When Principles Trump Personalities

David Sokol’s departure refocuses attention on Berkshire’s succession horse race.  It also underscores a vital fact: at Berkshire, principles trump personalities.

Buffett’s moral standard has always been clear:  Never do anything that you would not want your family and friends to see on the front page of the local paper. This principle is reinforced at every Berkshire shareholder meeting with the screening of a 1991 film clip.  In it, Buffett testifies before Congress as the Interim Chairman of Salomon Brothers.  He wants to win back confidence lost after Salomon’s Treasury auction scandal.  Buffett repeats the caution he gave to Salomon employees: Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.

David Sokol appears to have crossed this line and exercised poor judgment regarding Lubrizol.  He has stated [and Buffett has affirmed] that he wanted to leave Berkshire in the past, but was persuaded to stay.  Now Buffett has accepted Sokol’s resignation.  Did Buffett act ruthlessly?  No, he acted predictably on principle.  Should he have grilled Sokol who told him in “a passing comment” that he owned shares in Lubrizol?  Most likely, but Buffett operates on trust.  He trusted Mr. Sokol who has contributed immensely to Berkshire’s success.

Sokol’s departure raises an important question about Berkshire’s future. Widely regarded as a leading candidate to become CEO, Sokol had been acting as Berkshire’s Chief Operating Officer, an increasingly important role. Writing in his 2007 shareholder letter, Buffett reminded investors that earnings from non-insurance operating companies, were and would continue to exceed earnings from investments.  He wanted to buy companies outright.  But operating businesses require special management skills – the kind that Sokol displayed in his rapid turnaround of troubled Net Jets and leadership at Johns-Manville.  Buffett’s gracious comments in his press release credit Sokol’s contributions.

The succession question raised by Sokol’s departure is important:  who among the leading CEO candidates has the experience and skills to be the insider turnaround guy for businesses in trouble?  Anyone in this job is not likely to win popularity contests.  Perhaps Berkshire needs a triumvirate management model:  a CEO (Chief Capital Allocator and Chief Risk Officer, the principal roles played by Buffett), a Chief Investment Officer and a Chief Operating Officer.

This decision will be made by Berkshire’s board, which not only upholds fiduciary responsibilities to owner-partners, but also stewards Berkshire’s unique trust and principles based culture.  The current media frenzy shows how tough a job this is in a Twitter-fed environment where straight talk generates bigger headlines than blatant obfuscation.

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