What were you thinking, Warren? At his shareholders’ meeting, the oracle will have to answer for his biggest management bungle. In this week’s Newsweek, Buffett biographer Roger Lowenstein investigates the ethically “obtuse” side of the great investor.
America has a way of elevating its heroes beyond the realm of mere mortals. This has not been an issue on Wall Street, where heroes do not exist. Warren Buffett has been the glaring exception. An Omahan who was not of Wall Street so much as above it and who spoke in cracker-barrel English derived more from Twain than from J.P. Morgan, he fulfilled (I once wrote) America’s secular myth.
He was the man from the Plains whose virtue offered an antidote to the corrupt Northeast and to Wall Street in particular. It is a measure of his reputation that a radio interviewer asked me whether Buffett had, until late, behaved in a “near perfect” manner.No flesh and blood, examined up close, can meet such a standard. As the saying goes, “No man is a hero to his valet.” The David Sokol affair, in which an executive of Buffett’s Berkshire Hathaway was caught in a serious ethical trespass, and in which Buffett failed to deliver a rebuke, has shown us a bit of the great man’s undergarments.
The question for the 40,000 shareholders converging on Omaha for Saturday’s annual meeting (a.k.a. Buffett’s “capitalist Woodstock”) is whether the Sokol business tells us anything new, and perhaps dispiriting, about Buffett.
When I was writing a biography on Buffett, in the early ’90s, the trait that most distinguished him was his searing independence. Buffett was a brilliant, socially responsible investor, who engaged with the world only on his terms. He refused to be co-opted or recruited, whether with regard to stocks, philanthropy, or politics. His aloofness often caused associates to suffer disappointment. He zealously protected his time and his money; even his children suffered from the billionaire’s reserve. In a not atypical incident, he could barely lower his newspaper to listen to his teenage daughter’s tearful rendition of how she crashed his car. Friends described how Warren had rebuffed their requests for even small donations, and to causes with which the liberal billionaire sympathized. More fundamentally, associates yearned for a closer emotional connection.
Buffett’s detachment, of course, was a secret of his success. In 1969, after a fabulous run as a hedge-fund manager, he decided that Wall Street was barren of opportunities and returned his investors’ money. This was unselfish as well as prescient. The market crashed. Then, in the mid-’70s, when the market was mired in a virtual depression, Buffett leapt back into the game, now using Berkshire as his vehicle. America had abandoned stocks, but to Buffett, popular sentiment was irrelevant. Traders looked at trends, volume charts, and moving averages; Buffett peered beneath the stock certificate to the underlying business. By focusing on the long-term business prospects, he reclaimed the economic values that were obscured by Wall Street sophistry.
Over 46 years, his investments elevated Berkshire from $18 a share to $122,000 today. Meanwhile, he eschewed the greed that typifies Wall Street. Buffett never took a stock option; his salary maxed out at $100,000. And here is a more startling fact: He never sold a share of Berkshire. Ordinary shareholders have seen their lives enriched—their children educated at private colleges, their kitchens refinished in granite—as they peeled off shares. For Buffett, the rewards were largely intangible. Berkshire was his financial masterpiece—his “canvas.”
It is tempting to idealize such a figure, and Buffett is partly to blame, at times glossing up his image as a prairie sage. When he feels threatened, he is not above a little dissembling. This is a minor flaw, but a flaw all the same.
Buffett controls his agenda and habits more than anyone I know. He sticks to his same favourite foods (T-bones and hash browns) and same pals. From an early age, he showed an extreme desire to be wealthy, and an equally extreme aversion to compromise. As an unproven hedge-fund manager, he refused to reveal his investments; though this turned off potential investors, it walled him off from nettlesome clients.
Even today, Berkshire employs only about 20 people in its “headquarters.” It shuns consultants, because Buffett doesn’t want to be diverted from his designs—ditto spokespeople, because only Buffett “speaks” for Buffett. Associates are shocked at his firmness. A friend from Omaha, Scott Hord, once proposed that Warren invest with him in a new company that made tissue dispensers. Hord said the venture had a “good” chance of success. “How good?” Buffett shot back. Hord said 50 per cent. “You call that good?” Buffett countered. He suggested that Hord “go up in an aeroplane” and jump with a parachute that opened 50 per cent of the time. For Buffett, the prospect of losing money was as unthinkable as death. Philanthropy posed a similar risk—that of “wasting” his bequests—which he resolved, recently, by pledging the bulk of his estate to the Gates Foundation. This was typical Buffett: It concentrated his giving rather than spreading his funds and outsourced a task that was outside his ken.
Buffett is similarly beholden to business managers such as David Sokol—because they do things, such as managing large groups of people, that he would not. Berkshire operates roughly 70 businesses, from energy to candy. Except for a few (such as insurance) in which Buffett has particular expertise, he leaves the details to his managers. He does not like to meddle or to be meddled with. Moreover, he is virtually allergic to confrontation. Plausibly, this is a result of his difficult childhood—of his unbalanced, disputative, and abusive mother, who would erupt, unpredictably, into vicious rages.
Whatever the origin, Buffett shrinks from personal confrontation and always has. Few capitalists have reached such heights with so little drama. Buffett does not suffer public disagreements, hostile takeovers, or hostile anythings because he organizes his life to minimize conflict. He lives in a sort of gilded comfort zone. He heaps praise on his managers, knowing that it will inspire, and he scrutinizes their results like a hawk, but he refrains from micromanaging, much less scolding. This decentralized formula works with managers who prove trustworthy but—as Buffett is ill disposed to changing his lineup—not when one fails. With executives who perform, he either sees no demerits or overlooks them. Roberto Goizueta, the late CEO of Coca-Cola, was praised to the heavens by Buffett despite his greed and stock promotion. Buffett is famous for his critiques of corporate excess, but he has generally refrained from scoring individuals. At last year’s annual meeting, he defended Moody’s, a Berkshire investment and one of the firms that affixed those triple-A ratings on mortgage securities. As Berkshire is a passive investor in Moody’s, Buffett is not responsible for it. The same cannot be said for David Sokol.
Until recently, Sokol was considered a likely Buffett successor. He was chairman of MidAmerican Energy, one of Berkshire’s most auspicious companies, and had turned around NetJets, a perpetual money loser and thorn in Buffett’s side. In his annual letter in February, Buffett chirped, “I can’t overstate the breadth and importance of Dave Sokol’s achievements at this company.” Sokol was clearly one of his guys.
The month previous, Sokol suggested to Buffett that Berkshire acquire an obscure chemicals company, Lubrizol—since made famous by the revelation that Sokol, just beforehand, had purchased $10 million of its stock. When Berkshire did agree to acquire Lubrizol, in March, Sokol’s personal stake was enriched by some $3 million.
Two serious problems arise, the first being that Sokol learned about Lubrizol in his capacity as a Berkshire executive. Sokol’s sole duty was the furtherance of Berkshire’s interests—not of his family’s portfolio. Second, the fact that he planned to recommend an acquisition was confidential and material. Clearly, had he announced he was urging Buffett to acquire Lubrizol, the stock would have soared. But Sokol didn’t do that. He simply bought the stock.
Buffett learned the details of Sokol’s purchases in March. Shortly thereafter, Sokol resigned. Buffett’s public statement was profoundly unsatisfying—devoid of the slightest disapproval. He contented himself with the flaccid observation that both he and Sokol had concluded that Sokol’s activities were not illegal. This was a duck. What upsets Buffett admirers and shareholders of Berkshire—I am in each camp—is that Buffett himself has championed an ethical standard that goes well beyond “lawfulness.” In 1991, when confronted with a scandal at Salomon Brothers, in which Berkshire was an investor, Buffett abandoned his comfortable life in Omaha to assume control of the investment bank. He pledged to Congress that he would require Salomon’s bankers to operate “way way away from the line.”
Sokol was clearly too close to (if not over) the line, and Buffett’s refusal to acknowledge the fact is the most glaring example of ethical obtuseness in his career. His fans in Omaha will be hoping that he reconsiders, but publicly rebuking a lieutenant to whom he felt deeply grateful may be outside his prowess. Commentators such as Michael Steinhardt, a retired hedge-fund manager, have reveled in Buffett’s alleged moral defrocking as evidence that his reputation was overblown. Buffett, in fact, would benefit were his public to reconcile itself to his imperfections. To assert his uniqueness is not to say he is innocent of emotional complications, outsize ambition, or other human freight. Berkshire should draw a valuable lesson and recast its board—now dominated by close Buffett cronies. If the Sokol affair proved anything, it is that the 80-year-old Buffett should not be excused from the independent scrutiny to which other CEOs are subject. But assuming it is not repeated, the Sokol episode shouldn’t dislodge Buffett’s standing as the era’s greatest investor, and the one financier of the past 50 years who put an estimable face on Wall Street.
Lowenstein is the author of Buffett: The Making of an American Capitalist. His most recent book, The End of Wall Street, was just released in paperback.