Case Analysis of Sokol Scandal

Transcription

1 Case Analysis of Sokol Scandal Honors Contract Project Adriana DiMatteo 5/9/2011

2 2 Adriana DiMatteo JMC 417 Wu 5/9/11 Honors Contract Project Warren Buffett s Crisis Management Strategies and the Sokol Scandal The legendary CEO of Wall Street giant Berkshire Hathaway Inc. Warren Buffett has recently had to deal with a scandal concerning David Sokol, a former top executive, and his violation of Berkshire s insider trading rules and code of ethics. Sokol bought $10 million of the chemical manufacturer Lubrizol Corp. s stock just days before he recommended that Berkshire acquire the company (Hamilton, 2011). Then after Berkshire bought the chemical manufacturer in a $9-billion deal, the value of Sokol s stake increased and he earned a $3 million windfall from the deal (Hamilton, 2011). As a result, Sokol resigned and the SEC is investigating his trading practices. Buffett has used both defensive and accommodative crisis management strategies in dealing with the scandal to protect both his own personal reputation as well as Berkshire s. The defensive strategy used was the excuse strategy by blaming Sokol for deceiving Buffett and other top executives at Berkshire. The accommodative strategies that have been used are fill apology, corrective action, and ingratiation. Buffett has admitted to making mistakes in this situation and taken responsibility for that. Berkshire took the corrective action of forcing Sokol to resign, and Buffett has appeased the various publics involved by answering questions about the Sokol scandal at the company s annual shareholder meeting. Also, Buffett and his company followed many of the steps that should be taken for how to communicate during a crisis. Overall, I would rate Buffett s and his company Berkshire s crisis management response as strong

3 3 because of his effective use of several different crisis management strategies and following proper tactics for communicating during a crisis. Berkshire and Hathaway Inc. has a very solid and positive reputation for being an upstanding and ethical company, especially among large Wall Street corporations. In the April 30 th article David Sokol scandal dims merriment of Berkshire Hathaway stockholder meeting by Walter Hamilton of the Los Angeles Times, Charles Elson, a corporate-governance expert at the University of Delaware, is quoted as saying, this is the stuff people expect to see from a large Wall Street firm, not Berkshire Hathaway. Furthermore, Buffett himself has a very positive reputation and is known for his ethics as much as his financial savvy. According to Hamilton, in an era in which bad business behavior is prominent in the public psyche, many Buffett admirers attend [the shareholders meeting] simply for life lessons from an octogenarian revered as much for his homespun values and ethical moorings as his financial wisdom (2011).For example, one longtime Berkshire shareholder named Andrew Kilpatrick was quoted in the Hamilton article David Sokol scandal dims merriment of Berkshire Hathaway stockholder meeting as saying "You can ask him [Buffett] how to raise your children." The Sokol scandal is one of the biggest controversies Buffett and Berkshire have had to face, and it seems unusual that something like this would happen at this company. Therefore, the excuse defensive strategy works in this situation because people will believe Buffett when he says that he and the other top executives were intentionally deceived by Sokol in regards to the timing and magnitude of his Lubrizol trades (Hamilton, 2011). Even though a lawyer for Sokol denied that Sokol intentionally tried to deceive and mislead Buffett, people are most likely not going to believe Sokol over Buffett. If Buffett and Berkshire did not have a positive reputation for being

4 4 an ethical and trustworthy company this defense probably would not work, but since they do it is an effective way of doing damage control. In addition to using the excuse crisis management defensive strategy, Buffett and Berkshire used accommodative crisis management strategies, such as fill an apology, corrective action and ingratiation. The most important of these in terms of effectively handling the situation was filling an apology in which Buffett admitting to making a big mistake by not vetting Sokol s involvement with the Lubrizol deal more thoroughly (Hamilton, 2011). Buffett said at the annual shareholders meeting that Sokol told him that he owned stock in Lubrizol and it was a good company, but that he obviously made a big mistake by not saying, Well, when did you buy it? (Hamilton, 2011). By admitting to making a huge mistake and taking responsibility for it, it makes Buffett seem transparent and that he has nothing to hide. If he didn t take responsibility for not demanding more details from Sokol, then it would look like Buffett, as well as the company, were trying to hide something, or that they are just very negligent and incompetent. However, by Buffett admitting he made mistakes and taking responsibility for them people are much more likely to forgive him and forget the situation. Not only did Buffett admit to making mistakes regarding the Sokol scandal at the annual shareholders meeting, but he also admitted himself guilty of failing to condemn his underling's actions four weeks ago when the company disclosed Sokol's conduct as well as his resignation (Hamilton, 2011). This admission of initially mishandling the situation also further serves to demonstrate how Buffett is human and makes mistakes. Taking responsibility for your actions is one of the most key elements to recovering from a crisis because by doing so the public will forgive you (in this case Buffett), and this will minimize the damage to your reputation.

5 5 However, Buffett did not stop at just taking responsibility for his mistakes he also took corrective action to repair the damage. While Buffett was criticized for not being ruthless enough in his treatment of Sokol, who he praised in the press release announcing his resignation, he was actually much harsher on Sokol than the press release revealed. According to Andrew Ross Sorkin of the New York Times in his article Buffett Lets the Facts Bury Sokol, The day he issued the release, Berkshire called the Securities and Exchange Commission and briefed them on Mr. Sokol s trades, which Mr. Buffett described to me as pretty damning evidence. By calling the head of the enforcement division of the S.E.C., Buffett was showing that Sokol s unethical actions were not something he and his company tolerated. Also, just by responding to the criticism that he was not ruthless enough initially, Buffett was effectively taking corrective action to fix the perception that he was serious about protecting the reputation of himself and Berkshire. Even though it took Buffett over a month from the time of the initial press release regarding Sokol s resignation for him to make comments on the situation publicly, it did not hurt in this case because the company s annual shareholder meeting was the perfect venue to address the situation publicly. This was the perfect venue to address the situation because the shareholders are the most important key public that needed to be appeased in this situation, and it seems that the majority of the shareholders are satisfied. According to Sorkin, Berkshire s shareholders, the ones who actually have money on the line, seemed to be fine with the way the matter was handled (2011). Hamilton also reported that Many shareholders expressed satisfaction with Buffett's remarks Saturday and said they admired him as much as ever (2011). Finally, by waiting to make remarks on such a public stage it satisfies and appeases the national business media, which is another key public in this case.

6 6 Overall, even though mistakes were made by Buffett, I think he handled the crisis very well. He communicated with the key publics, was honest, didn t say no comment, and most importantly he took responsibility for solving the problem. Also, Berkshire did the smart thing in making Buffett the lead spokesperson for the company. This kept the message consistent. Furthermore, Buffett has a long history and reputation for being trustworthy and credible, so he is a reliable spokesperson. Finally, it makes Buffett and Berkshire seem more sincere by having Buffett himself be the spokesperson instead of public relations firm. "His answers did not come from a PR firm, which is a great thing," said Tom Van Horn, a lawyer from Manitowoc, Wis., who was attending his third Berkshire shareholder meeting (Hamilton, 2011).

7 7 References H amilton, W. (2011, April 30). Wa r r en buf fett addresses top execu tive's t radi ng sca ndal. Retri eved from h ttp:// atimes.com/news/custom/la - fi-buffett-meeting ,0, story H amilton, W. (2011, April 30). David sokol sca ndal dims m erriment of b erks hire hat haw a y stockholder meeting. R et ri ev ed fro m h ttp://art i cl es.l atimes.com /2011/ ap r /30/ business/la -fi-berkshire- b u f f ett S orki n, A. (2011, May 2 ). Buffet t lets the facts bury soko l. R et ri eved from h ttp://deal book.n yt i mes.com/2011/05/02/ w arren -b u ffett -lets-thef acts - bury- s o k ol /