Sokol Imposing Budget Discipline and Culture Change at NetJets

Published on December 4, 2009

More details are emerging regarding the management transition at NetJets earlier this year when David Sokol was named Chairman and CEO after Richard Santulli’s unexpected resignation.  Last month, Mr. Sokol granted an interview with The Columbus Dispatch regarding his turnaround plans for NetJets and predicted at least break even results for 2010.  In a New York Times article published today, some interesting details are provided regarding the management transition, Mr. Sokol’s cost cutting plans, and his overall management style.  A few brief excerpts appear below.

Santulli Unhappy With Oversight from Berkshire

One of the surprising aspects of the management transition is that Mr. Sokol appears to have been brought in to NetJets to provide “oversight” prior to Mr. Santulli’s resignation.  As followers of Berkshire Hathaway know, it is highly unusual for Warren Buffett to send supervisors from outside the subsidiary.  Apparently this contributed to Mr. Santulli’s decision to resign:

Mr. Sokol describes his mission succinctly. “We are instilling a culture of cost discipline and planning.” In an e-mail message to the staff, he wrote that he had never seen a company of NetJets’ size that operated “without an integrated business plan” and with a budget that was “often ignored.”

Within a week of his arrival in July, Richard T. Santulli, the founder and chief executive of NetJets, resigned. According to several people close to the company, Mr. Santulli was unhappy that a Berkshire executive was brought in to provide oversight.

Management Style Changes

One aspect of the transition that seems to be more clear after Mr. Sokol’s recent interview with The Columbus Dispatch and today’s New York Times article is the major difference in management style between Mr. Santulli and Mr. Sokol.  While Mr. Santulli was attempting to cut some costs through voluntary measures such as asking employees to forego holiday pay and take additional time off, Mr. Sokol’s approach has been more aggressive.  Some NetJets executives have not been happy with the changes:

Some former executives have complained about his management methods. A onetime NetJets executive, echoing the views of several others, said that Mr. Sokol was intimidating and put people on the defensive. “When he first came in, he got on the phone with a group of us and said: ‘I expect complete candor. I am taking notes and I expect full disclosure’ “ or their jobs could be at stake, this person recalled.

Mr. Sokol said he simply read from a script and did not make threats. He recalled the script thusly: “If you answer deceptively, that will not be looked upon favorably by the board.”

What is disturbing about this account of the situation, if accurate, is that it was even necessary to make a request for “complete candor” from senior management.  This could indicate more serious problems with senior management and, in fact, the article does list a number of changes that Mr. Sokol made within the first few months of taking control.

One management change involved the resignation of Mark Booth who ran NetJets’ European operations:

Then in October, the European chairman, Mark Booth, and that unit’s chief executive, Bill Kelly, abruptly resigned. Both of those men also declined to comment for this article, but several people close to the men said they were frustrated at being treated the same as their United States counterparts, even though the overseas business had been profitable for several years. They cited an e-mail message to the entire management team describing cost-control measures, in which Mr. Sokol wrote that any attempt to circumvent them would be dealt with “harshly and swiftly.”

In fact, Mr. Booth was praised by Warren Buffett in his 2007 annual letter to shareholders:

For the first ten years we made little financial progress there [Europe], actually running up cumulative losses of $212 million. After Rich brought Mark Booth on board to run Europe, however, we began to gain traction. Now we have real momentum, and last year earnings tripled.

As long-time readers of Mr. Buffett’s shareholder letters know, he does not typically name specific executives (particularly those below the subsidiary CEO level) unless he is providing strong praise.

Changing Culture is Difficult

Clearly, NetJets entered the recession with a cost structure that resulted in severe losses this year which proved to be unacceptable to Mr. Buffett leading up to the highly unusual act of sending in Mr. Sokol to supervise NetJets operations.  It is highly doubtful that Mr. Buffett would punish a subsidiary manager simply because of the economic downturn, particularly because the events leading up to the current recession were so unusual and severe in nature.  Instead, it is more likely that Mr. Buffett took his action due to factors that he viewed as controllable such as poor cost controls and overall management.

As Bruce Greenwald stated in the New York Times article, Mr. Sokol had to do something “dramatic” under the circumstances but it is not clear that actions intended to change an established management culture can work. Sometimes the entrepreneurial culture required to start an entirely new industry is very different from the culture needed to sustain a business once it has reached maturity.  Managing this culture change may prove much more difficult for Mr. Sokol compared to the cost cutting measures he has taken up to this point.

Disclosure:  The author owns shares of Berkshire Hathaway.

Sokol Imposing Budget Discipline and Culture Change at NetJets
Tagged on: