Better late than never. Per my previous post pertaining to the Berkshire Hathway shareholder meeting, I wanted to touch on Buffett's comments regarding the Sokol scandal. This topic was pretty much the only one being discussed in anticipation of the meeting, and it threatened to overwhelm the entire day. Buffett did a good job of ensuring that didn't happen by addressing the issue head-on, early in the day.
As is the standard, the meeting kicked off with a movie that included commercials for products and services offered by Berkshire companies, as well as footage from various sources that are assumedly deemed relevant to the present day. Nothing was really more relevant than the discussion around Buffett's 1991 assumption of the chairmanship at Salomon Brothers, during which he was asked what had happened at Salomon. At the time, he was new to what was going on at Salomon, and so he couldn't speak to a lot of details, but he offered the opinion that the rogue trading that had taken place was "inexplicable and inexcusable". He then likened that activity to Sokol's actions.
The inexcusable piece of the discussion was fairly obvious. Sokol violated Berkshire's code of ethics in grand fashion, and there's not much than can be said to defend his actions, unless there's a huge element of this that the public doesn't know.
The inexplicable was a bit more puzzling, which I guess pretty much defines the term. In any case, Buffett cited two primary reasons.
The first was that Sokol made no attempt to hide his trades. Schemers engaged in insider trading typically set up their "third cousin", or "trusts in Luxembourg" to disguise the fact that they are the players behind a trade. Regulators routinely review trading activity in the weeks leading up to a merger to determine if anything untoward occurred. Pretty odd behavior for somebody how is knowingly doing something illegal or unethical. My take: we obviously knew about Sokol's trades, although we have no way of knowing (so far) if there were additional disguised trades. That seems unlikely to me. More likely is the fact that he somehow thought what he was doing was acceptable. However, we're talking about a smart, knowledgeable guy, and the idea that he didn't know is truly inexplicable.
The next inexplicable factor was that Sokol didn't need the money. He made $24 million in Berkshire compensation last year. Buffett hastens to add that we Berkshire shareholders got our money's worth. Of course, greed comes in all shapes and sizes, and we've certainly seen egregious examples from wealthier people than David Sokol. Lest we think that's the end of it, Buffett shared a story that makes the greed explanation less plausible. In 1999, Berkshire Hathaway bought the majority of MidAmerican Energy, of which David Sokol was the largest shareholder. A couple of years later, long-time Berkshire board member Walter Scott suggested to Buffett a special compensation plan for Sokol and his right-hand man Greg Abe, in case MidAmerican knocked it out of the park. They designed a plan that would pay Sokol $50m and Abel $25m if MidAmerican hit some very ambitious growth numbers. Buffett presented the plan to Sokol - behind closed doors - and Sokol stated that it was very generous, but he wanted to see one change. That change was that he felt the $75m should be split evenly between he and Greg Abel. In other words, he voluntarily gave up $12.5m in a manner that would receive no publicity at all. Not the actions of an especially greedy individual. Buffett had a hard time reconciling that with the $3m or so that Sokol gained from his Lubrizol trades. My take: inexplicable indeed. Who knows, though...the bonus arrangement was 10 years ago, and people change.
Buffett summed up the entire situation by saying, more or less directly..."there we are with a situation, which is sad for Berkshire, sad for Dave, still inexplicable in my mind". Charlie Munger displayed his typical economy of words when asked about his take, saying "I think it's generally a mistake to assume that rationality is going to be perfect even in very able people. We prove that pretty well regularly."
In perhaps the most logical explanation of all, when asked the reason for irrationality, Munger suggested that "...hubris contributes to it". I think we can safely say that that has been proven very regularly.