By Alec Hogg
OMAHA – It’s part of the human condition to offer advice. We all do it, even though our suggestions would be better left unsaid. But occasionally one does get advice that can be used to our advantage long after the initial conversation. Such pearls are to be treasured.
Last weekend reminded me of this. In my numerous visits to the Woodstock of Capitalism, the Berkshire Hathaway annual general meeting in Omaha, I’ve benefitted greatly from guidance provided during the traditional question and answer that dominates the event. During the five-hour session, Chairman Warren Buffett and sidekick Charlie Munger provide guidance on topics diverse as business management through to building life skills. Their insight, coming as it does from wisecracking billionaires, seems to be taken more seriously than most. But for me, looking back on events of the past week, it was advice from Capetonian Leon Campher, offered back in the 1980s, which has resonated loudest.
Campher, used to run the investment side of now defunct Syfrets Trust and had put together a team of money managers without peer in South Africa. Their portfolios topped the performance tables and their operation became a magnet for the most talented. Their secret, Campher confided, was a healthy respect for the destructive power of arrogance and complacency. Advice that was as appropriate for the self-absorbed, brash youngster interviewing him as it is today for anyone in business anywhere.
Last weekend in Omaha Buffett bared his soul to his 30 000 shareholders. He is deeply embarrassed by the “Sokol Scandal” a dark cloud which hung over the usually joyful jamboree. Only by the end of the weekend had he purged himself of the matter, even cracking a joke at the Sunday afternoon media conference after being asked for his best learning of the past year: “To get Charlie to write future press releases.” But the scar will take time to heal.
The scandal involves allegations of insider trading against David Sokol, a Buffett lieutenant and tipped as his most likely successor. Insider trading is a criminal offence. It occurs when someone trusted with price sensitive information uses the knowledge to profit through buying or selling shares before the news becomes public. Given its hard won reputation for straight dealing, accusing a Berkshire executive of this is inconceivable. Yet it happened.
The 55-year-old Sokol, a previously low profile executive who like Buffett and Munger was born in Omaha, has rocketed into the spotlight in recent years. His successful management of group subsidiaries MidAmerican Energy and NetJets provided a media public profile well past the 70 other Berkshire managers. Add the media’s obsession with tipping Buffett’s successor, and it’s little wonder the man might have started to believe he walked on water.
Earlier this year Sokol was approached by Citigroup investment bankers wanting to interest Berkshire in buying Lubrizol Corporation, a specialist chemicals group listed on the New York Stock Exchange. Sokol liked what he saw and bought $10m worth of Lubrizol shares for himself. Only then did he suggest to Buffett the company would fit well into Berkshire, mentioning in passing that he owned some shares. Buffett investigated, liked what he saw, and launched a successful $9bn bid at a hefty premium. Sokol made a profit of $3m on his trade.
Sokol still maintains he did nothing wrong. He has shown no remorse and has no shame at the reputational damage visited on Berkshire. He even told Buffett when resigning on March 30 he was leaving at the pinnacle of his career. A less arrogant man would have approached things very differently.
For his part, Buffett believes Sokol’s actions were both “inexcusable and inexplicable”. Not just because the former colleague missed two obvious opportunities to tell him about his Lubrizoil trade. Buffett only discovered what had happened when a Citigroup executive told him after the takeover was done.
How did Buffett misjudge his manager so badly?
The answer probably lies in a story Berkshire’s chairman related at the AGM. Some years earlier he’d set tough targets for MidAmerican, proposing that if they were met, Sokol would get a bonus of $50m and his Deputy Greg Abel $25m. To Buffett’s surprise, Sokol spontaneously requested the money be split in half, effectively giving up $12.5m in favour of his number two.
That single event seems to have deeply influenced the chairman’s opinion on a man who became a trusted lieutenant. Opening the door for the Complacency that hit back so hard this past month. Proving this demon, like its twin sister Arrogance, shows no mercy. Even for the paragon of good ethics called Warren Buffett.
