Warren Buffett has asked for tough questions at the annual meetings of his Berkshire Hathaway Inc. He may get his wish after praising the outgoing executive who was later faulted by a board committee for misleading the company about stock trades.
Buffett uses his meeting and annual Omaha, Nebraska, press conference to promote Berkshire’s growth, pitch the company as an acquirer to potential takeover targets and tout his emphasis on ethics. The 80-year-old chief executive officer started having journalists screen shareholder inquiries in 2009 and encouraged them to pick the most challenging ones to replace inquires from prior years about baseball and religion.
The departure of David Sokol, 54, in March, after he invested in a firm he pitched as a buyout candidate, raised questions about Buffett’s oversight and succession planning. Sokol, once considered a possible replacement for Buffett as CEO, violated Berkshire’s ethics, the audit committee said April 26, weeks after Buffett praised his “extraordinary” contributions in announcing his resignation.
“Buffett is going to get questions about his own behavior” at tomorrow’s meeting said Lyman Johnson, professor of corporate law at Washington and Lee University School of Law. “I do think that Buffett erred in his initial announcement.”
Buffett oversees the heads of Berkshire’s more than 70 subsidiaries with the help of Vice Chairman Charles Munger, 87, and a staff of about 20 at the company’s headquarters. Berkshire employs more than 250,000 people across industries spanning insurance, energy and consumer goods, and Buffett entrusts operational authority to the CEOs of the individual units.
Berkshire is facing “governance challenges” that may hurt the company’s credit quality, Moody’s Investors Service said April 1, citing Sokol’s stock trades and resignation. The Securities and Exchange Commission is probing whether Sokol bought Lubrizol Corp. shares on inside information, a person who declined to be identified said on March 31.
Buffett, who disclosed the trades in a March 30 statement announcing Sokol’s departure, praised the manager for his work leading Berkshire’s MidAmerican Energy Holdings, its roofing unit Johns Manville and luxury-flight unit NetJets. “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” Buffett said.
“The whole notion of Berkshire Hathaway operating on a higher plane was based upon the idea they didn’t just do what was legal, they did what was ethical,” said Cornelius Hurley, a professor at Boston University School of Law and former assistant general counsel at the Federal Reserve Board of Governors. “When one of your senior officers gets caught with his hand in the jar and you say, ‘Oh it’s legal,’ you’ve kind of blown away that principle of higher standards.”
Sokol’s purchase of about $10 million in Lubrizol stock while representing Berkshire in discussions about buying the lubricant maker violated company policies on insider trading, the committee found. Prior to his agreement to buy Lubrizol, Buffett was unaware of the timing of Sokol’s trades and that he was working with Citigroup Inc. bankers to deal with the Wickliffe, Ohio-based company, according to the report. Lubrizol jumped 28 percent on March 14 when Buffett announced the $9 billion deal.
Sokol’s “misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the company,” the committee said.
Sokol “would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies,” according to a statement from William Levine, a lawyer for Sokol at Dickstein Shapiro LLP in Washington.
‘The Great Inquisition’
Buffett, who built the world’s third-biggest personal fortune by boosting Berkshire’s stock price in four decades as CEO, told executives in a 2010 memo that the while the company can withstand financial losses, “We can’t afford to lose reputation — even a shred of reputation.”
Andrew Ross Sorkin, the New York Times writer who is scheduled to be on the panel asking questions, said in an April 5 column that this year’s meeting could be called “The Great Inquisition” because of questions about Sokol rather than the “Woodstock” for capitalism, as it has been called by Buffett.
Buffett was asked at last year’s meeting about Berkshire’s $5 billion investment in Goldman Sachs Group Inc., which was sued by the SEC earlier in 2010 over its disclosures tied to collateralized debt obligations. Buffett praised Goldman Sachs, which settled the suit in July by agreeing to pay $550 million and said it made a mistake by omitting some information from investors.
Shareholders at the 2007 meeting called on Buffett to divest a $3.3 billion stake in PetroChina Co. because its parent company held oil reserves in pipelines in Sudan where the government was accused of supporting genocide. Buffett said at the meeting he had no disagreement with PetroChina’s actions. He sold the stake later that year.
In 2009, when Buffett instituted the new format, Berkshire was recovering from a year in which its shares fell 32 percent. The company’s Class A shares advanced 21 percent in 2010 and 3.6 percent this year through yesterday. Buffett in his annual letter requested shareholder questions and said that he and Munger “know the journalists will pick some tough ones, and that’s the way we like it.”
More than 30,000 people travel from around the world to Omaha for the annual meeting at the Qwest Center, where Buffett and Munger take questions for about five hours. Buffett’s annual press conference is scheduled for May 1.
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