Ethical Issues at Berkshire Hathaway: Controversy Following the Lubrizol Acquisition Deal

            
 
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Case Details:

Case Code : BECG127
Case Length : 16 Pages
Period : 2010-2013
Organization : Berkshire Hathaway Inc.
Pub Date : 2013
Teaching Note :Not available
Countries : US; Global
Industry : Diversified

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Excerpts Contd...

Potential Adverse Impact on Berkshire's Reputation

According to a financial expert, the Sokol affair indicated that Berkshire had to deal with a larger problem. Berkshire's reputation was dependent upon what Buffett had often spoken about - the high standards of corporate governance that his company adhered to. Buffett's reputation had been important for Berkshire's perceived worth. However, his approach and response in case of the Sokol issue generated grave concerns over Berkshire's prospects. Some observers also commented that Buffett had himself to blame for all the intense scrutiny as he had constantly portrayed his own self and Berkshire's persona to be on a higher pedestal than the usual profit-pursuing businessmen...

Business Ethics Case Studies | Case Study in Management, Operations, Strategies, Business Ethics, Case Studies

Lawsuit and Berkshire' s Audit Committee Report

On April 18, 2011, a Berkshire shareholder sued Sokol and Berkshire's entire Board of Directors for violation of fiduciary responsibilities and seeking compensation for the harm caused to the company's reputation and goodwill. The lawsuit claimed that Buffett had infringed on Berkshire's Code of Conduct by not checking on Sokol's dealings in Lubrizol shares...

Sokol Issue Symptomatic of a Deeper Malaise?

According to an expert, in the majority of instances where a company was scrutinizing possible infringements of the securities law, it would hold the accusations under review instead of conceding to or rejecting a violation, and await the outcomes of a comprehensive inquiry. However, Buffett had jumped the gun and stated that Sokol had not engaged in an unlawful act, and, that this was his final stance. Some observers remarked that the Sokol episode showed that though Buffett could be applauded for his acumen in valuing securities, for succeeding at constructing a conglomerate, and for creating wealth for himself and many other shareholders, his emphasis on integrity could not be taken at face value...

Lessons Learnt, if any...

At the Berkshire Annual Shareholders Meeting held on April 30, 2011, Buffett admitted that he should have raised more queries when Sokol had said that he owned Lubrizol shares at the time that he proposed its takeover. He, however, said that he was not going to make significant alterations to the company's procedures, meaning that the heads of Berkshire's subsidiaries would continue to function as they liked. He explained that with an employee strength globally of over 260,000, something would invariably go wrong. Clearly supporting the need to operate Berkshire on the basis of an element of trust, Buffett explained, “We can have all the records in the world and if somebody wants to trade outside them or something, you know, they're not going to tell us they're trading in their cousin's name.”...

Exhibits

Exhibit I: Berkshire Hathaway's Financial Performance (2005-2012)
Exhibit II: Excerpts from Berkshire's Code of Business Conduct and Ethics
Exhibit III: Lubrizol Stock Chart
Exhibit IV: Sokol's Dealings Leading upto Lubrizol's Acquisition
Exhibit V: Criticism Regarding the Selection of Law Firm to Aid The Inquiry

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