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Berkshire
Hathaway and David Sokol

Essay

Every individual,
business manager, owner, executives, employees and all other stakeholders often
face the need to make such decisions, which can cause complex ethical problems.
We are all compelled to make the right decisions. But sometimes our decisions
can result in other people’s dissatisfaction and that cannot be avoided. People
will suffer the consequences of our decision. Of course, a good manager will
have to choose between good and evil while evaluating the importance of material
values ??and adherence to established moral principles. He is in such a
position that the interests of his organization and the purpose of the work,
needs of consumers and others are in conflict with his personal needs. This is
exactly what happened to the company Berkshire – Hathaway back in 2011.

Berkshire
– Hathaway is a well-known and most desired holding company with its
headquarters in Omaha, Nebraska.  It owns
a lot companies with the wide array of different business industries like auto-insurance
company (e.g. Geico), chain of ice cream restaurants (e.g. Dairy Queen), fine
jewelry retail stores (Helzberg Diamonds), real estate, etc. It is also
considered as one of the most valuable publicly trading companies with the
market cap of approximately $500 billion. Berkshire – Hathaway is run by the
billionaire Warren Buffet (the chairman and CEO).  In March 2011, a big scandal erupted in the
company. There were two parties involved – Warren Buffet and David L. Sokol,
where one party was accusing the other of unethical action and behavior.

Warren
Buffet is one of the most influential and famous investors in the whole world. Buffett
takes the third place in the Forbes magazine, and also has been considered as the
richest man on the planet. He earned his capital by applying his knowledge and
ability of how to invest in the stock market. I remember from my childhood, that
he wrote many books on personal growth, and he shared tips on what skills you
need, and how to improve and advance yourself to become successful. He is well
respected by all people and knows better than anyone that reputation defines
success of the company. Also, according to New York Times, Warren Buffet had
already experienced some unethical problems in the past: “in the early-1990s,
when one of his holdings at the time, Salomon Brothers, was caught in a
Treasury bond scandal”; “in the mid-2000s, when executives at General Re, owned
by Buffett’s company, Berkshire Hathaway, were prosecuted for concocting a
phony transaction with A.I.G.”1

David
Sokol started working for Berkshire Hathaway since 1999. He performed well for
the company and was noticed by Warren Buffet for his excellent abilities to
manage the company, his outstanding contributions to growth and development of
subdivisions, also his managerial performance. David Sokol was one of the top
executives that has done great job and resolved a lot of issues that the
company was facing that time.  He earned
trust and confidence of Warren Buffet. And soon, many people believed that he
was going to be a “front-runner on a short list of potential successors to one
day replace Warren Buffett as CEO.”  2

Prior
to his resignation, which was a complete surprise for everyone, Sokol was
conducting his own research on the stock market. According to the Business
Insider, he traded 2,300 shares of the chemical company Lubrizol before he
advised Buffett to acquire this company. According to some calculations, this
deal could bring Sokol up to $ 3 million. Then later, in January he purchased
additional stocks from the same company. But he never mentioned that the CEO of
Lubrizol was planning to have a deal with Berkshire Hathaway. Another fact is
that Sokol suggested to Warren Buffet to purchase stocks from Lubrizol and left
out important information when giving suggestion to Warren Buffet about future
acquisition. 3
Once Berkshire Hathaway purchased stocks in mid-March, David Sokol made a quick
decision to resign. This news went public from the press release and it caused
a lot of drama and comments about his decision to resign. Many started
suspecting that the only reason why Sokol resigned was insider trading. Insider
trading is a type of unethical behavior, or illegal conduct, it is against the
law and will be prosecuted by the Security and Exchange commission.

According
to the Financial Times, Insider trading is defined as a “malpractice wherein
trade of a company’s securities is undertaken by people who by their work have
access to the otherwise nonpublic information which can be crucial for making
investment decisions.”4 In other words, the professional
investors are not allowed to use a confidential financial information to make
sales and purchases of money market funds for their own benefit. This is
considered unethical behavior that turns into conflict of interests between the
company and the employee.  

Every company
has its own rules of conduct that clarify what actions can be considered
ethical or unethical, legal or illegal. Unethical behavior will be always penalized
by the company. Illegal behavior will be penalized by the law. Similarly, Berkshire
Hathaway’s code of business conduct and ethics also outlines these rules for
their directors, officers, employees.  The
purpose of this policy is to increase level of personal integrity and commitment
to the company’s ethics, set standards for ethical behavior

 

 

. This
was a complete surprise, as Buffett very much trusted Sokol and could appoint
him as the head of Berkshire Hathaway. Sokol worked at Berkshire Hathaway for
more than 10 years. Meanwhile,
it became known that Sokol However, David Sokol himself stated that his
resignation is not connected with the purchase of Lubrizol shares.

 

Warren Buffett himself
claims that he did not ask for the resignation of Sokol, and for him it was a
surprise. Also, the investor believes that his manager bought Lubrizol shares
honestly and did not use insider information.

It is worth noting that
the shares of Berkshire Hathaway fell by 3%, and the paper Lubrizol added 0.1%.

 

 

Describe the
circumstances under which Mr. Sokol resigned. First, present the facts, by
addressing the following questions:

•           Who were the key players? Describe
their public reputations before Mr. Sokol resigned.

•           Describe the timeline of events of
surrounding Mr. Sokol’s resignation, both chronologically and in terms of when
information revealed publicly.

•           Describe Berkshire-Hathaway’s
unofficial ethics policy.

After compiling the
facts, consider the counterfactual – what could have happened but didn’t.
Address the following questions:

•           Explain why Mr. Sokol’s actions did
or did not violate Berkshire-Hathaway’s unofficial ethics policy.

•           Define a generic standard for what
would have been “the right thing to do.” This standard is your opinion. For
example, you might state, “I believe the company should have required its
officers to do the following: …”

•           Explain what behavior by Mr. Sokol
and other key players either fell short of or met your standard.

•           If these individuals’ behavior fell
short of your standard, conjecture what they could have done differently that
would have satisfied your standard. If these individuals’ behavior met your
standard, conjecture what they could have done differently that would have fallen
short of your standard.

 Ber

1 http://www.nytimes.com/2011/04/02/opinion/02nocera.html

2 https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-14-sokol-david-resignation.pdf

3 https://dealbook.nytimes.com/2011/04/12/disclosure-sheds-new-light-on-sokol-timeline/

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