2011: Why did you handle the David Sokol-Lubrizol situation as you did?

CAROL LOOMIS: So I will begin. I don’t think that anybody will be surprised that it is a Sokol question.

And actually, the — this particular long-term shareholder believed, as Warren has believed, he says, “I do not see why he should have been expected to ask Sokol about his Lubrizol stock holdings when he said he owned the stock. That wouldn’t have been a natural question.

“But when you found out the details of his stock purchases a short time later, I do not understand your reaction.

“Surely you realized immediately that these facts were going to become known and that they were going to damage Berkshire’s reputation, something you had said repeatedly you would be ruthless in protecting.

“Being ruthless probably would have meant your firing Sokol on the spot, but you didn’t do that.

“And then you put out a press release that many Berkshire shareholders that I have talked to found totally inadequate.

“You have always been very direct in stating things. You were not direct in that press release, except in praising David Sokol. Otherwise you stated some facts and behavior that you said you didn’t believe was illegal.

“And then you ended the release, leaving us — now maybe you thought somehow we were going to read between the lines — without expressing any anger about what had happened. Why were you not incensed?

“If you were, why did you not express your anger? Why did you handle this matter in the inadequate way you did?”

WARREN BUFFETT: Yeah. The — (applause) — it wasn’t really immediately thereafter. I learned on March 14th, which was the day we announced it. Now bear in mind his first conversation when he said he owned the stock was January 14th.

In between January 14th and March 14th, Dave gave no indication that he’d had any contact with Citigroup of any kind, and as we learned later, I mean, he went — they met in, maybe, October or something like that where — and talked about possible acquisition candidates for Berkshire.

But none of that — he told me at one point, he said Evercore and Citi represent Lubrizol. One of them represents the directors and one of them represents the company, and not a word about any contact.

On March 14th, when the deal was announced in the morning, I got a call from John Freund. John Freund is probably here today. John Freund works for Citi in Chicago, and he handles — he’s handled the great majority of our business in equities for decades, and I’ve got a direct line to him. I talk to him frequently.

And he called and said congratulations and — you know and aren’t you proud of our — words to the effect. You can talk to John directly, although I’ve been told that the Citi lawyers have told him not to talk, but that — knowing the press, they probably can work something out of him.

The — he’s — essentially his words were that Citi’s team had worked with Dave on this acquisition, and they were proud to be part of it, et cetera, et cetera.

And this was all news to me, so that set up some yellow lights, at least. And the next day, I had Marc Hamburg, our CFO, call Dave, and Dave readily gave him the information about when he had bought the stock and how much.

Marc also asked him what the participation of Citi had been in reference to Berkshire’s side of the transaction, and Dave said that he thought he called a fellow there to get their phone number, which turned out to be somewhat of an understatement.

Now, during the period when we announced the deal on March 14th, Lubrizol is the one that needed to prepare a proxy statement. We were not issuing shares at Berkshire. So there was no proxy statement, no — nothing of this — that sort — on our part.

The Lubrizol legal team, Jones Day, went to work with Lubrizol management to start preparing the proxy statement.

We eagerly awaited to see the first draft of that because I was going to be leaving for Asia on Saturday, which, I guess, would be the 19th, and I wanted to see what Lubrizol had to say about this whole Citi matter or anything else.

The most interesting part of every proxy statement is something that says — it’s basically the history of the transaction, and it’s the first thing I read on any deal because it gives you a blow-by-blow of what has taken place.

And as Marc Hamburg can tell you, I kept — and our law firm can tell you — I kept urging them to get that to me before I took off for Asia.

We got that the afternoon of Friday the 18th, and it had a fair amount of material in it about Dave’s involvement with Citigroup.

Then at that point — I believe it was at that point — our law firm got involved, Munger Tolles got involved, in their input to the Lubrizol lawyers as to what we had seen that was different or what we had seen that they didn’t know about that we could add.

Ron Olson, the director of Berkshire and partner of Munger Tolles, was on the trip to Asia. So we got on the plane on Saturday the 19th and traveled over the next week until the 26th.

And we knew at that point that his partners at Munger Tolles were interviewing Dave, as — maybe some other people too, but certainly Dave — and I believe that he was interviewed at least three times about both the stock purchases, the history of things with — of his relationship with Citigroup, and they were assembling this information.

I don’t have a BlackBerry or whatever it may be. Ron does. So he would get some information as we were over there. And he was getting some input but — and we decided that when we got back we would need to have a prompt meeting of the Berkshire board about this matter.

And we would also learn what — the full details, at least — of what Bob Denham, and maybe other attorneys at Munger Tolles learned from their interviews with Dave.

And we back on — I guess it would be Saturday the 26th — and on the 28th we were going to bring Charlie into it before calling a board meeting.

But there would have been a board meeting that week. And then about five or so in the afternoon, a letter was delivered by Dave’s assistant, which really came out of the blue.

And I — he said to me he felt he was retiring on a high point and he gave the reasons why he was retiring, which I laid out and so on.

I don’t know whether the questioning the previous week had affected his attitude. He would say not.

But in any event, we had that resignation. That resignation as is — I believe it may have been put in the audit committee report — may have saved us some money.

If we’d fired him, the question would be whether it was with cause or not with cause, and we would have said it was with cause, but that might have very well gotten litigated, and a retirement did provide, in effect, the same non-level of severance payments that a firing with cause provided.

So I drafted up a press release, which has since been the subject of at least mild criticism — (laughs) — and I laid out the good things that Dave had done, which he had done for the company. He’d done many good things, some extraordinary things.

And then I laid out some actions which I said, based on what I knew then, did not seem to me to be unlawful, and incidentally, I talked with both Charlie and Ron about that.

Ron would have been more careful in that wording. I’m not sure Charlie would have been. I’ll let him speak for himself on that.

And we ran it by — I ran it by Dave Tuesday morning, just to be sure the facts were accurate, and he said — he objected very much to something I’d put in where I said that I thought that he was, in effect, had had his hopes dashed for succeeding me and that was part of the reason, and he said that was absolutely not true, that he had no hopes ever of succeeding me and that I — you know, basically he was telling me what was in his mind, and I shouldn’t be trying to second-guess what was in his mind.

So I took that part out. But he affirmed all of the other facts in that letter, and then I took it out, I sent it to him a second time to make sure that he was OK with the facts, and he said they were accurate.

Now, in there was included the fact that Dave had no indication that Lubrizol had any interest in an approach from Berkshire and that, at least according to the final Lubrizol proxy, is not the case.

I have not talked to anybody except John Freund at Citigroup, so I have no idea what took place with the investment bankers at Citigroup, except for what I read in the Lubrizol proxy. But the Lubrizol proxy now says that Dave did know that Lubrizol had an interest on December 17th.

But, both in the two chances he had to review it, and then when he went on CNBC on a Thursday and he talked for a half an hour, he made no attempt to correct any of the facts in it.

Now, on Wednesday, when we put out the report, we had to have a board meeting first. It was news to the board. They got the release a little bit ahead of time and then we had a board meeting.

We also delivered — well, through our law firm, we phoned the head of the enforcement division of the Securities and Exchange Commission and told him exactly the facts regarding the stock purchases and anything else that they might have cared to know.

So I think we acted in that case, very, very promptly, to make sure the Securities and Exchange Commission, and the top of the enforcement division, was well-versed on what had taken place, to our knowledge up to that point.

So, from our standpoint and my standpoint, Dave was gone, minimum severance costs, minimum chances for lawsuits about compensation due him, and we had turned over some very damning evidence, in my view, to both the public and to the SEC.

What I think bothers people is that there wasn’t some big sense of outrage or something in the release, and, you know, I plead guilty to that.

I — this fellow had done a lot of good things for us over 10 or 11 years, and I felt that if I’m laying out a whole bunch of facts that are going to create lots of problems for him for years to come, that I also list his side of the equation, in terms of what he’d done for Berkshire.

And I — and as I said a little bit earlier, you know, one thing I didn’t even lay out was this extraordinary act where, in effect, he turned over 12 1/2 million dollars to a fellow employee.

So that’s the history of my thinking on it.

Charlie, do you want to add anything? (Applause)

CHARLIE MUNGER: Yes. Well, I think we can concede that that press release was not the cleverest press release in the history of the world. (Laughter)

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. 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.

So, Tom Murphy, one of our best directors — (applause) — one of our best directors, always told the people at Cap Cities, you can always tell a man to go to hell tomorrow if it’s such a good idea. (Laughter)

So the anger part of it — and I don’t think it was wrong to remember the man’s virtues as well as his error. (Applause)

WARREN BUFFETT: I might add as an aside, Charlie and I have worked together for 52 years, and we have disagreed on a lot of things. We’ve never had an argument.

I need Tom Murphy’s advice to remind myself of it a lot of times on other things, but with Charlie it’s never even been necessary. It was long before I met Murph.