What Happens at NetJets: Part 3

A comment on the last post raised a whole new series of questions and yes, I will address them. What I want to cover this time is another point.

The New York Times story on NetJets said that Sokol was first made chairman to address "allegations of excess spending and a consultant who was paid by both NetJets and a supplier. Those issues had been described in several letters to Berkshire from company employees, although the company has not identified the writers."

During the years when I was a fly on the wall at Berkshire Hathaway I knew of worse things that happened at a few of the subsidiaries, assuming this description above is halfway accurate. Even if a whistleblower was involved, Warren handled those situations quietly, privately, and preserved the dignity of the manager in charge. He made decisions that might stun corporate America (where, for the sake of appearances, lawyers require that people be instantly fired for the slightest infraction, to the point of absurdity). He considered each offense carefully in the context of the employee's whole career and concluded (usually) that the employee would straighten out and fly right if simply told to do so or if the incentives were changed.

I would go even further. Warren bends over backwards to give his managers the benefit of the doubt, particularly if they are people he trusts and/or if they run businesses that are very profitable. It should be apparent to any observer that if Buffett were presented with a dead body and a set of Ajit Jain's finger prints on a smoking gun, he would insist that Ajit did nothing wrong.

With NetJets, I don't have the facts and am not taking sides on the ethical issues. My point is that Rich Santulli had a great rep, and built an amazing business (even if it will never be as profitable as Buffett had hoped). Now his reputation has been permanently damaged in the pages of the New York Times at the hands of Berkshire Hathaway, which leaked the information.

Why pick on Rich? There's definitely no love lost between Sokol and Santulli. If Sokol became CEO, Santulli was not going to be a supporter, and perhaps Sokol and/or Buffett knew that.

It is rare for Warren Buffett to encourage or allow one of his managers to be criticized in public, and when it happens, it is in a Salomon or General Re situation. The story is a clear "before" and "after" in which a problem that embarrassed Buffett and Berkshire Hathaway has been "fixed." The unfortunate former employees in the "before" camp are publicly criticized and scapegoated, usually through some surrogate in the media. This works neatly to maintain a pristine aura around Berkshire Hathaway, but real life is not quite so tidy.

For the most part, Warren handles ethical problems within Berkshire with common sense and discretion, and most companies would do well to follow his example. Heads up, though -- do take note when someone is being used as a sacrificial lamb.  Media is a potent weapon, and it's always a good idea to deconstruct how and why it's being used to attack someone.  I sure hope that more fire and brimstone doesn't rain down on Rich, as if to prove that he deserves to be scapegoated. If anything more happens, perhaps he will be praised, which would be more appropriate.