. Addis says:

    I knew David Sokol well several years ago, before he joined the Berkshire group. He was dedicated to hard work and strict ethical principles. In several different contexts I personally observed his adherence to the highest standards of business and professional conduct.

  2. Shag from Brookline says:

    I had expected there would be several, perhaps many, comments following the Berkshire Annual Extravaganza. Perhaps they will yet come.

    I caught Pres. Obama’s White House Correspondents’ dinner schtick on the Internet this morning, and taking the theme of this post on motivation to an extreme, I had the thought: What if Obama and The Donald together trumped up the latter’s foray followed by the former’s responsive schtick, to promote the latter’s reality (aka unreality) show and the former’s 2012 reelection campaign?

  3. Lawrence Cunningham says:

    Shag: Can’t say I concur in the theory you mention, which is not analogous to the one I suggest, and farfetched. The simple, common and plausible analogy to mine: the teenage child who cannot get his/her parents’ attention on some vital matter turns to shop-lifting, which gets their attention.

  4. Shag from Brookline says:

    Lawrence,
    This was a “thought,” not a “theory.” “Farfetched”? Yes indeed. Overly imaginative – but, clearly tongue in cheek. In comparison, you seem serious. But even smart people do dumb – albeit profitable – things.

  5. AF says:

    If you are serious about this theory, it is extremely hard to believe. Sokol’s conduct may have been “not obviously illegal” but it is not obviously legal either, which means he faces some possibility of spending years in federal prison. In any event, he is disgraced. That he would take these risks because he couldn’t persuade the board to let him quit seems irrational and highly unstable. In terms of the stakes, his behavior is more analogous to a teenager attempting suicide than shoplifting.

    But whether it’s suicide or shoplifting, it is very odd to think that an executive of Sokol’s stature would be behaving like a teenage delinquent. Is there some background information that you have abotu Berkshire or Hathaway that makes this explanation seem more likely than the simpler one that his ethical sense was clouded by greed?

  6. Roger Pryor says:

    Interesting theory, fitted to the facts, so better than the vague blanket “greeds clouds ethics” refrain.

  7. Lawrence Cunningham says:

    AF:

    The likelihood of federal imprisonment in this case is low, following the sober and lucid analysis of the legal issues by Steve Davidoff and Peter Henning:
    http://dealbook.nytimes.com/2011/04/28/advice-for-david-sokol/. And “disgraced” also seems a bit strong, given the known facts.

    Like Roger above, I don’t see any particular appeal to the theory of an “ethical sense clouded by greed” merely because it seems simpler. And given the setting, I’m not sure the story is so simple. To recall Einstein, every theory should be as simple as possile, but not more so.