Breaking the Honor Code
Board: Berkshire Hathaway
At West Point, literally from our crucible at Basic Training until graduation (in my case 4.1 years later due to attitude), we have branded into our brains the simple verbiage of the Honor Code: "A Cadet will not line, cheat, or steal, or tolerate those who do."
Most people with a reasonably sound upbringing can figure this out, but if there is an uncomfortable or dodgy situation that is causing one's hackles to go up, but one is not quite sure, the three rules of thumb come into play:
1. Does this action attempt to deceive anyone or allow anyone to be deceived?
2. Does this action gain or allow gain of a privilege or advantage to which I or someone else would not otherwise be entitled?
3. Would I be unsatisfied by the outcome if I were on the receiving end of this action?
I don't know about #1, but it's going to take the charms of Svengali to convince me that Sokol didn't clearly violate #2 and #3. Naturally, he's not subject to an Honor Code, but I think it's the closest thing in my own life that I can draw upon from an educational background that reflects what I think Buffett wants to achieve in maintaining an ironclad, watertight reputation.
Anyone contemplating a buy of Lubrizol should be angry. Obviously, they would be beyond unsatisfied, not having the influence that Sokol does with Buffett. Regardless of the smallness, low probability, or whatever other unlikelihood that Sokol thought he had in swaying Buffett with his idea of acquiring Lubrizol, this was dead wrong. Even a layman investor knows that any buyout generates an immediate price spike in the target of acquisition, and many folks have spent many hours trying to decide what a takeover candidate might be to enjoy an arbitrage benefit.
To do so pursuant to meeting with the executives of a company, and then pitching it to your deep pocketed boss, and owning $10m of the stock at it's pre-takeover price is dead wrong.
Emotionally, this bothered me so much that I considered selling my entire Berkshire stake, but I'm mad at Sokol, and only about 5% of it is targeted at Buffett. I'll also reiterate that Buffett should have come down hard on Sokol. As one of my old commanding generals said, "the do-ah (the actions) does not match the ho-ah (the language)." Ho-ah is an Army interjection genially showing agreement or positive emphasis. Buffett issued a statement, and stuck his head in the sand.
This is a small blemish on Berkshire's Permanent Record, but one that could have faded over time had he excoriated Sokol. The tepid words to the effect of "nothing illegal happened" is like saying Charlie Sheen is an OK guy because hey, though he's a boozing wreck with multiple "girlfriends," nothing illegal happened