“The recent developments are credit negative for Berkshire,” Moody’s analysts led by Bruce Ballentine wrote in a note yesterday. “More broadly, the events underscore governance challenges at Berkshire that could impact credit quality.”
Chairman and Chief Executive Officer Warren Buffett, who’s also head of investments, is preparing Omaha, Nebraska-based Berkshire for his eventual departure. The 80-year-old billionaire is losing one of his top managers in Sokol, who resigned this week as it was revealed that he bought stock in a company he had targeted as a takeover candidate.
Sokol’s stock dealings and departure “one, portray a senior officer with the appearance of a conflict of interest, two, may give rise to burdensome regulatory/legal investigations, and three, raise questions regarding Berkshire’s risk controls,” Moody’s said.
Sokol bought about 96,000 Lubrizol Corp. (LZ) shares in January, less than two weeks before recommending Berkshire acquire the company, Buffett, 80, said in a March 30 statement. Berkshire agreed to buy Lubrizol for $9 billion. The stock purchases, executed in January, may have given Sokol a profit of about $3 million, according to disclosures by Buffett and data compiled by Bloomberg.
Trades Called Legal
Both Sokol, 54, and Buffett said the trades were legal.
Buffett has relied on Sokol as a manager and a dealmaker for more than a decade. The billionaire sent Sokol to China to scout an investment in carmaker BYD Co. and tasked the executive with the turnaround of NetJets Inc., Berkshire’s luxury-flight unit. Investors including Buffett biographer Andrew Kilpatrick had said Sokol was the most likely successor.
“The company faces management succession risk given the vital role played” by Buffett, Moody’s said. “As Berkshire prepares for a leadership change, we expect the firm to develop more robust governance practices, risk oversight and risk controls.”
Berkshire’s credit rating at Moody’s is Aa2, the firm’s third-highest grade. Moody’s downgraded Berkshire from its top Aaa rating in 2009.
Sokol’s Lubrizol stake as reported by Buffett would have been worth about $9.92 million on Jan. 7, based on the closing price on the New York Stock Exchange. The shares have risen about 30 percent to $133.80 since Buffett’s deal was announced, boosting the stake, if Sokol still owns it, to $12.9 million.
“I don’t believe that I did anything wrong,” Sokol told CNBC in a televised interview. “I can understand the appearance issue, and that’s why we made it public.”