Circumstances surrounding David Sokol's recent resignation from Berkshire Hathaway are credit negative for the company, Moody's Investors Service says, due to an appearance of conflict of interest and, more broadly, management-succession risk at the company.
Sokol served as chairman of Berkshire's MidAmerican Energy, NetJets and Johns Manville units. He announced his resignation in late March.
Berkshire CEO Warren Buffett says in a March 30 statement that he had not asked for Sokol's resignation and that the news “came as a surprise to me.”
According to Moody's, conflict-of-interest concerns stem from Sokol's involvement in identifying Lubrizol—a chemical company—as a Berkshire acquisition target. Moody's says that Berkshire's March 30 statement indicates that Sokol traded Lubrizol shares during December and January, around the time of his discussions with Lubrizol and Citibank regarding the acquisition.
“We believe that [Sokol's] trading of Lubrizol shares around the time of his discussions with Citibank and Lubrizol creates the appearance of a conflict of interest on his part,” Moody's says. “In addition, these activities may be investigated by the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and other parties. Finally, the sequence of events raises questions about the adequacy of Berkshire's risk controls, particularly in the area of securities trading, where Berkshire is an active player.”
Moody's says it expects Berkshire's management team to address any repercussions quickly and adds that the company's “Aa2” senior debt rating and stable outlook are not affected at this time.
Speaking more broadly about Berkshire's governance challenges, Moody's says the company “faces management-succession risk given the vital role played by CEO Warren Buffett, 80, in shaping strategy and managing investments.”
Moody's adds, “As Berkshire prepares for a leadership change, we expect the firm to develop more robust governance practices, risk oversight and risk controls.”
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