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

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"An ambitious executive appears to have taken advantage of his fortunate position within the Buffett universe to bring his boss a promising acquisition and—hey, why not?—make some cash for himself"

-Paul M. Barrett, Assistant managing editor and senior writer, Bloomberg Businessweek

"The whole notion of Berkshire Hathaway operating on a higher plane was based upon the idea they didn’t just do what was legal, they did what was ethical. When one of your senior officers gets caught with his hand in the jar and you say, ‘Oh it’s legal,’ you’ve kind of blown away that principle of higher standards"

-Cornelius Hurley , in 2011

Berkshire Hathaway Inc. (Berkshire), the conglomerate operating in industries as diverse as insurance, energy, and consumer goods, was known as much for the superior financial returns that it generated for its shareholders as for the avowed principles of its Chairman and CEO, Warren Buffett (Buffett). Buffett had often emphasized that the integrity and reputation of Berkshire mattered more to him than the profits generated by it. However, the moral high ground that Berkshire and its executives often claimed came under a cloud in March 2011 following Berkshire’s acquisition of Lubrizol Corporation (Lubrizol).

David Sokol (Sokol), one of the top executives at Berkshire and considered to be one of the frontrunners to the Berkshire CEO post, resigned abruptly. Sokol had spearheaded Berkshire’s acquisition negotiations with Lubrizol. In the course of the negotiations, Sokol had bought for himself Lubrizol shares valued at roughly US$10 million, shares which were subsequently valued at nearly US$13 million post the Lubrizol acquisition. According to experts, Sokol’s purchase of shares was ethically wrong as he based his decision of share purchase on information he had acquired in the course of the acquisition negotiations. Some experts even alleged that Sokol had engaged in insider-trading. However, in announcing Sokol’s resignation, Buffett came to Sokol’s defense, stating he had done nothing unlawful. The entire Sokol controversy brought to the fore the question of whether the trust based management espoused by Buffett could compensate for the lack of stringent internal controls. It also raised the question of whether Berkshire had succeeded in not compromising on its avowed stance of being ethical under all circumstances, when the actions of some of its key lieutenants came under question.

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