May 4, 2011
Buffett/Munger Apply Unocol Standard to Sokol Matter
Many people think Warren Buffett should have been more outraged by David Sokol's trading behavior related to Lubrizol. As I noted last month, I think Buffett knew what he was doing, and he allowed Sokol to sink or swim on his own. Information from a Dealbook interview -- Buffett Lets the Facts Bury Sokol -- with Warren Buffett and his partner partner Charlie Munger I think confirms that.
In crafting the initial press release on the matter, which praised Sokol for his service to Berkshire Hathaway, Buffett was measured and calm. As the Dealbook reports:
“I think we can concede that that press release was not the cleverest press release in the history of the world,” Mr. Munger said. “The facts were complicated, and we didn’t foresee appropriately the natural reaction.”
“But I would argue that you don’t want to make important decisions in anger,” he continued. “You want to display as much ruthlessness as your duty requires, and you do not want to add one single iota because you’re angry.”
This kind of calculated and measured response brings to mind the Unocal standard Delaware courts apply to anti-takeover measures. When the standard applies, the court adds two questions to the traditional business judgment rule: (1) Is there a cognizable threat to corporate policy? and (2) Are the defenses adopted proportional to a the perceived threat?
This is exactly the kind of analysis Buffett and Munger appear to have made. Sokol's behavior clearly posed a threat to the company. A proportional response warranted a measured response, at least at the outset. That doesn't mean an additional, more extreme, response was not available if the situation dictacted. As Munger further explained:
“You can always tell a man to go to hell tomorrow.”