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Reputability LLP are pioneers and leaders globally in the field of reputational risk and its root causes, behavioural risk and organisational risk. We help business leaders to find these widespread but hidden risks that regularly cause reputational disasters. We also teach leaders and risk teams about these risks. Here are our thoughts, and the thoughts of our guest bloggers, on some recent stories which have captured our attention. We are always interested to know what you think too.

Thursday, 28 April 2011

Berkshire Hathaway's Dilemma

It isn't often that a company publicly - and rapidly - reports on a breach of its ethical code.

On 30 March, the FT reported the resignation of David Sokol, hitherto seen as a possible heir to Warren Buffett.  Buffett's response to the resignation seemed mild given that there appeared to be a cloud over Sokol as he left.

The sky has now cleared - with a robust report by Berkshire Hathaway's Audit Committee.  Trenchantly critical of Sokol, the report was published partly to clear the air and partly to illustrate how Berkshire views threats to its reputation.  Sokol has protested his innocence.

Even if the Audit Committee is right, there is no evidence that this was anything more than an isolated breach of Berkshire's ethical principles.  But if there was any other impropriety at Berkshire, they must get on top of it before anyone else discovers it.  The reputational risk is particularly high.

Buffett's bienniel letter to his top managers wisely includes the following (here at page 26)
"If you see anything whose propriety or legality causes you to hesitate, be sure to give me a call. .....[and] let me know promptly if there’s any significant bad news. I can handle bad news but I don’t like to deal with it after it has festered for awhile. "
Buffett has a choice.  He can hope that his staff revisit his letter and voluntarily tell him if they are aware of any possible impropriety; or he can actively make sure that Sokol's act was an isolated one. 

Making sure is a tougher way to go: but were Berkshire pre-emptively to discover and deal with any other impropriety, they could well suffer modest or no reputational damage.  Were such mis-deeds to emerge independently, the damage would be far greater.

Buffett has repeatedly emphasised that Berkshire's appetite for reputational risk is zero.  The active investigation route is the only way in which Berkshire can be reasonably confident of keeping their reputation substantially undamaged.

And that reputation has a distinct value to its shareholders.  It is one of the reasons why Berkshire Hathaway shares trade at a significant premium to their reported asset value.

Anthony Fitzsimmons
www.reputability.co.uk

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