The Day Warren Buffett Failed His Investors
Yesterday broke a six-day winning streak for U.S. stocks, but investors can expect the market to get back to its winning ways on Thursday in the wake of solid earnings reports from technology heavyweightsApple and Facebook. The benchmark S&P 500 was just above breakeven at 10:20 a.m. EDT, while the narrower Dow Jones Industrial Average was down 0.07% and the technology-heavy Nasdaq Composite Index rose 0.17%. However, today's topic is a controversy that involves two low-tech blue chips: Coca-Cola and Berkshire Hathaway .
Respected value investor David Winters of Wintergreen Advisers has since March been publicly lobbying other Coca-Cola shareholders to reject the company's new equity compensation plan, calling it a "raw deal." As part of his efforts, Winters naturally contacted Buffett directly. Not only is Berkshire Hathaway Coca-Cola's largest shareholder, with a 9.1% stake at the end of last year, according to S&P Capital IQ, but Buffett's pronouncements on corporate governance carry much authority and he has longstanding relationship with the soda maker (his son, Howard Buffett, is a Coca-Cola director). However, Buffett missed an opportunity to use the full weight of his authority on behalf of his (and Coca-Cola's) shareholders.
In a televised interview yesterday, Warren Buffett told CNBC that although he and Berkshire Vice Chairman Charlie Munger disapprove of the plan, they refused to vote against it, abstaining instead. Here is how Buffett justified that decision:
Well, we abstained because we didn't agree with the plan. We thought it was excessive. And -- I love Coke. I love the management. I love the directors. But -- so I didn't want to vote no. It's kind of un-American to vote no at a Coke meeting. So [laughs] that's -- but I didn't want to express any disapproval of management. But we did disapprove of the plan.
The plan, compared to past plans -- was a significant change. And there's already a 9% or so overhang in terms of options outstanding relative to the amount of shares outstanding, 8% to 9%. And this authorization of another 500 million shares -- not all of which would've gone on options -- but that's another 11 percent of the company. And -- and -- I thought it was too much. And -- I talked to my partner Charlie Munger, and he thought it was too much. So we abstained.
That justification is irrational -- if Buffett disapproved of the plan, he ought to have voted against it rather than abstain. Shareholders were asked to vote specifically on the plan; voting no need not signal a broad rejection of Coca-Cola's managers, it simply indicated that they should review the compensation structure. Why avoid expressing "any disapproval" of management, if you clearly disapprove of management's actions on a specific issue? (And what's this "un-American" nonsense?)
Not only did Buffett decline to vote against the plan, but he was unwilling to make his opposition public ahead of the vote, saying that he "would not want to be in a position of campaigning on either side." How about campaigning on the side of his shareholders? The plan ultimately received 83% approval among shareholder votes cast.
In his 2007 letter to Berkshire shareholders, Buffett wrote:
Irrational and excessive comp practices will not be materially changed by disclosure or by 'independent' comp committee members. Reform will only occur if the largest institutional shareholders -- it would only take a few -- demand a fresh look.
In a statement yesterday, David Winters said. "We are surprised that Warren Buffett had the opportunity to take a stand against excessive management compensation and failed to seize it." As a tremendous admirer of Buffett and a student of his writings on corporate governance, I couldn't agree more.
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