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.
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.
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.