CASESTUDY ON

BERKSHIRE HATHAWAY Berkshire Hathaway traces its roots to a textile manufacturing company established by Oliver Chace in 1839 as the Valley Falls Company in Valley Falls, Rhode Island. Chace had previously worked for Samuel Slater, the founder of the first successful textile mill in America. Chace founded his first textile mill in 1806. In 1929 the Valley Falls Company merged with the Berkshire Cotton Manufacturing Company established in 1889, in Adams, Massachusetts. The combined company was known as Berkshire Fine Spinning Associates. In 1955 Berkshire Fine Spinning Associates merged with the Hathaway Manufacturing Company which was founded in 1888 in New Bedford, Massachusetts by Horatio Hathaway. Hathaway was successful in its first decades, but it suffered during a general decline in the textile industry after World War I. At this time, Hathaway was run by Seabury Stanton, whose investment efforts were rewarded with renewed profitability after the Depression. After the merger Berkshire Hathaway had 15 plants employing over 12,000 workers with over $120 million in revenue and was headquartered in New Bedford, Massachusetts. However, seven of those locations were closed by the end of the decade, accompanied by large layoffs. In 1962, Warren Buffett began buying stock in Berkshire Hathaway after noticing a pattern in the price direction of its stock whenever the company closed a mill. Eventually, Buffett acknowledged that the textile business was waning and the company's financial situation was not going to improve. In 1964, Stanton made a verbal tender offer of $1112 per share for the company to buy back Buffett's shares. Buffett agreed to the deal. A few weeks later, Warren Buffett received the tender offer in writing, but the tender offer was for only $1138. Buffett later admitted that this lower, undercutting offer made him angry. Instead of selling at the slightly lower price, Buffett decided to buy more of the stock to take control of the company and fire Stanton (which he did). However, this put Buffett in a situation where he was now majority owner of a textile business that was failing. In 2010, Buffett claimed that purchasing Berkshire Hathaway was the biggest investment mistake he had ever made, and claimed that it had denied him compounded investment returns of about $200 billion over the previous 45 years. Buffett claimed that had he invested that money directly in insurance businesses instead of buying out Berkshire Hathaway (due to what he perceived as a slight by an individual), those investments would have paid off several hundredfold. Buffett initially maintained Berkshire's core business of textiles, but by 1967, he was expanding into the insurance industry and other investments. Berkshire first ventured into the insurance business with the purchase of National Indemnity Company. In the late 1970s, Berkshire acquired an equity stake in the Government Employees Insurance Company (GEICO), which forms the core of its insurance operations today (and is a major source of capital for Berkshire Hathaway's other investments). In 1985, the last textile operations (Hathaway's historic core) were shut down.

Corporate affairs Kiewit Tower, the location of Berkshire's corporate offices Berkshire's class A shares sold for $108,020.00 as of September 28, 2011, making them the highest-priced shares on the New York Stock Exchange, in part because they have never had a stock split and never paid a dividend, retaining corporate earnings on its balance sheet in a manner that is impermissible for private investors and mutual funds. Shares closed over $100,000 for the first time on October 23, 2006 and closed at an all-time high of $150,000 on December 13, 2007. Despite its size, Berkshire has not been included in broad stock market indices such as the S&P 500 due to the lack of liquidity in its shares; however, following a 50-to1 split of Berkshire's class B shares in January 2010, Burlington Northern was replaced by Berkshire in the S&P 500 on February 16, 2010. Berkshire's CEO is Warren Buffett. His annual chairman's letters are widely read and quoted. Barron's Magazine named Berkshire the most respected company in the world in 2007 based on a survey of American money managers. In 2008, Berkshire invested in preferred shares of Goldman Sachs as part of a recapitalization of the investment bank. Buffett defended Goldman CEO Lloyd Blankfein's $13.2 million pay package when the company had taken and not yet paid back $10 billion in Troubled Asset Relief Program (TARP) money from the United States Department of Treasury. As of July 1, 2010, Buffett owned 32.4% aggregate voting power of Berkshire's shares outstanding and 23.3% of the economic value of those shares. Berkshire's vice-chairman, Charlie Munger, also holds a stake big enough to make him a billionaire, and early investments in Berkshire by David Gottesman and Franklin Otis Booth resulted in their becoming billionaires as well. Bill Gates' Cascade Investments LLC is the second largest shareholder of Berkshire and owns more than 5% of class B shares. Berkshire Hathaway is notable in that it has never split its shares, which not only contributed to their high per-share price but also significantly reduced the liquidity of the stock. This refusal to split the stock reflects the management's desire to attract long-term investors as opposed to shortterm speculators. However, Berkshire Hathaway has created a Class B stock, with a per-share value originally kept (by specific management rules) close to 130 of that of the original shares (now Class A) and 1200 of the per-share voting rights, and after the January 2010 split, at 11,500 the price and 110,000 the voting rights of the Class-A shares. Holders of class A stock are allowed to convert their stock to Class B, though not vice versa. Buffett was reluctant to create the class B shares, but did so to thwart the creation of unit trusts that would have marketed themselves as Berkshire look-alikes. As Buffett said in his 1995 shareholder letter: "The unit trusts that have recently surfaced fly in the face of these goals. They would be sold by brokers working for big commissions, would impose other burdensome costs on their shareholders, and would be marketed en masse to unsophisticated buyers, apt to be seduced by our past record and beguiled by the publicity Berkshire and I have received in recent years. The sure outcome: a multitude of investors destined to be disappointed." Berkshire's annual shareholders' meetings, taking place in the Qwest Center in Omaha, Nebraska, are routinely visited by 20,000 people. The 2007 meeting had an attendance of approximately 27,000. The meetings, nicknamed "Woodstock for Capitalists", are considered Omaha's largest annual event along with the baseball College World Series. Known for their humor and lightheartedness, the meetings typically start with a movie made for Berkshire shareholders. The 2004 movie featured Arnold Schwarzenegger in the role of "The Warrenator" who travels through time to stop Buffett and Munger's attempt to save the world from a "mega" corporation

formed by Microsoft-Starbucks-Wal-Mart. Schwarzenegger is later shown arguing in a gym with Buffett regarding Proposition 13. The 2006 movie depicted actresses Jamie Lee Curtis and Nicollette Sheridan lusting after Munger. The meeting, scheduled to last six hours, is an opportunity for investors to ask Buffett questions. The salary for the CEO is US$100,000 per year with no stock options, which is among the lowest salaries for CEOs of large companies in the United States. Governance The current members of the board of directors of Berkshire Hathaway are Warren Buffett, Charlie Munger, Walter Scott, Jr., Thomas S. Murphy, Howard Graham Buffett, Ronald Olson, Donald Keough, Charlotte Guyman, David Gottesman, Bill Gates, Stephen Burke and Susan Decker. Succession plans In May 2010, Buffett, months away from his 80th birthday, said he would be succeeded at Berkshire Hathaway by a team consisting of a CEO and three or four investment managers; each of the latter would be responsible for a "significant portion of Berkshire's investment portfolio."Five months later, Berkshire announced that Todd Combs, manager of the hedge fund Castle Point Capital, would join them as an investment manager. On September 12, 2011, Berkshire Hathaway announced that 50-year-old Ted Weschler, founder of Peninsula Capital Advisors, will join Berkshire in early 2012 as a second investment manager. Businesses Insurance group Insurance and reinsurance business activities are conducted through approximately 70 domestic and foreign-based insurance companies. Berkshires insurance businesses provide insurance and reinsurance of property and casualty risks primarily in the United States. In addition, as a result of the General Re acquisition in December 1998, Berkshires insurance businesses also included life, accident and health reinsurers, as well as internationally based property and casualty reinsurers. Berkshires insurance companies maintain capital strength at exceptionally high levels. This strength differentiates Berkshires insurance companies from their competitors. Collectively, the aggregate statutory surplus of Berkshires U.S. based insurers was approximately $48 billion as of December 31, 2004. All of Berkshires major insurance subsidiaries are rated AAA by Standard & Poors Corporation, the highest Financial Strength Rating assigned by Standard & Poors, and are rated A++ (superior) by A. M. Best with respect to their financial condition and operating performance. GEICO Berkshire acquired GEICO in January 1996. GEICO is headquartered in Chevy Chase, Maryland, and its principal insurance subsidiaries include: Government Employees Insurance Company, GEICO General Insurance Company, GEICO Indemnity Company, and GEICO Casualty Company. Over the past five years, these companies have offered primarily private passenger automobile insurance to individuals in all 50 states and the District of Columbia. The subsidiaries market their policies primarily through direct response methods, in which applications for insurance are submitted directly to the companies by telephone, through the mail, or via the Internet. General Re Berkshire acquired General Re in December 1998. General Re held a 91% ownership interest in Cologne Re as of December 31, 2004. General Re subsidiaries currently conduct global reinsurance business in approximately 72 cities and provide reinsurance coverage

worldwide. General Re operates the following reinsurance businesses: North American property/casualty, international property/casualty, which principally consists of Cologne Re and the Faraday operations, and life/health reinsurance. General Res reinsurance operations are primarily based in Stamford, Connecticut and Cologne, Germany. General Re is one of the largest reinsurers in the world based on net premiums written and capital. NRG (Nederlandse Reassurantie Groep) Berkshire acquired NRG, a Dutch life reinsurance company, from ING Group in December 2007. Berkshire Hathaway Assurance Berkshire created a government bond insurance company to insure municipal and state bonds. These type bonds are issued by local governments to finance public works projects such as schools, hospitals, roads, and sewer systems. Few companies are capable of competing in this area. Utilities and energy group Berkshire currently holds 83.7% (80.5% on a fully diluted basis) of the MidAmerican Energy Holdings Company. At the time of purchase, Berkshire's voting interest was limited to 10% of the company's shares, but this restriction ended when the Public Utility Holding Company Act of 1935 was repealed in 2005. A major subsidiary of MidAmerican is CE Electric UK. Manufacturing, service, and retailing Apparel Berkshires apparel businesses include manufacturers and distributors of a variety of clothing and footwear. Businesses engaged in the manufacture and distribution of clothing include Union Underwear Corp. Fruit of the Loom, Garan, Fechheimer Brothers and Russell Corporation. Berkshires footwear businesses include H.H. Brown Shoe Group, Acme Boots and Justin Brands. Berkshire acquired Fruit of the Loom on April 29, 2002 for $835 million in cash. Fruit of the Loom, headquartered in Bowling Green, Kentucky, is a vertically integrated manufacturer of basic apparel. Berkshire acquired Russell Corporation on August 2, 2006 for $600 million or $18.00 per share. Building products In August 2000, Berkshire entered the building products business with the acquisition of Acme Building Brands. Acme, headquartered in Fort Worth, Texas, manufactures and distributes clay bricks (Acme Brick), concrete block (Featherlite) and cut limestone (Texas Quarries). It expanded its building products business in December 2000, when it acquired Benjamin Moore & Co. of Montvale, New Jersey. Moore formulates, manufactures and sells primarily architectural coatings that are available principally in the United States and Canada. In 2001, Berkshire acquired three additional building products companies. In February, it purchased Johns Manville which was established in 1885 and manufactures fiber glass wool insulation products for homes and commercial buildings, as well as pipe, duct and equipment insulation products. In July, Berkshire acquired a 90% equity interest in MiTek Inc., which makes engineered connector products, engineering software and services, and manufacturing machinery for the truss fabrication segment of the building components industry and is headquartered in Chesterfield, Missouri. Finally in 2001, Berkshire acquired 87 percent of Dalton, Georgia-based Shaw Industries, Inc. Shaw is the worlds largest carpet manufacturer based on both revenue and volume of production and designs and manufactures over 3,000 styles of tufted and woven carpet and laminate flooring for residential and commercial use under

approximately 30 brand and trade names and under certain private labels. In 2002, Berkshire Acquired the remaining 12.7 percent of Shaw. On August 7, 2003, Berkshire acquired Clayton Homes, Inc. Clayton, headquartered near Knoxville, Tennessee, is a vertically integrated manufactured housing company. At year-end 2004, Clayton operated 32 manufacturing plants in 12 states. Claytons homes are marketed in 48 states through a network of 1,540 retailers, 391 of which are company-owned sales centers. On May 1, 2008, Mitek acquired Hohmann & Barnard a fabricator of anchors and reinforcement systems for masonry and on October 3 of that year, Mitek acquired Blok-Lok, Ltd. of Toronto, Canada. On April 23, 2010, Mitek acquired the assets of Dur-O-Wal from Dayton Superior Corporation. Flight services In 1996, Berkshire acquired FlightSafety International Inc. FSIs corporate headquarters is located at LaGuardia Airport in Flushing, New York. FSI engages primarily in the business of providing high technology training to operators of aircraft and ships. FlightSafety is the world's leading provider of professional aviation training services. Berkshire acquired NetJets Inc. in 1998. NetJets is the worlds leading provider of fractional ownership programs for general aviation aircraft. In 1986, NetJets created the fractional ownership of aircraft concept and introduced its NetJets program in the United States with one aircraft type. In 2004, the NetJets program operated 15 aircraft types. Retail The home furnishings businesses are the Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star Furniture Company, and Jordans Furniture, Inc. CORT Business Services Corporation was acquired in 2000 by an 80.1% owned subsidiary of Berkshire and is the leading national provider of rental furniture, accessories and related services in the rent-to-rent segment of the furniture rental industry. In May 2000, Berkshire purchase Ben Bridge Jewelers. A chain of jewellery stores established in 1912 with locations primarily in the western United States.[28] This joined Berkshire's other jeweler acquisition, Helzberg Diamonds. Helzberg is a chain of jewellery stores based in Kansas City that began in 1915 and became part of Berkshire in 1995. In 2002, Berkshire acquired The Pampered Chef, Ltd., the largest direct seller of kitchen tools in the United States. Products are researched, designed and tested by The Pampered Chef, and manufactured by third party suppliers. From its Addison, Illinois headquarters, The Pampered Chef utilizes a network of more than 65,000 independent sales representatives to sell its products through home-based party demonstrations, principally in the United States. See's Candies produces boxed chocolates and other confectionery products in two large kitchens in California. Sees revenues are highly seasonal with approximately 50% of total annual revenues being earned in the months of November and December. Dairy Queen services a system of approximately 6,000 stores operating under the names Dairy Queen, Orange Julius and Karmelkorn that offer various dairy desserts, beverages, prepared foods, blended fruit drinks, popcorn and other snack foods. Other non-insurance In 1977, Berkshire Hathaway purchased the Buffalo News and resumed publication of a Sunday edition of the paper that ceased in 1914. After the morning newspaper Buffalo Courier-Express

ceased operation in 1982, the paper began to print morning and evening editions.[30] It remains Berkshire's only newspaper holding. On December 25, 2007, Berkshire Hathaway acquired Marmon Holdings Inc. Previously it was a privately held conglomerate owned by the Pritzker family for over fifty years, which owned and operated an assortment of manufacturing companies that produce railroad tank cars, shopping carts, plumbing pipes, metal fasteners, wiring and water treatment products used in residential construction. Andin International (designer and manufacturer of fine jewelry), founded by the Buddhist teacher Geshe Michael Roach, is a division of The Richline Group, Inc., a wholly owned subsidiary of Berkshire Hathaway formed in 2007. Berkshire acquired McLane Company, Inc. in May 2003 from Wal-Mart Stores, Inc., which brought on other subsidiaries such as Professional Datasolutions, Inc. and Salado Sales, among others. McLane provides wholesale distribution and logistics services in all 50 states and internationally in Brazil to customers that include discount retailers, convenience stores, quick service restaurants, drug stores and movie theatre complexes. Scott Fetzer Companies The Scott Fetzer Companies are a diversified group of 21 businesses that manufacture and distribute a wide variety of products for residential, industrial and institutional use. The three most significant of these businesses are Kirby home cleaning systems, Wayne Water Systems and Campbell Hausfeld products. Scott Fetzer also manufactures Ginsu Knives. In 2002, Berkshire acquired Albecca Inc. Albecca is headquartered in Norcross, Georgia, and primarily does business under the Larson-Juhl name. Albecca designs, manufactures and distributes custom framing products, including wood and metal molding, matboard, foamboard, glass, equipment and other framing supplies. Berkshire acquired CTB International Corp. in 2002. CTB, headquartered in Milford, Indiana, is a designer, manufacturer and marketer of systems used in the grain industry and in the production of poultry, hogs, and eggs. Products are produced in the United States and Europe and are sold primarily through a global network of independent dealers and distributors, with peak sales occurring in the second and third quarters. Finance and financial products Berkshire acquired XTRA Lease in September 2001. XTRA, headquartered in St. Louis, Missouri, is a leading transportation equipment lessor. XTRA manages a diverse fleet of approximately 105,000 units, constituting a net investment of approximately $1 billion as of December 31, 2004. The fleet includes over-the-road and storage trailers, chassis, intermodal piggyback trailers and domestic containers. Clayton's finance business, (loans to manufactured home owners), earned $206 million down from $526 million in 2007. Loan losses remain 3.6% up from 2.9%. First, the company operates under a highly decentralized business model. Executives who run the company s subsidiarieswhich include a diverse mix of insurance, railroads, utilities, wholesalers, retailers, and suppliersare afforded considerable autonomy to make short- and long-term business decisions largely without the approval of headquarters. Second, the company operates with low levels of internal controls. Managers are given general instructions to grow their businesses with a focus on improving competitive position, but they are not required to submit strategic plans or operating budgets that project how they will achieve results. Finally, all capital allocation decisions at the parent levelthose involving the acquisition of new businesses or the purchase of publicly traded securitiesare made exclusively by Chairman and CEO Warren Buffett, in consultation with Vice Chairman Charlie Munger.

The company does not employ analytical staff nor does an investment committee review or approve investment decisions. The success of this system is predicated on the expectation that Berkshire Hathaway managers operate with high levels of integrity. In evaluating management, Buffett has said that he looks for integrity, intelligence, and energy, with an emphasis on the former. In making decisions, he asks managers to consider what he calls the newspaper test: How would they feel about any

DAVID SOKOL AND LUBRIZOL David Sokol came to Berkshire Hathaway through the company s acquisition of MidAmerican Energy in 1999, where he served as CEO. Over the years, Sokol distinguished himself through his managerial performance and, in the process, earned considerable praise from Buffett. For example, in 2008, Buffett wrote in the annual letter to shareholders that Sokol s results were unmatched elsewhere in the utility industry. In 2009, he described Sokol as an enormously talented builder and operator. Sokol also distinguished himself for his contributions to Berkshire beyond his role at MidAmerican. In 2008, he flew to China to facilitate a $230 million investment in Chinese automobile and battery manufacturer BYD. That same year, he negotiated a $4.7 billion investment in Constellation Energy. Buffett also expanded Sokol s operatingresponsibilities by naming him CEO of Johns Manville (2007) and CEO of NetJets (2009). These were unusual moves in that Berkshire managers rarely assumed responsibility for more than one business unit. Because of his high profile within the company, many observers speculated that Sokol was the front-runner on a short list of potential successors to one day replace Warren Buffett as CEO. For these reasons, it came as a shock to many when Buffett announced the sudden resignation of Sokol in a March 2011 press release. Buffett explained that the decision was made for personal reasons and unrelated to Sokol s performance at Berkshire. He noted that I had not asked for his resignation, and it came as a surprise to me. He also noted that Sokol had discussed stepping down from his roles at Berkshire twice before in prior years and both times, I and other board members persuaded him to stay. More bizarre were the circumstances surrounding the announcement. Just two weeks before Sokol s resignation, Berkshire had agreed to acquire specialty chemical company Lubrizol in a deal valued at $9.7 billion. Sokol had been instrumental in arranging the discussion between

A Conversation with Warren Buffett, The Charlie Rose Show, Jul. 10, 2006.

Warren Buffett, Chairman of Salomon, Testifies Before House Subcommittee, PR Newswire, Sep. 4, 1991. Wesco Financial, 2007 Annual Meeting, cited in: Outstanding Investor Digest, Vol. XXI, No. 1&2, Feb. 29, 2008. MidAmerican owns utilities, natural gas pipelines, and other energy assets in the United States and United Kingdom. David Sokol (chairman and CEO), Greg Abel (president), and Walter Scott (director) have continued to hold a minority ownership position in MidAmerican since the acquisition. Scott, who recommended the deal to Buffett, has been a director of Berkshire Hathaway since 1988 and was on the board at the time of the purchase. Although the deal was terminated when Berkshire was outbid by the French utility EDF, Berkshire earned a $1.2 billion profit from interest, common stock conversion, and termination fees for its commitment. Andrew Bary, Sokol More Likely to Succeed Buffett, Barrons, Aug. 10, 2009.The Buffett and Lubrizol CEO James Hambrick that lead to the deal. What was bizarre was that in the same press release that Buffett announced Sokol s resignation, he also disclosed that, unbeknownst to him at the time, Sokol had purchased $10 million in Lubrizol stock just days before proposing the acquisition to Buffett. Buffett did not condemn Sokol for his actions. Instead, he simply stated that Sokol s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. Furthermore, he knew he would have no voice in Berkshire s decision once he suggested the idea. For these reasons, neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign. Buffett concluded the press release by returning to the topic of Sokol s resignation: Dave s letter was a total surprise to me, despite the two earlier resignation talks. I had spoken with him the previous day about various operating matters and received no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation. He ended by stating, I have held back nothing in this statement. Therefore, if questioned about this matter in the future, I will simply refer the questioner back to this release. True to his word, Buffett did not make public comment on the matter in the weeks that followed. If he believed that Sokol s actions were wrong, he expressed that sentiment more by what he did not write in the press release than what he did (see Exhibit 1). Sokol, however, was vocal in defending his actions. In a lengthy interview on CNBC, he said, I don t believe I did anything wrong. He explained that he never had any authority at Berkshire to invest a dollar in stocks. He also said that he didn t think there was even a five percent chance that Buffett would agree to the deal. He concluded, I guess, knowing today what I know, what I would do differently is I just would never have mentioned it to Warren, and just

made my own investment and left it alone. When asked about the implication of his resignation on Berkshire Hathaway s succession plan, he stated, It s just not a job I would aspire to, because nobody is going to do it as well as Warren does. And there s going to be a lot of change that comes with that. But the reality is Warren s not going anywhere. I admire enormously what he s done. But whoever replaces Warren will not get to do it the way he does it. REACTION AND IMPLICATIONS There was considerable public reaction to the news. Although legal experts expected an SEC investigation, there was some doubt whether Sokol s actions constituted insider trading because

Berkshire Hathaway, Warren E. Buffett, CEO of Berkshire Hathaway, Announces the Resignation of David L.Sokol,. However, he was expected to face shareholder questions at the company s annual meeting one month later. he did not have access to material nonpublic information at the time of his purchases. It was also unclear that Sokol breached a fiduciary duty to Berkshire, given that he was not involved in the decision to acquire Lubrizol or the negotiation of purchase price. While some speculated that Sokol might have violated Berkshire s insider trading policy, which prohibits trading in securities that Berkshire is actively considering taking a public position in, subsequent reports revealed that Lubrizol was not on the list of restricted securities that Buffett circulated among management .

The criticism of Warren Buffett, however, tended to be stronger than the criticism of Sokol. Experts contended that he should have asked for more details about Sokol s holdings in Lubrizol when Sokol first brought up the matter. Others criticized Buffett for not taking a harder line against Sokol s actions. According to one commentator: Even if the SEC concludes that Sokol did nothing illegal, the known facts suggest that what Sokol did was wrong.... Instead of condemning Sokol, Buffett gave him a pat on the back on the way out the door. Buffett missed an opportunity to show moral courage, stand up for principle, reinforce to his employees what he expects from them, and, not least of all, to live up to his own public reputation. Another commentator was more blunt: Mr. Buffett whitewashed Mr. Sokol s blazingly obvious ethical lapse. A third asked, Why hasn t Mr. Buffett been ruthless?

Some blamed the corporate governance system of Berkshire Hathaway for having lax internal controls. According to one journalist, the unfolding events are raising questions about controls and governance at the highest levels of his business. Another questioned whether, Berkshire needs more compliance programs and people to manage them. A third contended that Berkshire Hathaway s board was in part to blame: The Berkshire Hathaway board is full of independence issues. It s just that no one seems to care. She accused the audit committee of being passive with regard to Buffett and not proactively probing management, internal auditors and external auditors to gain insight and to make oversight decisions that will hold up, if necessary, in court.

According to some, his actions appeared closer to front running than insider trading. Front running occurs when a stock broker purchases (or sells) public securities in advance of a customer order to purchase (or sell) those same securities. Front running is illegal in a brokerage setting because it reduces the profitability of the trade for the client and constitutes self-dealing by the broker. It is not clear how front running applies in a private setting. Finally, Sokol s resignation highlighted the succession challenges at Berkshire. While Buffett had assured investors in the past that the directors and I have thought through the succession question carefully and that we are well prepared, Sokol s sudden resignation and in particular the comments he made regarding the challenges of succeeding Buffett were troubling.

WHY THIS MATTERS 1. Given its size, Berkshire Hathaway has had a relatively clean record on governance-related matters. This track record speaks to the quality of corporate governance and the ability of its trust-based model to work. Still, the Sokol matter raises significant issues for the board: a. How much has the reputation of the firm suffered from Sokol s actions? Is this a flash in the pan, or will there be long-term ramifications? b. Did Sokol violate the company s insider trading policy? c. Did Sokol s actions reveal shortcomings in the company s governance system that need to be addressed? Or were they instead an isolated incident? d. Should the company add additional controls to prevent similar events from recurring? If so, what would be the cost of these controls in terms of decision making, performance, and culture? e. Do potential successors need to be held to a higher standard of conduct so that their actions do not negatively impact the reputation of the firm? 2. The Sokol matter also raises questions that are general to all organizations. What events must occur before a company decides that changes to the overall governance system are required?

David Sokol: Interview on CNBC Squawk Box (Excerpted Comments)

BECKY: I guess the question that some people have asked is, why create your own miniBerkshire when you could be running the actual Berkshire? SOKOL: Well, there are two reasons really. One isto be honestWarren s not going anywhere. And by the way, it s just not a job I would aspire to, because nobody is going to do it as well as Warren does. And there s going to be a lot of change that comes with that. But the reality is Warren s not going anywhere. He s in great shape. He s every bit as sharp today as he was when I first met him eleven or twelve years ago. I actually think in some ways he s gotten better because he seems to have an even broader perspective than he did before. He s incredibly intelligent and insightful. And frankly, Berkshire is very fortunate to have him. But I d like to do kind of like what he did in 1965, which is invest my own money, control a significant piece of it and control my own schedule. I admire enormously what he s done. But whoever replaces Warren will not get to do it the way he does it. He owns 34 percent of the company. And again, none of that is a criticism. I actuallyif I could be a thousandth as successful as he is when I am done and when I m 75 or 80, I ll be real pleased.\ BECKY: You know, the questions come out of this though, revolving your ownership in Lubrizol shares, and the timing on that as you were bringing this deal to Berkshire as a potential acquisition. SOKOL: Let me hit two things there. One is, first of all, it was in the press release in an effort to be a hundred percent transparent. The goal, which is a little interesting given some of the comments I ve read and that I thought full disclosure was a good thing. And the purpose there was those shares, my ownership there, would come out 30 or 60 days from now when the voting takes place [by Lubrizol shareholder], etc., on that transaction. And we did not want people to look back and say, Why didn t they tell us that? So it s out there. The thing people need to understand is, I have never had any authority at Berkshire to invest a dollar in stocks. I have a lot of authority within MidAmerican, Johns Manville, NetJets. But I ve always been looking for transactions, both to invest in personally, and then if I thought a company was something that Warren might have an interest in, I would forward it to him. Lubrizol is exactly that. I got interested in Lubrizol frankly I can t tell you where I first heard the name sometime last fall. I pulled their 10K. Found what they ve been doing the past couple of years interesting. I made a decision to buy some shares. When I mentioned to Warren that I thought there was an opportunity, perhaps, for Berkshire, I told him that I owned some shares. And frankly, I didn t think he had any interest. Most of the ideas that I ve forwarded to Warren over the years just were not companies that he had an interest in. BECKY: December 14th is when you bought the first shares of the company. 2,300 shares? SOKOL: I put an offer in, actually, to buy 50,000 shares with a limit price JOE: But we re under the impression that on the 13th you told Citigroup to set up a meeting with Lubrizol s board, that Berkshire might be interested in SOKOL: No, no. JOE: That s not true? It s not that Berkshire might be interested in acquiring Lubrizol? David Sokol: Interview on CNBC Squawk Box (Excerpted Comments, continued)

SOKOL: We had a broad conversation where one of the bankers who was in the meeting said he knew the CEO of Lubrizol, and I said, Gee, if you know him well enough to set up a meeting, that would be great, I d love to meet him. JOE: But not about Berkshire buying Lubrizol at that point? SOKOL: Well, we didn t even I mean, he would have certainly have inferred since I worked for Berkshire, you know, that Berkshire would have an interest. JOE: Although you didn t, you said already, you didn t usually decide what Berkshire was going to buy? SOKOL: I can t decide. I have no but I work for Berkshire so I m just saying that it certainly would, I think he would have assumed my interest was in some way for Berkshire. BECKY: Why did you sell that stake seven days later? SOKOL: Well, I put a bid, or an offer in for 50,000 shares at, I believe it was at $104 dollars limit. And they only got 2,300, if I remember the number right. And then the stock had gone up from there. About a week later I was doing some tax planning and I had some short-term losses and some short-term gains. It looked like that s all the shares I was going to get, and you know, it s not worth my time to try to manage 2,300 shares in our portfolio. And so I figured I d take the gain and put it against the losses. BECKY: So why did you buy back in, I guess, on January 5th, 6th, and 7th, was when you were buying in. That was about 96,000 shares? SOKOL: Right. First of all, I liked Lubrizol. I thought it was a good company, a company I d be happy to be invested in long-term. The stock came back down. Actually, don t hold me to these numbers exactly, but I d put in an offer in to buy a 100,000 shares if I remember right, to my broker. And he got a certain amount of them at just under $104 and then the stock actually came down some more. Bought the remainder at $102, thereabouts, and then the stock went up and we weren t able to get any more. That s how I tend to buy stocks, is determine what I think is a price that I want to buy a certain block. I don t have time to trade or do any of those kinds of things. If I can get it great, if I can t And so anyways, 96,000 shares. The next thing that happened is, I think it was January 12th, the banker from Citibank called me and said, Hey, I think Jim Hambrick is going to give you a call to see if you want to, want to get together for dinner. JOE: Had you spoken to Buffett yet and said that this is a company we, that Berkshire should look at? When was the very first time you said that? SOKOL: I believe the first time was either, either just before Mr. Hambrick called me or just after. I don t recall. BECKY: Would that be before or after you bought the second tranche of shares? SOKOL: Oh, it was after. BECKY: After. SOKOL: After. That would have been the 14th because Mr. Hambrick called me on the 14th , so I either called Warren just before that call or just after it. And we had a pleasant conversation. Mr. Hambrick told me about a health issue he had recently had and talked about my son, who has a similar health issue historically. And then I called Warren and said, You know, there s an opportunity here either for you or I to have dinner with James. David Sokol: Interview on CNBC Squawk Box (Excerpted Comments, continued) told Warren I purchased shares in the company. And frankly, at that time Warren was pretty cool to the idea. He says, Yeah, I know the company. It s interesting, but I m not sure it

economically makes sense. But hadn t looked at it for awhile. But, you know what, why don t you do ahead and have a meeting and see if there s anything there. And subsequently had dinner with James up in Cleveland. I believe it was the 25th. BECKY: OK. And then after that dinner, when you talked to Buffett again and explained what had happened at that dinner, he was more interested based on those conversations? SOKOL: Well, just before that dinner he had sent me an email, actually with, I think it was a Standard & Poor s tear sheet, circling their margins saying, The real question is, you know, can they sustain this margin growth, you know, that they ve had the last couple of years. And that is the, frankly, that is the element of, I think, Lubrizol that you have to get comfortable with, that they do have the ability to sustain their margins. That was the primary conversation then that I had with James. And James offered that if Warren had an interest in continuing the discussion, he d love to come and meet Warren. And so, talked to Warren the next day and from that point on I had no more conversations with JOE: You knew at that point you had almost a hundred-thousand shares and the wheels were starting to turn for a possible acquisition by Berkshire. At that point did that seem to you that this doesn t smell right and maybe I should sell this right now before SOKOL: Not at all. Actually, I think it would have been wrong for me to do anything. Once I mentioned to Warren that James had an interest, to me then it was a Berkshire opportunity, whether Berkshire would want to do it or not was up to Berkshire. I would certainly help them, if Warren wanted me to, as he has in other transactions, but it s 100 percent his decision. I made the decision to buy the shares because I thought it was a good investment for my, my family, and I would do it again tomorrow. JOE: But it had already entered your mind that maybe it would be good for Berkshire to acquire it, might be an attractive SOKOL: Sure. Yeah. But that s up to Berkshire. That s why when I mentioned to Warren that I had either talked to, or was talking to James on the phone, that I owned shares. You know, Warren certainly needed, deserved to know that. Berkshire should know that. But I, I also knew that the decision going forward would be theirs and they should know any conflicts I have. BECKY: But some people have raised the question on timing around that. If it was a stake that you had held for, let s say, six months, a year, two years, we ve had other people who have been on who have said that wouldn t concern them at all. The idea that this came in such close connection with the idea being brought to Berkshire, to Warren s attention, that s where they have a conflict. Do you understand that that could give the appearance of impropriety? SOKOL: I, I can understand the appearance issue, and that s why we made it public in the press release, is that we want people to know there is nothing there. The reality is, I have no control over a deal ever happening. And so to I mean, the alternative would be for me to only invest my family assets and if I think there s a good deal for Berkshire, not give it to them. I mean, that, to me, makes no sense. It s ultimately their decision. David Sokol: Interview on CNBC Squawk Box (Excerpted Comments, continued) SOKOL: I disclosed to Warren that I owned the shares. The reason he learned of it at that time was Marc Hamburg, the CFO, had called me and said, Hey, Warren had told me you owned some shares of Lubrizol. We ll need to disclose those ultimately. Can you give me the details? And I

BECKY: So he knew you had a stake but he didn t know, necessarily, how much you owned or when you bought it? SOKOL: That s right. He didn t ask, and but ultimately, obviously, when Marc called and said, Hey, I just need the details of that, he got them. JOE: You know, David, Warren is, and Berkshire, has such a squeaky clean reputation and I know there s a lot that goes into your decision to resign. But you can see that someone might say that Warren accepted your resignation this time because of what happened and the way that it might look or the way that it might smell to people? As much as he protects his reputation and Berkshire s, you don t think there s anything to that? SOKOL: Well, I think, you know, I, you have to ask Warren why he ultimately accepted it. BECKY: If you had to do it over, seeing the hoopla that s broken out, if you had to do it over, would you change your mind on it? SOKOL: Ah, you know, I guess, knowing today what I know, what I would do differently is I just would never have mentioned it to Warren, and just made my own investment and left it alone. I think that s a disservice to Berkshire, but if that s what people want in the future, that s fine. You can t, or at least I don t think you can, ask executives to not invest their own family s capital in a company that Berkshire had no interest, or even knowledge of, and somehow police that. The only thing you can do is just say if you invest your own money, don t ever mention it to anybody at Berkshire. That doesn t make sense to me either, but, but that s certainly what it sounds like.

STEPS TAKEN BY WARREN BUFFETT Warren Buffett in his plain and simple way dived straight to the topic that everyone wanted question him on, the recent controversy regarding David Sokol. Buffett stated that Sokol's action were "inexplicable and inexcusable", just as the scandal that damaged the reputation of Saloman Brothers. He further added that this incident will not have a lasting effect on his reputation. Buffett reportedly said in a press conference, "I don't think it will change a record of 80 years."

Though, Buffett seemed unwilling or unable to talk in detail on his own failings in the failure of oversight, when addressing Berkshire shareholders. He pleaded guilty to not express any outrage. "I obviously made a big mistake not saying, 'Well, when did you buy it?'" Mr. Buffett said. Later he joked that Charlie Munger, his longtime investing partner would be taking care of future news releases.

Some experts have rather asked, did Buffett learn from Salamon incident? Their point is that the crude trading had exposed poor controls of the management.

There are Treasury trading rules, and Violation of these by Paul W. Mozer was only a major symptom of a bigger internal ailment. Even senior management including John H. Gutfreund, who was the chairman and chief executive officer of Salomon Brothers, had neglected to inform the board of the company and also the regulators about the full extent of the trading misdeeds.

Sokol"s actions at Berkshire may not be comparable to that of Mozer at Salmon but it does show a lack of oversight. The company was admired by many investors around the world for strong focus on ethics. This blind spot came in picture after the audit committee report. Nonetheless, it shows a lack of appropriate governance and control.

Sokol, who has resigned from Berkshire, said his decision to leave the company was unrelated to his purchase of the shares and that he believes he did nothing wrong. After the shareholders meeting, Sokol through his lawyer accused of making him a scapegoat.

In a statement on March 30, Mr. Buffett had said he and Mr. Sokol didn't regard the Lubrizol trades as being unlawful.

OUR VIEW POINT The company should reinforce their policies and code of ethics. Senior management should be more accountable and they should know every transaction carried by the top managements. And financial accounting of top management and financial audits should be done frequently. We would have charged Mr. sokol with insider trading. Full disclosure of Mr. sokol should have been taken as mandated by satae law, in Delaware where Berkshire have been incorporated.

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