Berkshire Hathaway: America's Largest Holding Corporation - Essay Sample

Introduction

Berkshire Hathaway is one of the largest companies in the world. It is a holding corporation that owns many other businesses, and it is headquartered in Omaha, Nebraska in the United States of America (USA). This company started its operations in 1839 as a textile manufacturer. In its first years, it had much success in the flourishing textile business. However, after some time, its business started dropping, and this led to loses. Eventually, the business began closing some of its textile mills due to a decrease in sales. In 1962, an investor named Warren Buffet started to buying stock in this company following his analysis of the trend of its shares. By 1964, he was a major shareholder in this company. Later, Warren started shifting the inclination of this business from textile to the insurance sector and bought some large insurers. For instance, he purchased the Government Employees Insurance Company (GEICO) towards the end of the 1970s. In the late 1980s, Berkshire Hathaway closed its last textile mill and changed its operations to other businesses from the textile industry. Currently, it owns many companies, and this is the core of its services.

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In the course of its operations, this business has bought many assets, and it has a large number of employees that form its workforce with Warren Buffet being its chief executive officer and the chairman of its board of directors. This company has succeeded in its operations for a long time. However, in early 2011 it faced an ethical challenge that involved one of its top executives. Precisely, this executive engaged in illegal insider trading, which is unethical. This paper seeks to analyze this case and show the faults that caused this case, how the leadership handled it, and possible methods of avoiding it in future. Fundamentally, this analysis will evaluate the ethical issues behind this case and their impact on the business.

The Model of Leadership at Berkshire Hathaway

The success of many businesses depends typically on the leadership model that the company uses. Specifically, the management of a business is the one responsible for directing the organization to achieve the set goals. Therefore, several companies and leaders seek to use a realistic style that enhances the working of their staff to achieve high performance and attain their goals. The leadership styles that managers use can be classified into distinct categories, namely, autocratic, transactional, charismatic, transformational, democratic, and bureaucratic (Al Khajeh, 2018). Each of these styles has differences that affect the performance of an organization. Precisely, the transformational leadership style seeks to improve the staff and focuses on their needs. Transactional leadership is based on transactions whereby the leader gives staff tokens for each achievement they make. Charismatic leadership, on the other hand, uses visions that leaders develop and then the followers are asked to follow and execute them. Autocratic leadership uses decisions from leaders, who do not seek to know the demands of the staff members. These leaders are somewhat bossy in nature (Al Khajeh, 2018). Contrary to this model, democratic leadership decentralizes the process of decision-making and allows all stakeholders to participate in the processes that take place at the organization.

Other than the leadership styles discussed above, some other factors determine the success of the leadership style that an organization uses. For instance, a leader can decide to include moral and ethics in his or her leadership style (Gumus, Mehmet Sukru Bellibas, & Gumus, 2016). According to Gumus et al. (2016), a moral leader usually focuses on honesty, trustworthiness, integrity, doing the right thing, and being open. If a person combines morals with an appropriate leadership style, the leader typically ends up leading effectively. Now, considering the discussion of Al Khajeh (2018), not all leadership styles are effective. Precisely, the best models are transactional, transformational, and democratic leadership styles. The effectiveness of these leadership styles comes from the fact that they mainly focus on empowering the followers rather than making them follow what the leader desires (Solomon & Steyn, 2017). Successful application of these styles leads to higher satisfaction and causes members of staff to concentrate on high performance and achievement in their work. Therefore, a person that uses any of these models and combines it with ethical practice usually ends up achieving high success in his or her leadership.

In the case of Berkshire Hathaway, the leader, Warren Buffet, focuses on democratic style, and he profoundly insists on maintaining high ethics in the operations of the corporation. Specifically, since this corporation has many staff members and a large number of other companies that it owns, it is not easy for its leader to control all of them. Therefore, he decided to use the democratic leadership model by allowing them the freedom of determining their mode of working, so long as they ensure that they behave ethically (Larcker & Tayan, 2016). Based on his leadership style, several people, such as Stanley (2017), say that he tells his staff the principles that they should use and then trusts them to behave correctly. Now, while this model of leadership is supposed to be effective in influencing staff members to perform effectively, it can also lead to problems. Specifically, allowing the workers to decide on how to work causes the risk of someone doing something wrong. This is the factor that caused the ethical issue that this paper discusses. Mostly, the case made it seem that ethics received a second place at the company at that its staff focus more on profits and personal gains. Therefore, while this model of leadership was supposed to be effective, it gives staff much autonomy, which increases the chances of a person doing the wrong thing.

The Ethical Issue That Affected This Corporation

In early 2011, one of the executives of Berkshire known as David Sokol informed Buffet that they could acquire a company named the Lubrizol Corporation. A short while later, Berkshire acquired this business, but later news of the fact that Sokol had also purchased shares from the same company came out, leading to allegations of insider trading. Precisely, a few days before Sokol informed Warren of the proposition to acquire Lubrizol Corporation, he had purchased shares of the same company, amounting to ten million dollars. However, shortly after the acquisition, his shares increased in value to thirteen million dollars, thus, causing a profit of three million dollars in about two months (Heineman, 2011). While it is not wrong for the workers of Berkshire or its executives to purchase shares from other companies, this acquisition should be within the confines of ethical behavior and should follow regulations governing such activities. In this case, Sokol knew that if Berkshire acquired Lubrizol, the value of its shares would rise, and this will profit him (Larcker & Tayan, 2016). This transaction caused a conflict of interest, and it caused a hot debate regarding whether it was ethical and legal. Consequently, it caused Sokol to resign from his post at the corporation. However, even after his resignation, the chief executive officer, Warren was still defending Sokol by stating that his dealings were correct.

Insider Trading and How It Affected This Corporation

The ethical issue that affected this organization is insider trading, which refers to purchasing shares of a company while possessing information that is not public. According to the regulations of the US Securities and Exchange Commission (SEC), illegal insider trading mainly deals with transacting based on corporate information that is not public (Hoang, Neuhauser, & Varamini, 2017). The reason for the illegality of insider trading is that it places other investors at a disadvantage if one of them possesses insider information regarding a business that could lead to personal gain. Moreover, if encouraged, this behavior harms the confidence of other investors, leading to a reduction in the liquidity of trading and lowers the efficiency of the market (Clacher, Hillier, & Lhaopadchan, 2009). For instance, if an investor possesses information regarding loss in a company before its publishing, and decides to sell all his or her shares before the company releases the financial report, this person avoids losing money like other investors. Moreover, information regarding other issues such as merger announcement, stock splits, and dividend increases usually affect the price of a stock. If a person has the information before its publication, the individual can profit greatly (Doffou, 2003). These are cases of illegal insider trading, and that is the reason the SEC seeks to stop instances of this activity.

In the case of the Lubrizol acquisition, Sokol had already purchased shares of this business immediately before informing Warren of the opportunity of acquiring the company. As previously stated, he knew that when Berkshire buys a company, the value of its shares usually increases. Therefore, when he purchased the shares, he did it knowing that Berkshire would acquire the firm, and this would lead to massive profits on his side. Because this information was not available to other investors at the time of his purchase, this case fits the definition of illegal insider trading, and it is unethical. Moreover, Sokol had been instrumental to the acquisition process, despite owning shares of Lubrizol, which makes him an interested party to the acquisition (Larcker & Tayan, 2011). In this case, since Sokol knew that he had a stake in the acquisition deal, he should have stepped aside and let another person participate in the discussion. Additionally, this step alone could not have absolved him from all ethical issues pertaining to insider trading since he had already acquired shares for Lubrizol Corporation.

The CEO of Berkshire defended the actions of Sokol by stating that he did not know how Warren would behave when he received the news of the opportunity of acquiring Lubrizol. This defense still does not make the actions ethical since he was instrumental in the transaction (Larcker & Tayan, 2011). Therefore, this implies that he worked hard to ensure that Berkshire acquires Lubrizol. Now, remembering what Larcker and Tayan(2016) also said regarding the meaning of Berkshire buying a business, Sokol knew that the value of his shares would increase, leading to a massive profit. Therefore, his actions were purely intentional and ethically wrong. However, this case also has an exciting twist to it. The Harvard Business Review issue of June 20112 reports the results of a survey 52 top leaders charged with insider trading. This research showed that their main motive is not always financial profit, but the belief that other people also engage in the practice (Harvard Business Review, 2012). Likewise, in this case, while the transaction gave Sokol a profit of three million dollars, this money is not comparable to the gain that he would have gotten had he remained in Berkshire. Therefore, his motivation could not have had been purely financial gain.

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