Wednesday, March 30, 2011
David Sokol, potential successor of Warren Buffett resigns
David Sokol has abruptly resigned from Berkshire Hathaway, the company run by the billionaire Warren E. Buffett, raising major questions about the future stewardship of the conglomerate.
Mr. Sokol, 54, was long considered to be a leading candidate to take over from Mr. Buffett, now 80. The question of succession has been a concern to Berkshire’s investors and the many avid followers of Mr. Buffett, who has said he has no plans to step aside anytime soon. The company has given few clues about its plan other than to say it has identified four current Berkshire managers who could become the next chief executive. Now that game plan may have to be tweaked.
The resignation also raises deeper questions about Mr. Sokol’s stake in a company that Berkshire is acquiring.
In a statement on Wednesday announcing the departure, Mr. Buffett said that Mr. Sokol had bought thousands of shares in the company, Lubrizol, a maker of lubricants, two months before Berkshire announced a $9 billion deal for the company. Shares of Lubrizol have risen 27 percent since the deal was announced two weeks ago.
Mr. Sokol had pitched the acquisition to Berkshire’s board.
“Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” Mr. Buffett said in the statement. “He has told me that they were not a factor in his decision to resign.”
Yet the disclosure raises questions about the timing of Mr. Sokol’s share purchases — and whether he may face any legal repercussions.
Mr. Sokol could not be reached for comment.
The disclosure about Mr. Sokol’s stake in Lubrizol appears to be a rare mark on Berkshire’s squeaky-clean image. Meyer Shields, an analyst who follows Berkshire at the brokerage firm Stifel Nicolaus, said Mr. Sokol’s departure went “deep into the question” of Berkshire’s culture and raised the issue, not addressed in Wednesday’s statement, of whether Mr. Sokol had bought into other companies before a Berkshire acquisition.
“This is a company that has spent a lot of energy building its reputation, and as a result it makes it more vulnerable to news like this,” Mr. Shields said.
Class A shares of Berkshire fell more than 2 percent in after-hours trading.
Still, regulators have not announced any plans to scrutinize Mr. Sokol’s shares in Lubrizol, and he has not been accused of any wrongdoing. A spokesman for the Securities and Exchange Commission, which investigates allegations of insider trading, declined to comment.
Mr. Sokol’s resignation shocked some Berkshire Hathaway employees, according to people at the company who were not authorized to speak publicly. Even Mr. Buffett acknowledged that his statement was “unusual.”
The departure immediately recasts the field of candidates in the race to be the next chief executive of Berkshire. Yet there is a bench at Berkshire for Mr. Buffett to draw from.
One leading candidate to run Berkshire is Ajit Jain, the head of the company’s reinsurance operations. In his February letter to investors, Mr. Buffett praised a number of other Berkshire managers, including Tad Montross of General Re, Matthew K. Rose at Burlington Northern Santa Fe and Tony Nicely of Geico.
In late November, Berkshire hired Todd Combs, manager of a hedge fund in Connecticut, as a potential successor to Mr. Buffett as chief investment officer. (Mr. Buffett has said the plan is to divide the chief executive and investment jobs.) Mr. Combs was hired to oversee a sizable portfolio that would probably grow as he became comfortable with it and Berkshire’s operations.
Mr. Buffett praised Mr. Sokol, saying his “contributions have been extraordinary.” Mr. Sokol had run several Berkshire subsidiaries, including MidAmerican Energy and NetJets, which sells fractional ownerships of private jets.
On Wednesday, Mr. Buffett said that he did not ask for Mr. Sokol’s resignation, which was a “total surprise to me.” Mr. Sokol had twice before mentioned resigning, but Mr. Buffett was able to persuade him to stay, he said.
Mr. Buffett said he had spoken with Mr. Sokol the previous day and “received no hint of his intention to resign.” Mr. Sokol’s assistant delivered the resignation letter late Monday. Mr. Buffett said he did not attempt to talk Mr. Sokol out of the decision.
Mr. Sokol told Mr. Buffett: “As I have mentioned to you in the past, it is my goal to utilize the time remaining in my career to invest my family’s resources in such a way as to create enduring equity value and hopefully an enterprise which will provide opportunity for my descendants and funding for my philanthropic interests. I have no more detailed plan than this because my obligations from Berkshire Hathaway have been my first and only business priority.”
The resignation, however, comes under a cloud of suspicion about the stake in Lubrizol.
Mr. Sokol purchased 2,300 shares of Lubrizol on Dec. 14, which he then sold on Dec. 21, according to Mr. Buffett. On Jan. 5, 6 and 7, Mr. Sokol bought 96,060 additional shares, Mr. Buffett’s statement said.
It was not until mid-January that Mr. Sokol “brought the idea for purchasing Lubrizol to me,” Mr. Buffett said. “Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea.”
Mr. Buffett added, “Though the offer to purchase was entirely my decision, supported by Berkshire’s board on March 13, it would not have occurred without Dave’s early efforts.”
It is unclear whether Mr. Sokol’s resignation and the disclosures about his Lubrizol stake would jeopardize the deal. Mr. Sokol was thought to be spearheading the deal, which is scheduled to close in the third quarter of this year, pending approval by Lubrizol’s shareholders.
And some legal experts cast doubt on the possibility that he would face insider trading charges.
A former lawyer with the S.E.C., who asked not to be identified in order to preserve business relationships, said that for this case to qualify as insider trading, Mr. Sokol would have to have been in possession of material nonpublic information at the time he bought or sold the stock. He would also have had to breach a duty to his employer, Berkshire Hathaway.
In this case, Mr. Sokol made a “passing remark” to Mr. Buffett about his stake in the company in mid-January, when Berkshire was first considering the deal.
Although Mr. Sokol’s departure appears linked to the Lubrizol stock purchase, Alice Schroeder, the author of “The Snowball,” the bestselling Buffett biography, noted that Mr. Sokol’s tough management style had antagonized employees.
Ms. Schroeder posted an e-mail from Mr. Sokol to employees in which he effectively “threatened to shut down the company if people don’t stop criticizing him,” as she described it.