What David Sokol’s Departure Means for Berkshire Hathaway

David Sokol, considered by many to be the leading candidate to replace Warren Buffett as the chairman of Berkshire Hathaway (NYSE: BRK-A, BRK-B), has resigned. His stated reason was to build up a business to leave to his family. The real reason, it seems, is that Sokol took a major position in Lubrizol before Berkshire bought it at a substantial premium in a $9 billion deal.

The bottom line is that these transactions always become known, and Sokol, who’s arguably one of the most capable executives in the world, got out in front of the bullet and left before he had to. Warren Buffett and Berkshire Hathaway are more than one man’s name and that of a large company — they are a platinum-coated brand that implies the absolute highest ethical and business standards. Berkshire, despite its gargantuan, multi-billion dollar market cap, is still a handshake company. Buffett has the cash to make the world turn with a phone call, sure, but his cache is more than that. The world trusts him. He’s known for being a straight-shooter.

Sokol’s actions, which Buffett thinks are legal to the letter of the law, would still besmirch the company. Sokol is a company man, and he fell on his sword. That, and he had to. This stock sale, worth about a million dollars, is not especially large by the standards of businessmen of his stature, but it would have undermined him as CEO. It will be the second paragraph in his New York Times obituary, even if he is never charged with any wrongdoing.

The question, of course, is what material impact it will have on Berkshire.
The answer is likely very little.

I am sad to see Sokol go. He is, by all accounts, not only an able executive and dealmaker, but he’s also a humble guy in accordance with the custom of Buffett’s bench of talent. His absence will be felt at the companies he ran — Mid-American, John Mansville, NetJets and any projects to which Buffett had him working on — will likely be put on hold, which might well block the deals Buffett says he is itching to do. But as far as a significant impact on Berkshire’s businesses, I don’t see a problem, only an opportunity if Wall Street overreacts.

It’s been a parlor game among investors for 10 years or longer to speculate on Buffett’s successor. The Oracle of Omaha has made some recent hires that signal who will run Berkshire’s investments after Buffett retires or dies (he says his retirement is scheduled for five years after his death), but there is still some question as to who will run the company. Only the Board of Directors knows. [My colleague Dave Sterman thinks Ajit Jain, Buffett’s trusted insurance man, has the inside track.]

Action to Take –> Since only the board knows who will be Buffett’s successor, there shouldn’t be a significant impact on the stock. But there very well could be some panic selling. My own sense is that there would likely be an overreaction, and the degree to which such selling would occur would determine whether it presented a significant buying opportunity. If the shares drop below $80, they will look tempting. If they fall to $75, they’re a steal. Any lower than that and investors should rob nuns to raise cash to buy the stock.

P.S. — We’ve just identified six surprising events that could break your portfolio wide open in 2011. Knowing these pivot points in advance lets you focus your investing strategy like a beam of light in the dark… and make a lot of money in a hurry. Get them free by simply watching this video presentation.