Warren Gets Buffeted

It's been a difficult day for the Sage of Omaha -- or should that be the Saint of Omaha?

The famously upright Mr. Buffett must have known what was coming when he penned a news release last night announcing the resignation of David Sokol, chairman of several Berkshire Hathaway subsidiaries, and detailing Sokol's January stock purchases in Lubrizol, a company that he pitched to Buffett a few days later and which Berkshire subsequently bought. What was coming, of course, was a storm of media coverage questioning the ethics of the Lubrizol deal and even -- gasp! -- the moral courage of Buffett himself.

Just a few days ago, Business Finance columnist Lee Nicholas covered what he described as a "highly reassuring" communication from Buffett to his firm's managers:

"Mr. Buffett tells his managers to zealously guard Berkshire's reputation, stating that Berkshire can afford to lose money, even a lot of money, but cannot afford to lose a shred of reputation. The notion that ‘everyone else is doing it' does not provide justification for a business decision. To reiterate the somewhat obvious, any activity or decision that has the slightest odor of impropriety should be avoided."

Trouble is, the message doesn't seem to have gotten through to David Sokol. Pitching a company that you own 96,000 shares in doesn't seem to me to pass the sniff test of "the slightest odor of impropriety."

It doesn't seem to bother Buffet, though, at least as far as you can tell from his announcement. No sign of any knuckle-rapping, or condemnation of Sokol's actions. True, the guy was already heading out the door -- the resignation was a "total surprise," Buffett writes -- but Buffett clearly missed a chance here to demonstrate that Berkshire's famous Code of Conduct is more than just words on paper.

He points out that the Lubrizol purchases were "not unlawful," but of course that's not the issue. (Though the SEC may yet make it an issue.) When it comes to reputational risk, the letter of the law is only part of the picture, as the world's most successful investor well knows.