Questions of Ethics in Omaha

Two recent stories in the Omaha area are notable for the questionable ethics displayed by the actors involved. The first one made national news and featured the Oracle of Omaha Warren Buffett and the man formerly presumed to be his successor at Berkshire Hathaway, David Sokol. As you probably heard, Sokol purchased approximately $10 million in shares of Lubrizol only months before Berkshire Hathaway purchased the company at a premium, thus making Sokol a tidy $3 million profit. Although the legality of this financial maneuvering by Sokol is in question, I do feel the ethical implications are clear. Sokol manipulated the system in order to enrich himself, a system in which he is in a unique position to do so that the rest of us could only dream of.

We would all love to have the influence a Sokol has so that we can invest in something that makes us a 30% gain in a matter of months, but most of us do not. I believe that as much as we can reasonably allow, the stock market should be a place where those with a thousand dollars to invest have the same shot of making a 30% gain as the guy with a million dollars. I don’t have a problem with someone like Buffett who has made billions mostly by buying undervalued stocks and holding them until they return to a reasonable valuation, because anybody could have bought American Express or Coca-Cola when he did and made the same percentage gain because everyone was privy to the same information he had (note: this writer was not alive when Buffett made a fortune buying American Express.) However, when someone uses his considerable influence to make guaranteed gains in the stock market that could not have been replicated by those of us without that influence, then I take issue with it. At that point the stock market becomes not a place for us all to invest our hard earned money but just another vehicle for the rich to get richer.

The second story to make headlines is the hiring of MUD director Mark Doyle for the newly created job of senior vice president and chief customer officer at MUD by new CEO Doug Clark. The issue is that Mark Doyle as a director recently voted in favor of hiring Clark as CEO so there is the appearance of a quid pro quo arrangement where Doyle voted to hire Clark and now Clark is returning the favor by hiring Doyle.

I have to agree with director Tim Cavanaugh, the sole director to vote against the hiring of Doyle, who stated in regards to this situation that “I just don’t think it sends the right message.” A scenario like this certainly does not inspire confidence that the board of directors is putting the interests of the public first as is their fiduciary duty. The whole reason for a board of directors is that the board is supposed to protect the interests of the stakeholders. The board hires a CEO to run the company and is supposed to make sure that CEO is running the company to its satisfaction and thus the satisfaction of the stakeholders. If the CEO does a good job, the directors will we rewarded by retaining their positions on the board and the stakeholders will be rewarded with the positive results of that CEO’s actions. That is how it is supposed to work. If a CEO can hire directors to high paying jobs then the directors’ motivations may shift from protecting the interests of the public to pleasing the CEO in the hopes of someday being hired by the CEO for one of those high paying jobs. In this situation you wonder if the board is really putting the interests of the public (all ratepayers are considered owners or stakeholders of MUD) first and foremost or if the directors are simply using their power on the board to potentially enrich themselves.

All that being said the board may have made the best possible hire and the company could prove to be the better for it. (I recommend Robert Nelson’s take here for further enlightenment on this situation) I’ve not yet reached the point of channeling an 18^th century Frenchman and calling for these directors to be put to the guillotine (figuratively, of course) but after its recent actions the board is certainly walking a tightrope from here on out. Another decision of questionable motivation or display of insufficient leadership and the board may leave us know choice but to call for heads to roll. Ultimately one of my primary motivations for this blog is to do what little I can to hold those in positions of power here in Omaha and Nebraska accountable for their actions. Fortunately in this case, unlike the situation with Sokol, we have the ability to register our dissatisfaction with our votes if it comes to that, as we are given the opportunity to vote for the board of directors of MUD so we can hold them accountable.