A "Whitewashed Buffett" - More Corporate Governance Loose Ends Exposed At Berkshire

Tyler Durden's picture

The Berkshire-Sokol scandal has once again been drowned away by a variety of secondary noises, which however does nothing to eliminate the latent, and increasingly broader, sentiment that something is very wrong at the firm which for so many years was nothing short of the Oracle's cathedral for the great unwashed. Today, Bloomberg's Jonathan Weil shines a light in another can of worms that has just been exposed courtesy of Berkshire's report on David Sokol's conduct by its "audit committee", letting many new and unexpected cockroaches appear.

First, Weil analyzes just how independent the audit committee and its report is, finding it is anything but:

The audit committee, which consists of three “independent” directors, concluded Sokol had violated Berkshire’s insider-trading policies and code of ethics, an allegation he denies.

The report itself, however, was anything but independent.

Rather than hire its own separate legal counsel, as the company’s charter authorizes it to do, the audit committee relied on Berkshire’s longtime law firm, Munger, Tolles & Olson, to help conduct its probe and prepare the report. And the committee allowed Ronald Olson, a Munger Tolles partner and Berkshire director who isn’t independent of the company’s management, to act as its public spokesman, all of which underscores weaknesses in Berkshire’s own corporate governance.

So what would an objective and unconflicted report really look like?

A truly independent, no-holds-barred report would have delved into whether Buffett, Berkshire’s chairman and chief executive, made any incorrect or misleading statements in his March 30 letter to shareholders announcing Sokol’s resignation. It also would have addressed the advice Buffett received from Olson and any other Berkshire directors in drafting that letter, which Berkshire disclosed as part of a company press release.

As Berkshire’s code of business conduct and ethics says, all officers and directors involved in preparing communications to the public “shall make disclosures that are full, fair, accurate, timely and understandable.”

The report by the audit committee, led by former Capital Cities/ABC Inc. chief Thomas Murphy, didn’t address whether the statements in Buffett’s March letter lived up to that standard. The main reason Buffett has received so much harsh criticism lately is that lots of people seem to believe they didn’t.

Murphy didn’t return phone calls seeking comment. Nor did Berkshire audit committee member Donald Keough, chairman of the investment bank Allen & Co. The panel’s other member, former Microsoft Corp. executive Charlotte Guyman, declined to comment.

Here, a blatant conflict of interest emerges, although not one which Berkshire would acknowledge. Naturally. After all by now we know that traditional corporate governance laws, and frankly any laws, don't really apply to Buffett as they do to the normal peasantry.

Olson, in an interview, told me he saw no problem with serving as a Berkshire director at the same time he’s an outside lawyer for both Berkshire and its audit committee. “There’s no conflict in our operating on behalf of the audit committee as their lawyers, and we did it,” he said. “I don’t see that being inconsistent with my role as a director in any way.”

Yet Olson seemed stumped when I asked him how he keeps his activities as a director and lawyer for the same company separate; essentially Olson is his own client. “I’m not going to go into detail about all of this,” he said.

Alas, we doubt any corrupt regulator will dig to heavily into that statement.

Next, Zero Hedge previously ridiculed the massive discrepancy between the original Buffett letter and the follo- on report. Weil also focuses on that particular "weakest link":

Buffett’s March 30 letter, in which he praised Sokol profusely, provided plenty of material for the committee to examine. For example, Buffett opined that none of Sokol’s Lubrizol purchases “were in any way unlawful,” a statement that was incomplete at best.

Buffett’s letter said nothing about whether Sokol’s trades violated Berkshire’s internal policies. Buffett later said they did. Nor did it mention that, on that same day, Berkshire reported Sokol’s trades to the Securities and Exchange Commission’s enforcement division. Berkshire “turned over some very damning evidence,” Buffett said at Berkshire’s annual shareholder meeting last weekend.

In his March letter, Buffett also wrote that Sokol had said his Lubrizol purchases “were not a factor in his decision to resign,” a line that wasn’t remotely credible. It wasn’t until a month later, at last weekend’s annual meeting in Omaha, Nebraska, that Buffett said Sokol’s trades were a firing offense.

At this point any other company would be seeing its stock plummeting as a result of so much flip-flopping, it would make Cramer seem like a deep value fundamental investor. But not Berkshire: after all, Berkshire is simply immune from the vicissitudes of the real world.

There's more:

Buffett also said last week that he consulted with Olson and Berkshire Vice Chairman Charlie Munger after he wrote a draft of the March letter. The audit committee’s report didn’t address the advice they gave him. Instead the committee limited the report’s scope to Sokol’s conduct alone.

Munger did tell shareholders over the weekend: “I think we can concede that that press release was not the cleverest press release in the history of the world.” That’s far too kind.

Not to mention that it is Munger himself who will likely soon be in hot water over his purchase of BYD, as Zero Hedge first noted.

In conclusion:

Berkshire’s audit committee had the opportunity to provide a full accounting of what went wrong. Instead its members lent their names to a whitewash that ignored the most important question: Whether Buffett or anyone else on Berkshire’s board may have violated the company’s ethical standards.

We are thankful to Weil for putting in finer, and more politically correct prose then we ever would have, what is a blatant example of crony capitalism at the very top. And after all, when one has an economy of scale, achieved allegedly without the kind of impropriety that is the heart of the issue here, and when millions of people's jobs are at stake should justice be pursued, Buffett has nothing to fear. Alas, the flipside of this is that ever fewer people are able to preserve an outlook on the market and the economy, in which there is fair and equitable treatment to everyone, and instead merely reward those who are in the process of becoming, or already are, Too Big To Fail. It is no surprise Buffett first came to realize the folly of believing the Administration would allow the big financials to fail (and thus put in billions of his own capital, in hopes it would soon be propped up by taxpayer capital): after all it takes one, perhaps the original TBTF, to spot all the other ones. The rest is merely corrupt regulation and judicial travesty history.

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Vergeltung's picture

god, ain't that the truth.

TruthInSunshine's picture

OT (yes, Buffett is a blob of cow dung):

Top Japan Nuclear Technology Institute Senior Advisor: ‘Fuel Rods Completely Melted, May Already Escaped Pressure Vessel’, ‘Water [Inside Pressure Vessel] Is Highly Contaminated With Uranium, Plutonium, Cesium, Cobalt, In The Concentration We’ve Never Seen Before’


“I believe the fuel rods are completely melted. They may already have escaped the pressure vessel. Yes, they say 55% or 30%, but I believe they are all melted down. When the fuel rods melt, they melt from the middle part on down.

(Showing the diagram) “I think the temperature inside the melted core is 2000 degrees to 2000 and several hundred degrees Celsius. A crust has formed on the surface where the water hits. Decay heat is 2000 to 3000 kilowatts, and through the cracks on the crust the radioactive materials (mostly noble gas and iodine) are escaping into the air.

“Volatile gas has almost all escaped from the reactor by now.

“The water [inside the pressure vessel] is highly contaminated with uranium, plutonium, cesium, cobalt, in the concentration we’ve never seen before.

At the decay heat of 2000 kilowatt… There’s a substance called cobalt 60. Highly radioactive, needs 1 to 1.5 meter thick shields. It kills people at 1000 curies. He calculated that there are 10 million curies of cobalt-60 in the reactor core. If 10% of cobalt-60 in the core dissolve into water, it’s 1 million curies.”


10 million curies equals 370,000 terabecquerels, and 1 million curies equals 37,000 terabecquerels.


“They (TEPCO) want to circulate this highly contaminated water to cool the reactor core. Even if they are able to set up the circulation system, it will be a very difficult task to shield the radiation. It will be a very difficult work to build the system, but it has to be done.


“It is imperative to know the current condition of the reactor cores. It is my assumption [that the cores have melted], but wait one day, and we have water more contaminated with radioactive materials. This is a war, and we need to build a “bridgehead” at the reactor itself instead of fooling around with the turbine buildings or transporting contaminated water.”

Cone of Uncertainty's picture

She's nothing more than a knob-gobbling, Buffett ballwasher.

Mongo's picture

The rats... are sinking with the ship

TheFourthStooge-ing's picture

In a submerging economy, corruption and lies are standard operating procedure. The foetid stench of decay gets stronger as you get closer to the top of the heap.


Sudden Debt's picture

his activities as a director and lawyer for the same company separate; essentially Olson is his own client. “I’m not going to go into detail about all of this,” he said.



Only in lala land is that even possible!

and the US of course...


like Osama would say: BULLSEYE BITCHEZ!

Rick64's picture

Maybe Munger can investigate himself and invoke attorney/client privilege.

Mercury's picture

The real issue here is how vague and toothless "insider trading" rules are (and how lame and arbitrary the SEC is).  Sokol obviously (IMHO) acted unethically and may have violated some BRK compliance policy but he probably didn't do anything illegal (although, strangely, he would have if LZ were involved in a tender offer instead of an acquisition).

Miss Expectations's picture

My real name is Martha Stewart and I have some questions.  I'll give The Donald a call to see if I can borrow his PR guy for a day or two.

Cursive's picture

I'm waiting for Buffett's Death from Market Failure.

Alcoholic Native American's picture

I thought the paw paw of capitalism gave all his money away.  Probably got a phone call from Ben saying "We can't have that much money in one place, it's growth would rapidly accumulate even faster and we still have the plebes thinking that we have a legitimate rat race going on here".

As the old saying goes, the rich get richer in their sleep.



I am a Man I am Forty's picture

 i can't stand the senile duo of munger and buffett, but this isn't going to amount to anything but a shareholder lawsuit and a black eye for the firm, the smart folks saw through BRK prior to this, the rest are desperately waiting for next years meeting

Cleanclog's picture

As goes Berkshire, with Captain Buffet at the helm, so goes trust in corporate America.  So now, the common person no longer trusts government, corporations, hospitals, schools, police, transportation, or farmers.  Grand isn't it?  Hopefully everyone still knows, and mostly trusts, their next door neighbors.

riley martini's picture

  It took a lot of guts for that lawyer to file against a fascist insider like Buffet , He should file the Munger case too , the SEC isn't going to do anything not with the POTUS exempting select criminals from prosecution.

bugs_'s picture

dirty from the top down

Confused's picture

Conflict of interest? Whats that? 




Jeremy Roenick's picture

Seems to me this is very bullish for Berkshire.  Better gobble up the stock.



NotApplicable's picture

What I find funny is that not only will Warren no longer want to refer back to his letter, he likely can't without further incriminating himself. Not that he will ever be indicted for anything, but still, the public embarrassment makes for good entertainment.

Oh, and color me shocked that the audit wasn't really independent, but yet more damage control.

Extremist Tan's picture

Buffett to step down in 12 mos. BRK to break up. Becky will move in to "help with the gardening."

AgShaman's picture

Maybe he'll join the king of "Sell-outs"....Capt. Syntax Destruction (Sir Alan) and slip on off to a private European villa....it's time for him to set down the golf clubs A-La "Carl Speckler" in a lightning storm...and slither off into the shadows like the wanker he really has always been. Who cares anyways....Bill and Melinda has already gots his population reduction monies' promises/charitable donations. 

williambanzai7's picture

Pretty lame Mr Olson, much better would be expected even from a hoy shot barracuda Wall Street firm, which Munger Tolles certainly is not.

sbenard's picture

What was it that Buffett once said that we learn when the tide goes out? Something about WHO has been swimming naked? Sorry, but I don't want to see Buffett naked.

I guess we don't have a choice!