The Resignation of David Sokol: Mountain or Molehill for Berkshire Hathaway?

10 Pages Posted: 21 Apr 2011 Last revised: 3 Sep 2013

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Date Written: April 21, 2011

Abstract

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: Did Sokol violate the company’s insider trading policy? Did Sokol’s actions reveal shortcomings in the company’s governance system that need to be addressed? 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?

Topics, Issues and Controversies in Corporate Governance and Leadership: 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. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Keywords: corporate governance, insider trading, transparency and disclosure

JEL Classification: G30, G34

Suggested Citation

Larcker, David F. and Tayan, Brian, The Resignation of David Sokol: Mountain or Molehill for Berkshire Hathaway? (April 21, 2011). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-14 . Available at SSRN: https://ssrn.com/abstract=1817900

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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