The short list for Warren Buffett successor, the chairman of Berkshire Hathaway Inc. (BRK.A) (BRK.B), gets shorter with the sudden resignation of David Sokol, who was the top contender for the CEO post.
David Sokol, the CEO of NetJets Inc., a jet-rental company, and Chairman of MidAmerican Energy Holdings Co., a subsidiary of Berkshire Hathaway, until his resignation, also played a key role in the recent Lubrizol deal. Lubrizol Corp. (LZ) is a specialty chemicals company.
Sokol’s resignation was made public on Wednesday in a press release by Buffett , which immediately sent Berkshire’s Class B shares (traded category) down by approximately 3%.
In the press release, Sokol, who spent 11 years at Berkshire, said that he intended to resign in order to focus on creating an enterprise for his family and devote more time to his philanthropic activities. The release also stated Sokol’s ownership of 100,000 share in Lubrizol, the company that Berkshire is on its way to acquire.
The abrupt resignation has not only surprised investors, regulators and portfolio managers but has also created a short-term uncertainty over the company’s succession plan.
David Sokol at Berkshire
David Sokol, aged 54, made his foray into Berkshire in 2000 as the Chairman of MidAmerican. Buffett bought 75% stake in MidAmerican for about $9 billion. Under Berkshire, Sokol retained a minority equity stake in MidAmerican and expanded the unit by buying a natural gas pipeline and power producers in California and the U.K.
For the year ended 2010, his unit generated revenue of $11.3 billion, down a modest 1.2% year over year. This revenue accounted for 8% of the total conglomerate’s revenues.
Sokol had always been praised by Buffett for his performances at the company.
Sokol and Lubrizol Deal
It was primarily Sokol, who gave his analysis on Lubrizol’s merits and convinced Buffett for the $9 billion deal, a couple of months before it was finalized on March 14, 2011.
Although Sokol had casually intimated Buffett, during the discussions about the deal, that he owned share in Lubrizol, the amount and the tenure of the ownership was not questioned by the latter. On March 19, it came to Buffett’s knowledge that Sokol had bought 2,300 shares of Lubrizol on Dec. 14, which he then sold on Dec. 21.
Again, between January 5 and January 7, Sokol bought 96,060 shares of the same company with a limit price of $104. He continued to hold these shares through the acquisition talks, without revealing these facts. The acquisition news led to a 27% hike in Lubrizol share price, which would have generated a profit of almost $2.9 million for Sokol.
It is being widely viewed that the transaction will attract U.S. Securities and Exchange Commission’s investigation on the alleged use of insider trading. Insider trading laws prohibit individuals from trading on shares based on material nonpublic information in violation of some duty of trust .
However, Buffett said that he did not see anything unlawful in Sokol’s share purchases, since it was done at a time when there was no clue about the deal. Buffett also informed that Sokol had wanted to resign a couple of times two years back, but Buffett convinced him to stay both the times. Moreover, the reason stated by Sokol for his resignation is same as what he stated earlier when he had sought for resignation.
Buffett’s silent acceptance of Sokol’s departure forces us to think whether Buffet wanted him to go after knowing about his personal stock trading of Lubrizol, just around the time when the deal was finalized.
Among the top contenders for the post
Sokol successfully restored profitability at NetJets, a near-bankrupt subsidiary of Berkshire, and reorganized another Johns Manville, an ailing roofing and insulation company. After these stellar performances, Sokol was widely perceived as the most eligible candidate to succeed to Buffett’s chair.
Other than Sokol, Berkshire Hathaway national indemnity insurance business head Ajit Jain, Geico executive Tony Nicely and, more recently, Burlington Northern Santa Fe Chief Executive Matt Rose were also rumored to have secured place in the list of Buffett’s probable successors.
Though Sokol’s departure has shrouded the succession plans of one of America’s biggest Board rooms in uncertainty, it is seems to be a short lived affair as the remaining nominees are talented and capable enough to perfectly substitute Sokol. Nevertheless, it is simply statistically unlikely that any new management of this behemoth conglomerate will be able to continue the world’s most famous investor Warren Buffett’s long-term market out-performance.
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