David Sokol, a top Berkshire Hathaway executive who once was speculated to be Warren Buffett’s next-in-line, resigned under a cloud when it was revealed he purchased $10 million worth of Lubrizol stock a day after he set in motion a merger with Berkshire. The company’s acquisition of Lubrizol for $9 billion increased Sokol’s holding by $3 million. Although Buffett initially defended Sokol, at a shareholder’s meeting on April 30, he called Sokol’s actions “inexcusable” and “incomprehensible.”
What got our attention about this coverage was the nattering in a New York Times article on April 23, which quoted a series of experts who wondered whether Buffett’s management style is too “hands off.” It cites a paper from Stanford University's Graduate School of business: "Did Sokol’s actions reveal shortcomings in the company’s governance system that need to be addressed?” We think it's the wrong question, and illuminates the thinking that has created and fostered the entrenched parent-child cultures that are so damaging to organizations.
This is fed by the mythology that one person can be in charge of another's accountability. If Sokol’s actions were unethical (as most agree they were), why speculate about whether Buffett’s hands-off management style is to blame? The fact is, a trusted leader made a choice to behave in an unethical way. Unless Buffett was actively encouraging an unethical culture, why castigate his management style? Would a more stringent management style have prevented that from happening? Maybe. And maybe not: All kinds of abuses and unethical behavior can and have emerged in hierarchical, strictly controlled business environments.
Buffett also announced at the shareholder meeting that he had no plans to become a “stricter parent” in the wake of Sokol’s resignation. It would be a shame if he had. Many people have extolled the generally ethical environment at Berkshire Hathaway. As Berkshire’s vice chairman, Charles Munger, pointed out, “We’ve had a close brush with scandal two times in 50 years. We’re not going to devote a lot of time to this.”
Buffett’s business philosophy, as outlined in a recent Vanity Fair article, has long been to let the leaders of Berkshire Hathaway’s subsidiaries run things as they think best, based on their experience and expertise. The company is decentralized and the responsibility for operations rests solely in the hands of local managers. And this clearly hasn’t inhibited Berkshire Hathaway’s success.
Can promoting this kind of management freedom result in abuses and bad choices? Of course! (And it also presents opportunities to learn from the fallout.) But when a smart, experienced adult chooses to behave in an ethically questionable way, the blame should land squarely on the person who made the choice, not on the boss for being a “bad parent.”
What got our attention about this coverage was the nattering in a New York Times article on April 23, which quoted a series of experts who wondered whether Buffett’s management style is too “hands off.” It cites a paper from Stanford University's Graduate School of business: "Did Sokol’s actions reveal shortcomings in the company’s governance system that need to be addressed?” We think it's the wrong question, and illuminates the thinking that has created and fostered the entrenched parent-child cultures that are so damaging to organizations.
This is fed by the mythology that one person can be in charge of another's accountability. If Sokol’s actions were unethical (as most agree they were), why speculate about whether Buffett’s hands-off management style is to blame? The fact is, a trusted leader made a choice to behave in an unethical way. Unless Buffett was actively encouraging an unethical culture, why castigate his management style? Would a more stringent management style have prevented that from happening? Maybe. And maybe not: All kinds of abuses and unethical behavior can and have emerged in hierarchical, strictly controlled business environments.
Buffett also announced at the shareholder meeting that he had no plans to become a “stricter parent” in the wake of Sokol’s resignation. It would be a shame if he had. Many people have extolled the generally ethical environment at Berkshire Hathaway. As Berkshire’s vice chairman, Charles Munger, pointed out, “We’ve had a close brush with scandal two times in 50 years. We’re not going to devote a lot of time to this.”
Buffett’s business philosophy, as outlined in a recent Vanity Fair article, has long been to let the leaders of Berkshire Hathaway’s subsidiaries run things as they think best, based on their experience and expertise. The company is decentralized and the responsibility for operations rests solely in the hands of local managers. And this clearly hasn’t inhibited Berkshire Hathaway’s success.
Can promoting this kind of management freedom result in abuses and bad choices? Of course! (And it also presents opportunities to learn from the fallout.) But when a smart, experienced adult chooses to behave in an ethically questionable way, the blame should land squarely on the person who made the choice, not on the boss for being a “bad parent.”