Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett, preparing the firm for his eventual departure, criticized former manager David Sokol for a stock deal while lauding the integrity of a CEO candidate.
Sokol, seen as a possible successor to Buffett before he resigned in March amid revelations that he’d purchased shares in Berkshire takeover target Lubrizol Corp., violated the company’s insider-trading rules, Buffett said yesterday at Berkshire’s annual meeting in Omaha, Nebraska. The 80-year-old billionaire assured shareholders that Berkshire’s top choice to be the next CEO is trustworthy. He didn’t name the executive.
“The leading candidate right now, I would lay a lot of money on him being straight as an arrow,” Buffett said.
Sokol’s stock deals, which Buffett called “inexplicable” considering his wealth, depleted Berkshire’s roster of possible CEOs. Berkshire said in February that it had four candidates, without identifying them.
“Investors are very worried about succession and justifiably so, and the situation gets more urgent with every year,” said Jill Fisch, a professor at the University of Pennsylvania Law School who has written about corporate governance. “In terms of future uncertainty, that’s the biggest risk for Berkshire Hathaway.”
Buffett, who’s also Berkshire’s chairman and biggest shareholder, singled out reinsurance head Ajit Jain for praise during yesterday’s meeting at the Qwest Center, an Omaha arena with more than 18,000 seats. Jain, 59, has a mind that “works like a machine,” Buffett said.
Buffett’s Best Deal
“I can’t think of any decision he’s ever made that I could have made better,” Buffett said. “I don’t know what his best deal was. I know what my best deal was: It was hiring him.”
Buffett said his criteria for the next CEO include both the “quality of the person” as well as managerial skills.
“It’s vital that you have someone at Berkshire that is running the place who cares more about Berkshire than he cares about himself,” he said. “We have multiple candidates that fulfill that.”
Buffett, the world’s third-richest man according to Forbes magazine, has a personal fortune of about $50 billion. He takes an annual salary of $100,000 to run Berkshire, and said his successor will have to be paid more.
“The next CEO will make a lot of money,” Buffett said yesterday. “Whatever level the board decides then in terms of a base value should be supplemented by an options system.”
Buffett’s responsibilities will be split, upon his death or retirement, among at least three people. A CEO will oversee the operating units and one or more investment managers will take charge of the portfolio. Buffett said his son Howard will probably assume the position of non-executive chairman and has “no designs” on taking over.
Buffett’s eventual replacements will take charge of a $200 billion company whose composition and culture are largely the expression of just one person. The CEOs of each operating unit, from Fruit of the Loom to Dairy Queen to Geico, were vetted by Buffett before acquisitions and promotions.
Sokol, 54, was considered by Buffett biographer Andrew Kilpatrick as the top CEO candidate before stepping down. Buffett announced Sokol’s departure in a March 30 statement that also described the Lubrizol stock deals.
Sokol bought about $10 million of Lubrizol Corp. shares in January while representing Berkshire in discussions about buying the lubricant maker. Lubrizol jumped 28 percent on the New York Stock Exchange on March 14 when Buffett announced a deal to buy the company for about $9 billion.
“At no time did Mr. Sokol violate the law or any Berkshire policy,” William Levine, a lawyer for Sokol at Dickstein Shapiro LLP in Washington, said yesterday in an e-mailed statement. “At no time did Mr. Sokol intend to personally profit at the expense of Berkshire or its shareholders. At no time did Mr. Sokol mislead or deceive.”
Berkshire turned over “very damning evidence” about Sokol’s deals and acted promptly in informing the Securities and Exchange Commission, Buffett said. “He violated our insider-trading rules and he violated the principles I lay out every two years to our managers,” Buffett said at the annual meeting.
Buffett’s remarks yesterday contrast with comments from March 30, when he cited Sokol’s “extraordinary” contributions to Berkshire. The company’s audit committee said April 26 that Sokol misled Buffett and violated the firm’s rules.
“It is alarming that Mr. Buffett would be advised to so completely flip-flop and resort to transparent scapegoat-ism,” Levine said in his statement.
‘A Big Mistake’
Buffett said previously that Sokol had made a “passing remark” about a personal investment in the company. The committee said in a report that Buffett was unaware of the timing of Sokol’s trades or that he was working with Citigroup Inc. bankers to deal with Lubrizol.
“I made a big mistake by not saying, ‘Well, when did you buy it?’” Buffett told shareholders yesterday.
“At best, the report makes Buffett look naive,” said Elizabeth Nowicki, a professor at Tulane University Law School and former attorney with the U.S. Securities and Exchange Commission, in an interview before the meeting. “At worst it looks like he didn’t immediately follow up the moment he knew that things were smelling bad.”
Sokol had run an energy utility for Berkshire. His duties included scouting for acquisitions and overseeing luxury-travel and roofing units.
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’s rules will be “looked at again by the audit committee” in the wake of Sokol’s departure, Buffett said.
“We hope to get some value out of this experience,” Buffett said at yesterday’s meeting.