Sokol affair casts shadow on Buffett style

Reuters News
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Posted: Mar 31, 2011 11:50 AM

By Ben Berkowitz

NEW YORK (Reuters) - So much for Warren Buffett's philosophy of leaving his managers alone.

A key Buffett lieutenant resigned this week, and said he bought shares in a company he later pitched to his boss. While Buffett said his employee, David Sokol, did nothing unlawful, governance experts said the entire episode was a black mark for a company that has long prided itself on its rectitude.

"It's the kind of behavior that, as a matter of corporate governance, sophisticated companies try to avoid," said John Coffee, a law professor at Columbia University.

Experts said that part of the problem may be that Buffett's company, Berkshire Hathaway, prides itself on having few of the internal controls that other major companies have, and instead banks on the honor of its senior employees.

"The key is the people. That's been his playbook ever since he's started. He knows the rules, and he expects the people he works with to know them too," said Michael Holland, chairman of Holland & Co, which oversees $4 billion in assets and owns Berkshire shares.

Changing the way he runs his business would sting for Buffett, who bets everything on his reputation -- something he made crystal clear in a July 2010 memo to his managers that he released this past February.

"We can't be perfect but we can try to be. As I've said in these memos for more than 25 years: 'We can afford to lose money -- even a lot of money. But we can't afford to lose reputation -- even a shred of reputation.'"

He added: "We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter."

'MANAGE LITTLE'

Buffett likes to brag about the way he runs companies -- by not running them, leaving them instead in the care of what he considers capable executives who do not need his oversight.

"There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A 'hire well, manage little' code suits both them and me," Buffett said in his annual shareholder letter in February.

Ultimately, by his own admission Buffett is not an operational leader, but a sort of inspirational one. He contents himself to let others run the businesses.

Investors say in this case, he may have picked the wrong person to help him lead.

"If I had any knock against Buffett, is how much he espoused his successor, how this was the right guy, how much he rallied the flag around him as his successor ... and now this guy is gone," said Matt McCormick, portfolio manager at Cincinnati-based Bahl Gaynor Investment Counsel.

(Additional reporting by Dan Wilchins, Jonathan Stempel and Maria Aspan in New York and Sarah Lynch in Washington, editing by Matthew Lewis)