Long ago when I was a young reporter covering the Arkansas legislature for the local paper in Little Rock, there was a line I’d hear in the hallways periodically about the prevailing moral standard some lawmakers lived by when doing the people’s business, called “the do-right rule.”
It went like this: If I’m the one doing it, then it must be all right. This brings us to the subject of Warren Buffett, a longtime adherent to his own version of the do-right rule, which has no particular meaning other than that it is flexible and sounds folksy. The problem with this rule is it works well, until it doesn’t. And lately for Buffett, one of the greatest value creators ever, it hasn’t been working so hot.
Witness the harsh public reaction to the goodbye kiss Buffett planted last week on David Sokol, 54, the head of several Berkshire Hathaway Inc. (BRK/A) subsidiaries who had been widely viewed as Buffett’s successor in waiting.
In his letter disclosing Sokol’s surprise resignation, Buffett praised Sokol’s “extraordinary” contributions. He told how Sokol had bought millions of dollars of Lubrizol Corp. (LZ) stock for himself, shortly before he suggested (successfully) to Buffett that Berkshire buy the company. It was all legal, Buffett opined. Buffett also told us that Sokol had said his Lubrizol purchases “were not a factor in his decision to resign,” as if that were credible.
It wasn’t until the end of his letter that I began wondering if Buffett had lost his mind. “I have held back nothing in this statement,” he said. “Therefore, if questioned about this matter in the future, I will simply refer the questioner back to this release.”
So, it wasn’t just some questioners who would get the “Great Oz Has Spoken” treatment from Buffett. All questioners would, which is nuts. I mean, what’s he going to do if and when the Securities and Exchange Commission asks him about Sokol’s trades? Take the Fifth?
This should be a defining moment for Buffett, and for the public whose rock-star adulation he craves. Maybe now the world will realize we never should have held him up -- or bought his act -- as some moral paragon for business.
Sure, we can admire his talent for securities analysis, and his success at building an empire and making himself and lots of other investors rich. But let’s put to rest the exaltations about his plain talk and his eye for strong character. He’s a corporate chief executive officer, for goodness sake. These are the kinds of dodges we’ve come to expect from many CEOs.
Buffett, whose record of reputational hits is long and varied, is no exception.
Moody’s, Coke, Gen Re
He was on the audit committee of Coca-Cola Co.’s board when the SEC found the company had misled investors about its earnings during the 1990s. He stayed silent about Moody’s Corp. (MCO) as it sold the public down the river with countless AAA ratings on garbage subprime mortgage bonds while Berkshire was its largest shareholder.
Four former executives of Berkshire’s Gen Re unit were sentenced to prison for helping American International Group Inc. commit accounting fraud a decade ago. At least in that instance, after Gen Re paid $92 million last year to settle investor claims and end government investigations, Buffett publicly acknowledged that the company had done something wrong.
And how much does Berkshire’s board really care about its trusted insiders’ trading anyway? The company kept Deloitte & Touche as its outside auditor after learning in 2008 that Deloitte’s vice chairman had been trading in and out of Berkshire’s stock while he was the advisory partner on Berkshire’s audit. That caused Deloitte and Berkshire to violate the SEC’s auditor-independence rules, the agency said last year.
Rather than change firms, though, Berkshire concluded Deloitte was independent anyway. The SEC went along with it, which ultimately is what mattered, not some higher Berkshire virtue of keeping up pristine appearances. (The former Deloitte partner last year paid about $1 million to settle fraud allegations by the SEC.)
Sometimes Berkshire’s whoppers are more subtle. The company’s latest proxy lists Microsoft Corp. Chairman Bill Gates as an “independent” director, even though Buffett has pledged most of his $47 billion fortune to the Bill & Melinda Gates Foundation. That may be OK under the SEC’s definition of independent, just not under a common-sense standard.
Another supposedly independent director is Walter Scott, who owns 9.4 percent of the voting shares in Berkshire subsidiary MidAmerican Energy Holdings, from which Sokol is resigning as chairman. Berkshire’s proxy assures us these matters were duly considered.
Berkshire steers millions of dollars of fees each year to Vice Chairman Charlie Munger’s old law firm, Munger, Tolles & Olson, where Berkshire director Ronald Olson is a partner. Other directors include Buffett’s son, Howard. At most public companies such dealings would be held up as examples of weak governance. Because this is Buffett, Berkshire usually has gotten a pass.
There is one benchmark by which the 80-year-old Buffett has been wildly successful: “In Berkshire’s case, we long ago told you that our job is to increase per-share intrinsic value at a rate greater than the increase (including dividends) of the S&P 500,” Buffett wrote in his latest annual letter to shareholders.
That, along with finding an able successor, is the standard by which investors should and will judge him. Anyone searching for a folk hero to idolize should look somewhere else.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
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