Warren Buffett was asleep at the wheel. And he didn’t wake up when he realized that one of his lieutenants who was likely to succeed him had purchased stock in a company and then pitched the idea of Berkshire Hathaway acquiring it. David Sokol, now departed from Berkshire Hathaway, bought $10 million in shares of Lubrizol, a company whose acquisition he would later shepherd through Berkshire Hathaway. When the SEC investigation became public, Mr. Buffett offered a big, “So, and?â€(See “Neither Dave nor I feel his Lubrizol purchases were unlawful,†April 9, 2001), but the audit committee was not quite on the same page. It issued its report on Mr. Sokol’s activities, and shortly thereafter, Mr. Buffett spoke at the annual shareholder’s meeting and reversed course, “ I don’t think there’s any question about the inexcusable part. He violated the code of ethics. He violated our insider trading rules. He violated the principles I lay out every two years.â€[1] In the month after the “What?†take by Buffett, Berkshire’s audit committee conducted its own investigation and Buffett concluded that the report had “pretty damning evidence.â€
Oh, the feet of clay! The Barometer was counting on Mr. Buffett to uphold the statement he made after he had to take over at Salomon Brothers after that firm had illegally cornered the bond market, “Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.†[2] Especially after the audit committee reminds you to conjure up the ruthlessness.
Mr. Buffett fell short in his reaction. But, there is assurance in having an audit committee willing to lay out facts that make the CEO flip-flop. However, even the audit committee came late. Truth be told, Mr. Sokol was a wild card and an ill fit for the touted Berkshire culture. He did get results, but what has emerged is a classic picture of a performer whose behavior was overlooked because of his results. Mr. Buffett and the audit committee were too distant on this management duty. Until the SEC spoke up, Mr. Sokol was wielding power in a way inconsistent with Buffett’s stated values. A judge pointed out that Mr. Sokol fooled around with a company’s numbers so that he did not have to pay as much to a joint venture.[3] Mr. Sokol was said to have brass knuckles, even bringing a suit against employees at a subsidiary to find out who was bad-mouthing him.
Here’s a safety tip for audit committees – if one of your officers is suing employees, you might want to take a gander at the suit. And if that same officer is in litigation over the accounting at a subsidiary, that might be a good time to delve into the books there. Sokol was making messes long before Lubrizol.
Oh, the blinders we have on when it comes to executives who work miracles with numbers, are turn-around artists, and remarkably skilled. Truth be told, these miracle workers do not exist. Business is a tough row to hoe. When someone stands out, in press profiles and performance, check the feet for clay.
[1] Michael J. de la Merced, “Buffett Criticizes Former Lieutenant,â€Â
New York Times, May 1, 2011, p. A30.
[2] Id.
[3] Peter Lattman and Geraldine Fabrikant, “A Conspicuous Absence,†New York Times, April 27, 2011, p. B1.
About mmjdiary
Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD.
The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards.
Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio.
She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News.
In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles.
Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
