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Warren Buffett, Coca-Cola and the Not-So-American Dream

Next Thursday, for the seventh time, I am going to Omaha, Nebraska, for the Berkshire Hathaway annual meeting. But this is the first time that I find myself respecting Mr. Buffett a little bit less than the year before.

One of Berkshire Hathaway’s largest and oldest stock holdings, Coca-Cola Co., held a proxy vote yesterday, and its management clearly decided to award itself too much stock. Warren Buffett acknowledged in an interview that he is against the plan: “We do not believe it would be consistent with Berkshire’s long-ingrained culture to support such a plan at any of your equity holdings.”

However, instead of expressing with his proxy ballot what he really feels, he abstained from voting against the plan, and explained: “I could never vote against Coca-Cola.”

By failing to vote against something that was clearly wrong, Buffett, who in my mind (until yesterday) used to be a moral compass for corporate America, became another middling American politician — the common type that all of us respect so little, the one that votes not for what he believes in but for what is going to keep him in the good graces of his party or get him reelected.

When your company owns 10 percent of another company (even if it is Coke), there is a responsibility that comes with the investment. But when you are Warren Buffett, who constantly speaks out against excessive compensation, that responsibility is even greater.

There should be no double standard for Coca-Cola or for Buffett. After paying its management millions of dollars to run a company “a monkey could run” (Buffett’s words, not mine), shareholders shouldn’t have to fork over an additional 14 to 16 percent over four years to management to incent them to do their jobs — running a company with such a significant competitive advantage (which was there long before these executives arrived) that any MBA student with a C- average could operate.

We don’t own Coke and probably won’t own it unless the price gets cut by half, so my tirade here is not as a wounded shareholder but as an American. It’s what Buffett said in a CNBC interview that bothered me the most: “It’s kind of un-American to vote no at a Coke meeting.” I would not want to live in a country where everyone always agrees with the powers that be, where people are afraid to speak up. I lived there once — in the Soviet Union.

I could not disagree more with Buffett. Coke’s compensation plan is unjust for the shareholders. It is American to speak up against injustice — yes, even if it is perpetrated by an American icon such as Coke. Let me correct that: especially if it is an American icon such as Coke. And let’s be honest: The shareholders, not the management, own Coke. An injustice is what transpired at the company, even if 83 percent of shareholders who voted were too indifferent to read the proxy.

It is unpleasant to write something negative about a person you respect and owe so much in your development as an investor and as individual. But I am sure the pre-Coke-vote Warren Buffett, the one who had such a tremendous impact on me, would want people to disagree with him if he were wrong.

That said, I am still making my annual pilgrimmage to Omaha. But as I’ve written in the past, going to the Berkshire Hathaway meeting is not really about Berkshire Hathaway and not even about Buffett or his right-hand man Charlie Munger. Omaha, for these few days in spring, becomes value investor central, giving me the opportunity to see my value investment friends from all over the world

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hey v, sorry i didn't read this article before i saw you at the meeting. would be in interested in your opinion about his comments at the meeting.

let us know if you do a follow-up to this article. let me know when you're in marina del rey!

May 10 2014 at 10:45 PM EST

max flower
 

BRAVO BRAVO You are so right.. I have lost ALL respect for him

Apr 30 2014 at 7:57 AM EST

charlie
 

In the 70's and 80's, CEO's made an average of 30-40 times the average workers at their companies. Now it hovers between 300 & 400. Revolutionary and great CEO's who start a company and make life changing products are worth it, IMHO. Think Gates, Jobs, Musk, Brin, et al.

But for established companies like coke and At&t, I is a bit over the top. Not that leadership good leadership isn't difficult, buy exceptional leadership is very rare. Former Att ceo Ed Whitacre sat on the board of Anheiser Busch. Agusta Busch the 3rd, sat on the At&t board. Whitacre pulled out upwards of $30 million a year while at helm. A very good CEO and deal maker, but stock price during his tenure didn't produce outsized returns for the shareholders. In fact from 1998 to departure in 2007 basically treaded water like the S&P 500.

Whole Foods Market CEO (who founded the company) has implemented transparent compensation for ALL employees and it is in their by-laws capping any employees salary at no more than either 30 or 40 times average workers compensation. Pretty impressive on the other hand. Like Buffet says they like Labradors, not pit bulls to sit on their boards. Buffett probably felt pinched and took the politically correct way out. He is still to celebrated for all he has done right for capitalism.

Apr 27 2014 at 11:13 AM EST

Bill Rietman
 

I had a very similar reaction. I think a very good case could be made that these large salaries hurt investors more than they help, and I consider the boards that approve them to be in dereliction of their fiscal responsibility to the shareholders. If you can't even get W.B. to take a reasonable stand in more than principle, well, the magnitude of the problem becomes rather clear, doesn't it? If all your buddies voted on your salary (and didn't have to contribute) I bet you would be pretty well compensated too.

Apr 25 2014 at 8:23 PM EST

John Mitton
 

After reading the comments here and posting my own comment on Twitter, I have to say if the executive giants of KO want greater ownership in KO then maybe they should have it. I heard it referred to as a "sugar water" company. Unless I'm missing the greater humanitarian significance of KO then let them have it.

Maybe their logistics are more valuable then their product.

Apr 25 2014 at 6:25 PM EST

Amberverde
 

Hi Vitaliy, Giants of the industry, like Buffett, should have their decisions and opinions (regardless of volume) challenged by commentators. No argument there. That said, I find two of your assumptions troubling; 1) that Coca Cola has been or is an easy company to run, and 2) that you, or anyone for that matter, outside of the Omaha Inner Circle truly understand the inner-workings of Mr Buffett's mind, or his strategy. If in his decades of investment success he has actually opted this one time to languish in his Coca Cola obsession - choosing carbonation over cash, so to speak - then, with respect, I think he's earned it. Ed Emerson, HNW Magazine

Apr 25 2014 at 9:39 AM EST

Ed Emerson
 

For argument's sake, let's regard this compensation as not particularly excessive, thus making it easier for Mr. Buffett to abstain against voting since that is regarded as un-American. The question that arises then is: At what point does compensation become so excessive and detrimental to shareholders that Mr. Buffett regards that as un-American and votes against it?

In his 2002 letter to shareholders, he wrote at length on the subject of executive compensation, the committees that approve of these, and best practice. In the 2004, he outlined three factors that institutional investors should take into account when assessing whether the interests of the CEO and management are aligned with those of shareholders, one of which is CEO compensation.

In that same letter in 2004, he wrote:
"Charlie and I love the idea of shareholders thinking and behaving like owners. Sometimes that requires them to be pro-active. And in this arena large institutional owners should lead the way." In this occasion, as you point out Mr. Katsenelson, he fails to "walk the walk."

Taking a critical look at the thoughts and actions taken by someone whom one learns so much from is difficult so credit is due for pointing them out.

Apr 25 2014 at 5:50 AM EST

Michael Tsangaris
 

Now I know why he was such a fan of Heisenberg!

Apr 24 2014 at 9:03 PM EST

Chris
 

Great Article. My thoughts exactly after listening to his interview. Buffett remains a great investor and business analyst. Unfortunately, he seemed to have lost independent thought on a number of topics long ago including anything regarding the US economy or any of his holdings. This interview on Coke illustrates is just another example.

Apr 24 2014 at 4:38 PM EST

Marc
 

I think this is the first time he has publicly abstained from voting with the management of one his "inevitables". So for him this distinction was probably a big deal; for us regular folks - not so much.

In hindsight, all of us "Snowball" readers, should have seen this outcome coming a mile away, but it disappoints me all the same. His ability to rationalize and compartmentalize gives him incredible focus but it also blinds him on occasion.

Apr 24 2014 at 4:28 PM EST

Doug