Archive for the ‘Insider trading’ Category

The Resignation of David Sokol: Mountain or Molehill for Berkshire Hathaway? (PDF)
by Authors: Professor David F. Larcker and Brian Tayan, MBA ’03

Additional related information:
-Berkshire Hathaway Audit Committee Report (Link)
-Questions and Answers From 2011 Annual Shareholders Meeting (Link)

Given its size, Berkshire Hathaway has had a relatively clean record on governance-related matters. This track record speaks to the quality of its governance system and the ability of its “trust-based” model to work.

For these reasons, it came as a shock to many when Warren Buffett announced the sudden resignation of David Sokol in March 2011.  Sokol, CEO of Berkshire Hathaway’s energy subsidiary, was widely considered the front-runner on a short list of potential successors to one day succeed Buffett.  More bizarre were the circumstances surrounding the announcement.  Just days before recommending to Buffett that Berkshire Hathaway purchase specialty chemical company Lubrizol in a $9.7 billion deal, Sokol accumulated common stock in Lubrizol worth $10 million.

The matter raised significant issues for the Berkshire board of directors:

1. Did Sokol violate the company’s insider trading policy?
2. Did Sokol’s actions reveal shortcomings in the company’s governance system that need to be addressed?
3. What will be the long-term impact of these events on company’s reputation?

More broadly, the matter raises questions that are general to all organizations.  How extensive must events be before a company decides that governance changes are required?

Read the attached Closer Look and let us know what you think!

Topics, Issues and Controversies in Corporate Governance:The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. To see the full series of  Stanford Closer Looks go here.

Corporate Governance and the Information Content of Insider Trades (SSRN)
Authors: Alan D. Jagolinzer, Leeds School of Business, University of Colorado; David F. Larcker
Stanford University – Graduate School of Business; Daniel J. Taylor, University of Pennsylvania – The Wharton School
Date: March 2011

Abstract:
Most corporate governance research focuses on the behavior of chief executive officers, board members, institutional shareholders, and other similar parties. Little research focuses on the impact of executives whose primary responsibility is to enforce and shape corporate governance inside the firm. This study examines the role of the general counsel in mitigating informed trading by corporate insiders. We find that insider trading profits and the predictive ability of insider trades for future operating performance are generally higher when insiders trade within firm-imposed restricted trade windows. However, when general counsel approval is required to execute a trade, insiders’ trading profits and the predictive ability of insider trades for future operating performance are substantively lower. Thus, when given the authority, it appears the general counsel can effectively limit the extent to which corporate insiders use their private information to extract rents from shareholders.

Keywords: corporate governance, insider trading, insider trading policies, general counsel, restricted trade windows