Warren Buffett delivered a bombshell yesterday, announcing the resignation of David Sokol, the chairman of Berkshire Hathaway's (NYSE: BRK-B) MidAmerican Energy unit. Sokol was widely considered to be the front-runner to become the CEO of Berkshire in the PB (post-Buffett) era. This is not good news for Berkshire shareholders and neither are some of the circumstances surrounding the departure.
In a memo-style press release from his own hand, Buffett explains that Sokol -- who had wanted to resign twice in the past -- is leaving to manage his personal wealth. Buffett also reveals that Sokol made a substantial purchase of Lubrizol (NYSE: LZ) shares in early January, just prior to suggesting to him that he consider the company as an acquisition target. Berkshire announced the $9.7 billion acquisition of Lubrizol on March 14.
This isn't the Berkshire way
The press release has a bit of Jedi-mind-trick quality to it ("This isn't the securities law infraction you're looking for. Move along."), with Buffett stating that he does not believe that the share purchases were illegal and that Sokol's decision to resign is unrelated to the share transaction. However, careful readers will note several clues to suggest this is not business as usual at Berkshire:
- Focusing solely on legality here is disingenuous. Buffett has always aspired to follow the letter and the spirit of the law.
- When Sokol tried to resign in the past, Buffett surely must have fought tooth and nail to retain him, as he wouldn't want to lose a manager of that caliber. However, this time, Buffett says he made no effort to persuade him to stay. I don't think this is an insignificant detail; rather, I think Buffett is signaling that he condemns Sokol's Lubrizol share purchase.
Why disclose the share purchases at all, if they tarnish Sokol's and Berkshire's images? First, Buffett likes to deal openly and fairly with his shareholders. Furthermore, it makes good sense to get out in front of a story like this if there is a risk that it will come out (and that risk is always there). Although this looks less serious than the case linking a Goldman Sachs (NYSE: GS) director to the alleged Rajaratnam insider trading ring, it's very odd that someone of David Sokol's stature would commit an error in judgment of this magnitude. In itself, that is probably enough for Buffett to have ruled him out for consideration as Berkshire's next CEO.
The bottom line for shareholders
Where does that leave Berkshire and its shareholders? It's certainly not good news, as Sokol was the most likely candidate for the top spot. In a filing in February, Berkshire said its board "has identified four current Berkshire subsidiary managers who are capable of being C.E.O.," so the company isn't without options. While the impact of Sokol's departure on Berkshire's long-term value need not be significant, it certainly increases the pressure on Buffett to share more information regarding the succession plan with his shareholders. For his biographer's opinion, click here.
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