The data seem clear on David Sokol's conflict of interest in the Berkshire/Lubrizol deal. He bought shares in Lubrizol, and then encouraged Berkshire to buy the company. He claimed that because he didn't know whether Berskhire would follow his recommendation he didn't have inside information. But he clearly had information that the public didn't have: that the probability of the acquisition was elevated. The far more interesting question from our standpoint is why Warren Buffett, known for his embrace of ethical business practices, failed to understand the unethicality of Sokol's actions when he learned of them, and intervene. Had Buffet suddenly gone over to the dark side? Or, as Berkshire portrayed the story, did Buffett do absolutely nothing wrong?
We think that neither of these conclusions is correct. As we discuss in our April 2011 HBR article "Ethical Breakdowns," mounting research shows that we often fail to notice others' unethical behavior if it's in our interest not to notice. This failure of oversight, called "motivated blindness," is unconscious and common. When Sokol told Buffett that he owned stock in Lubrizol, Buffet probably didn't consciously ignore the warning signs; he didn't see them at all.
Motivational blindness contributed not only to Buffett's action, but to the failure of major accounting firms to see the corruption in the books of the firms that they audit. It also accounts in part for the failure of security rating agencies to accurately gauge the riskiness of the instruments they rate. Auditors who want to be rehired, who want to sell consulting services to their clients, and who may even consider job offers from those same clients, are motivated to overlook the corruption of these parties. Auditors are expected to be independent, but their desire to please their client makes such independence impossible. And, when we allow financial firms to choose for themselves the agencies that rates their financial products, the agencies have every incentive to be lax.
To read the entire article visit: Ethical Blind Spots: A Lesson from Warren Buffet