Thursday, March 31, 2011

And the value trap of the year award goes too...

David Sokol.

Apparently, he had tried to resign his post 2 times in the past, but the Warren Buffett and the board of Berkshire convinced him to stay. Given the seeming allegations of insider trading, this doesn't look good for Berkshire.

While we don't have the facts on the matter, there should be nothing wrong with simply having dinner with a CEO, buying shares, and suggesting to your boss that they might want to do the same. We have no idea what was discussed at the dinner, and should be slow to come to a conclusion until more facts come out.

This instance does act as an example to show people that over reliance on the reputation of management is not good. For example, most people have in the past, thought that David Sokol would eventually become CEO of BRK... obviously, this isn't the case, and should suggest that succession plans are not as firm as one thought.

More importantly, one must also question the thinking of the board of BRK, in that if Sokol was actually on the list of candidates, why did he remain on it, when he had expressed interest in resigning 2 times in the past... It seems that it would be a red flag that the guy might not want to be there forever.

Having a few core people that are integral to a company can be a double edged sword... they generally work well for a while, but, when they leave, it is very troubling. At least they still have Munger, Buffett and Jain! With this said, BRK is set up pretty well, and has a huge pool of able managers to draw from.

Disclosure: None. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, write, or so much as even think about.


Anonymous said...

When somebody writes up their thesis on a stock and presents it - I look to see if they are long that stock. Should they be long the stock and disclose that information to me, I view that to be a good thing - since they have been willing to put their own money on the line. It gives me extra comfort - indeed it's often a gamechanger for me. If they don't invest in the stock themselves I am much, much less likely to invest in the stock. Actions speak louder than words, as the saying goes.

In David Sokol's situation, he seems to have done exactly the same thing. He saw a good investment, invested in it himself and then advised his boss that it was a good investment. Now, you may say that his boss had the ability to materially effect the price of the stock he had just purchased - but so what? I can buy a stock, recommend it to a rich man, or a big fund (whom I know will take me seriously) and watch as it goes up materially due to his/their purchase. Have I done something wrong? I don't see how I have.

Or are we saying that he should *first* act for Berkshire and *then* for his own portfolio? Seems to be the wrong way around to me. If we want to talk ethics, it seems like it would be *more* ethical to first put your own money on the line and then inform others of what you've done.

Another issue seems to be that Sokol was initially acting on behalf of Berkshire in his approach to Lubrizol as evidenced by the proxy statement. This implies that somehow Sokol was wrong to represent as Berkshire when in fact he was acting for his own personal portfolio. I would argue that he was acting for *both*. He liked Lubrizol so much that he invested his own capital and convinced Buffett that it was in Berkshire's interests too. How was Berkshire harmed? How was anybody harmed?

The bigger context here is the insider trading laws (and other laws like Sarbox) in the United States. They have created this vicious atmosphere of suspicion, intrigue and ridiculous "financial" political correctness. The automatic reaction is always: the businessman is corrupt.

Atlanta Roofing said...

I am glad only that Sokol was outed as a guy who'd sell Berkshire's reputation for a measly three million, and that, whether he jumped or was gently pushed, he's been ousted. Now, if only the fan boys would stop defending Buffett against Buffett...