David Sokol: The Man Who Nearly Replaced Warren Buffett

Greg Abel was asked if he was prepared to leave Warren Buffett’s shadow when he took over as CEO of Berkshire Hathaway earlier this month.

The Question of Succession at Berkshire Hathaway

But the transition reminded some investors of another executive—Abel’s former boss—who for years was considered most likely to take the reins at one of the world’s best-known companies.

As a standout executive who expanded important Berkshire companies and turned others around while showcasing his investment prowess, David Sokol won Buffett’s trust. The Omaha native was well-liked by Berkshire’s board and Buffett, who publicly praised him for his achievements, despite the fact that he could be a demanding manager, according to some who dealt with him.

David Sokol’s Rise Inside Berkshire

Buffett reportedly said to Fortune magazine, “He gets more done in a day than perhaps I get done in a week, and I am not exaggerating.” Then, in a matter of weeks in 2011, a dispute surrounding Sokol’s personal stock trades caused his hopes to collapse. His lawyer then criticized Berkshire’s treatment of him, and his exit from the corporation became contentious.

According to a person with knowledge of the situation, Sokol, 69, has not communicated much with Berkshire Hathaway and its officials since departing. However, according to a friend, he has shown pride in Abel and his current appointment above Berkshire. The rise and fall of Sokol continues to baffle some Berkshire investors.

Investor Views on a Fallen Heir Apparent

Darren Pollock, a longstanding Berkshire shareholder and the head of Cheviot Value Management in Los Angeles, says, “By all appearances, Sokol was a man of integrity and talent who was set to replace Buffett.” “One fateful and uncommon behavior got in the way.”

A profile on the website of the Horatio Alger Association, a nonprofit Sokol has funded, states that Sokol, the youngest of five children born to a grocery store manager and a homemaker, stayed at home while attending the University of Nebraska. He lived in a trailer with his spouse after getting married in his junior year. Following graduation, Sokol worked as a structural engineer before being recruited to manage the waste-energy company Ogden Projects.

Building an Executive Reputation

Sokol became CalEnergy’s chief executive in 1991. Through aggressive acquisitions, he transformed the business into a vast utility. In 1998, it acquired MidAmerican Energy and adopted its name. Some dubbed Sokol “The Great Young God,” a reference to both his intelligence and his ego, because he was known for being tenacious and somewhat challenging.

According to two persons involved in the deal, Sokol once became enraged when members of his team wanted to take a day off for Yom Kippur while working on a hostile takeover of a rival. Sokol said to them that he worked on Christmas and that he did not understand why people would not work on their holy day. A senior banker requested to be removed from the account amid the hate.

Leadership Style and Personal Tragedy

Sokol wants others to put in as much effort as he does, according to Jonathan Bram, a founding partner of Global Infrastructure Partners and Sokol’s longtime banker at Credit Suisse. “I never thought that he was unduly demanding; he is a decent person,” Bram remarked.

During the same period, Sokol and his family experienced tragedy. David Sokol Jr., his youngest child, passed only a few weeks after graduating from high school in 1999 following a fight with Hodgkin cancer. In the biography of Horatio Alger, Sokol stated of his son, “It was wonderful to observe his inner power.”

Berkshire’s Major Acquisition Phase

After acquiring 80% of MidAmerican Energy in late 1999, Berkshire Hathaway went on to acquire the remaining portion of the business. Buffett publicly praised Sokol, the company’s CEO, while Abel served as president of MidAmerican.

At the time of the transaction, Buffett stated, “If I just had two draft picks out of American business, Walter Scott and David Sokol are the ones I would chose for this industry,” alluding to MidAmerican’s biggest individual stakeholder.

Compensation and Corporate Trust

Buffett agreed to provide Sokol $50 million and Abel $25 million in exchange for the company achieving specific objectives. Buffett was impressed by Sokol’s generosity when he retorted that he and Abel should each get $37.5 million.

In addition to managing MidAmerican’s expansion, Sokol turned around its NetJets division, which allows businesses and the rich to share ownership of aircraft. According to Berkshire shareholder Pollock, “Buffett consistently praised his abilities to enhance the destinies of Berkshire businesses—from roofing and insulation to real estate brokering to fractional aircraft ownership.”

Investment Philosophy and BYD Bet

Sokol is a fervent admirer of Ayn Rand’s 1957 book “Atlas Shrugged,” which presented a moral defense of capitalism and self-interest. In his self-published management book, “Pleased But Not Satisfied,” Sokol wrote of the importance of integrity—and the need to put pressure on employees. According to him, he rated staff members “in the order in which I would dismiss each person if I was forced to do so one at a time” in a notepad.

After learning about BYD, a Chinese battery manufacturer at the time, via investor Li Lu and longstanding Berkshire vice chairman Charlie Munger, Sokol oversaw a $230 million investment in the business in 2008. MidAmerican later bought a 9.9% share in the company after Sokol visited China to research it.

The Lubrizol Controversy

Berkshire made a profitable investment in BYD, which went on to overtake Tesla as the leading global seller of electric cars. Since then, Berkshire has sold its ownership of the business. Early in 2011, Sokol had become well-known at Berkshire and was considered by many to be Buffett’s heir.

Then, in March of that year, Berkshire paid $9 billion to acquire Lubrizol, a chemical manufacturer. It soon became clear that Sokol had bought roughly $10 million worth of Lubrizol shares two months prior, and that he had suggested the transaction. Following the acquisition, Sokol’s stake increased in value by $3 million.

Aftermath and Public Fallout

Shortly after the announcement of his acquisition, Sokol left Berkshire. Buffett stated at the time that Sokol expressed a wish to invest his “family’s riches” for a longer period of time and that the stock purchases had no bearing on his choice.

Later that year, Sokol’s trading breached “the highest norms of business ethics,” according to a report by Berkshire Hathaway’s audit committee, which the corporation has since deleted from its online archives.

Life After Berkshire Hathaway

Buffett expressed confusion by Sokol’s choice at Berkshire’s annual meeting, claiming that he earned roughly $24 million that year, suggesting that he did not require the additional funds. Buffett remarked during the meeting, “Dave did not mask the trading, which, you know, that is quite inexplicable.”

When contacted for this article, Buffett declined to comment. Following the controversy, Sokol’s lawyer said that Sokol “deserved better” and denounced Berkshire’s treatment of him. According to the lawyer, Buffett was informed that Sokol had Lubrizol stock.

Subsequently, the Securities and Exchange Commission declared that it would not prosecute Sokol. Sokol has maintained a modest profile since leaving Berkshire. He purchased a seven-bedroom, eight-and-a-half-bathroom house in Fort Lauderdale, Florida, in 2017 for $19.9 million. According to a buddy, he also owns residences elsewhere.

Soon after leaving Berkshire, Sokol founded Teton Capital, an investment firm, to invest his several hundred million dollars in riches, according to persons with knowledge of the situation. According to a buddy, he is still an active investor.

Frequently asked questions

1. What made David Sokol significant to Berkshire Hathaway?

A senior Berkshire executive, David Sokol was considered by many to be Warren Buffett’s most likely successor. He turned around NetJets, effectively expanded MidAmerican Energy, and received high public acclaim from Buffett and the board.

2. What prevented David Sokol from succeeding Warren Buffett?

Shortly before Berkshire purchased Lubrizol in 2011, Sokol purchased shares of the company, a transaction he had suggested. Despite being lawful, the action was viewed as unethical and resulted in his resignation.

3. Did David Sokol receive a conviction for insider trading?

No. The SEC later said it would not take action against him. But Berkshire’s audit committee found that his behavior went against the company’s moral principles.

4. What role does Greg Abel play in this narrative?

Sokol oversaw Greg Abel at MidAmerican Energy. Although Sokol was once thought to be Buffett’s successor, Abel eventually advanced through the ranks and is currently Berkshire’s CEO.

5. After David Sokol left Berkshire, what happened to him?

Sokol maintained a low public profile, founded Teton Capital, his own investing company, amassed substantial personal wealth, and is still active as a private investor.

Conclusion

David Sokol’s tale is one of remarkable ascent and abrupt decline. He seemed destined to be the head of Berkshire Hathaway based on his skill, performance, and Buffett’s own admiration. However, a single contentious ruling—lawful but morally dubious—put a halt to that course.

His instance serves as a potent reminder that integrity and reputation are just as important at Berkshire as performance. Despite working under Buffett’s extended shadow, Greg Abel’s rise demonstrates the company’s desire for stable leadership free from scandal.

Disclaimer:
This content is for informational purposes only and is based on publicly available reports. It does not constitute financial, legal, or investment advice.