Buffettgate Two: An Unenforced “Policy” Isn’t a Policy

Several years ago I had dinner with one of my former managers. His firm had just settled a discrimination lawsuit for $1 million. Top management blamed my colleague, because he had lost control of the situation.

I remembered the salesman, a loud bully. A group of us would arrive early and read the paper. My first morning, he snatched the Wall Street Journal from my hands and swaggered to his desk. I walked over and pointedly recovered it. This continued until the third morning, when I took back my paper and accidentally spilled his coffee. I apologized. I can be a little clumsy when retrieving my property, and I was likely to become even more unpredictable. He stopped grabbing my paper after that.

The salesman had tormented a new sales assistant, and this time he went beyond childishness. His least offensive remark to the young man was to regularly call him “Jew boy.” The assistant lawyered up, and the result was the lawsuit against the firm.

My colleague felt he was being unjustly blamed. “We have a policy against discrimination,” he protested. Yet he had heard the slurs, witnessed the salesman berating the assistant, and had done nothing.

“So you say,” I responded. “A piece of paper with words on it doesn’t constitute a policy. A policy that isn’t enforced isn’t a policy; it’s a cover story.” The sales assistant’s lawyers successfully made the same argument.

Berkshire Hathaway’s Cover Story

Today’s Wall Street Journal noted that Warren Buffett, the CEO of Berkshire Hathaway, had a policy against insider-trading that restricted officers, including David Sokol, from investing in “securities of other public companies in which Berkshire has invested or may in the future invest.” The reporters thought the memo might give comfort to those concerned about potential ethical breaches by Berkshire Hathaway’s autonomous management.

David Sokol bought shares in Lubrizol the day after meeting with Citigroup bankers to discuss potential acquisition candidates for Berkshire Hathaway. At least that was what the Citi bankers understood to be the purpose of the meeting. Sokol’s actions were inappropriate. Front-running is an offense for which a banker or investment banker would be fired. Citi’s bankers were shocked when they learned of Sokol’s purchases. Moreover, it appears his actions were “expressly prohibited” by Berkshire Hathaway’s “policy.”

Yet, Buffett seems to support and excuse Sokol’s actions: “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign.” Why didn’t Buffett make it a factor and ask Sokol to resign?

During an initial meeting with Sokol about Lubrizol, Sokol told Buffett he owned shares in the company, but Buffett didn’t ask him for further information including details of the timing, price, and number of shares. Warren Buffett devotes 12 hours a week to playing bridge. After the cards are dealt, players engage in an auction in an attempt to determine the value and number of the cards in each suit held by their partners. Yet Buffett states he did not inquire further about a senior Berkshire Hathaway officer’s investment in an acquisition candidate.

Charlie Munger, a member of Berkshire Hathaway’s board of directors, called Sokol’s purchases, “a glitch.” Sokol tried to excuse his own actions by telling CNBC that Munger had bought a 3% stake in Chinese electric car and battery maker BYD, prior to Berkshire’s acquiring a large stake in that company. The facts of Munger’s purchases (through a fund) were different, and Munger hedged: “I don’t want to criticize his comparisons.” Perhaps because doing so would highlight that Sokol’s behavior was unethical.

Warren Buffett may be more diligent when he plays cards than in enforcing the policies he wrote for Berkshire Hathaway. Principles only matter when they are inconvenient. A policy that isn’t enforced isn’t a policy. Neither Warren Buffett nor Charlie Munger will publicly consider that there is anything even potentially immoral or unethical about Sokol’s behavior. The SEC may find it goes even beyond that, when it completes its inquiry.

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