Last week Berkshire released an 18-page report by its audit committee, detailing the findings of the panel’s investigation into Sokol’s trading in Lubrizol Corp. (LZ) Sokol, you may recall, is the former chairman of several Berkshire units who resigned in March amid revelations he bought about $10 million of Lubrizol shares shortly before he recommended successfully to Warren Buffett that Berkshire buy the company.
The report itself, however, was anything but independent.
Rather than hire its own separate legal counsel, as the company’s charter authorizes it to do, the audit committee relied on Berkshire’s longtime law firm, Munger, Tolles & Olson, to help conduct its probe and prepare the report. And the committee allowed Ronald Olson, a Munger Tolles partner and Berkshire director who isn’t independent of the company’s management, to act as its public spokesman, all of which underscores weaknesses in Berkshire’s own corporate governance.
A truly independent, no-holds-barred report would have delved into whether Buffett, Berkshire’s chairman and chief executive, made any incorrect or misleading statements in his March 30 letter to shareholders announcing Sokol’s resignation. It also would have addressed the advice Buffett received from Olson and any other Berkshire directors in drafting that letter, which Berkshire disclosed as part of a company press release.
As Berkshire’s code of business conduct and ethics says, all officers and directors involved in preparing communications to the public “shall make disclosures that are full, fair, accurate, timely and understandable.”
The report by the audit committee, led by former Capital Cities/ABC Inc. chief Thomas Murphy, didn’t address whether the statements in Buffett’s March letter lived up to that standard. The main reason Buffett has received so much harsh criticism lately is that lots of people seem to believe they didn’t.
Murphy didn’t return phone calls seeking comment. Nor did Berkshire audit committee member Donald Keough, chairman of the investment bank Allen & Co. The panel’s other member, former Microsoft Corp. executive Charlotte Guyman, declined to comment.
Olson, in an interview, told me he saw no problem with serving as a Berkshire director at the same time he’s an outside lawyer for both Berkshire and its audit committee. “There’s no conflict in our operating on behalf of the audit committee as their lawyers, and we did it,” he said. “I don’t see that being inconsistent with my role as a director in any way.”
Yet Olson seemed stumped when I asked him how he keeps his activities as a director and lawyer for the same company separate; essentially Olson is his own client. “I’m not going to go into detail about all of this,” he said.
If the owners of a closely held company want to put its outside attorney on the board, fine, that’s their business. Berkshire, however, has public responsibilities. Olson and Munger Tolles should have told Berkshire’s audit committee to hire its own independent counsel to assist with its inquiry into the Sokol affair, says James Cox, a securities-law professor at Duke University School of Law.
“In these high-profile matters, communicating that you are independent and that you are acting independently is the ultimate message and not the report itself,” Cox told me. The audit committee’s members “should have managed that, and they failed.”
Buffett’s March 30 letter, in which he praised Sokol profusely, provided plenty of material for the committee to examine. For example, Buffett opined that none of Sokol’s Lubrizol purchases “were in any way unlawful,” a statement that was incomplete at best.
Buffett’s letter said nothing about whether Sokol’s trades violated Berkshire’s internal policies. Buffett later said they did. Nor did it mention that, on that same day, Berkshire reported Sokol’s trades to the Securities and Exchange Commission’s enforcement division. Berkshire “turned over some very damning evidence,” Buffett said at Berkshire’s annual shareholder meeting last weekend.
In his March letter, Buffett also wrote that Sokol had said his Lubrizol purchases “were not a factor in his decision to resign,” a line that wasn’t remotely credible. It wasn’t until a month later, at last weekend’s annual meeting in Omaha, Nebraska, that Buffett said Sokol’s trades were a firing offense.
Not So Clever
Buffett also said last week that he consulted with Olson and Berkshire Vice Chairman Charlie Munger after he wrote a draft of the March letter. The audit committee’s report didn’t address the advice they gave him. Instead the committee limited the report’s scope to Sokol’s conduct alone.
Munger did tell shareholders over the weekend: “I think we can concede that that press release was not the cleverest press release in the history of the world.” That’s far too kind.
Berkshire’s audit committee had the opportunity to provide a full accounting of what went wrong. Instead its members lent their names to a whitewash that ignored the most important question: Whether Buffett or anyone else on Berkshire’s board may have violated the company’s ethical standards.
Maybe that’s because they didn’t like the answer.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in New York at firstname.lastname@example.org
To contact the editor responsible for this column: James Greiff at email@example.com