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Stanford Closer Look (BRK.A): The Resignation of David Sokol: Mountain or Molehill for Berkshire Hathaway?

Apr. 21, 2011 1:33 PM ET
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The Resignation of David Sokol: Mountain or Molehill for Berkshire Hathaway? (PDF)
by Authors: Professor David F. Larcker and Brian Tayan, MBA ’03

Given its size, Berkshire Hathaway has had a relatively clean record on governance-related matters. This track record speaks to the quality of its governance system and the ability of its “trust-based” model to work.

For these reasons, it came as a shock to many when Warren Buffett announced the sudden resignation of David Sokol in March 2011.  Sokol, CEO of Berkshire Hathaway’s energy subsidiary, was widely considered the front-runner on a short list of potential successors to one day succeed Buffett.  More bizarre were the circumstances surrounding the announcement.  Just days before recommending to Buffett that Berkshire Hathaway purchase specialty chemical company Lubrizol in a $9.7 billion deal, Sokol accumulated common stock in Lubrizol worth $10 million.

The matter raised significant issues for the Berkshire board of directors:

  1. Did Sokol violate the company’s insider trading policy?
  2. Did Sokol’s actions reveal shortcomings in the company’s governance system that need to be addressed?
  3. What will be the long-term impact of these events on company’s reputation?

More broadly, the matter raises questions that are general to all organizations.  How extensive must events be before a company decides that governance changes are required?

Read the attached Closer Look and let us know what you think!

Topics, Issues and Controversies in Corporate Governance:The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. To see the full series of  Stanford Closer Looks go here.

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