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“The way to get big shots to change their behavior is to embarrass them.”
So said Warren Buffett, aka the World’s Greatest Investor, in 2009 on the subject of excessive executive compensation. He was speaking at the annual meeting of his conglomerate, Berkshire Hathaway, a forum that he has often used to criticize executive compensation practices. In that 2009 meeting, though, he also made a suggestion about how to begin to change such practices. Institutional investors, he said, should start to “speak out on the most egregious cases.”
Apparently, though, Buffett doesn’t believe in the adage that you should practice what you preach. At least not based on what we saw last week. Given a chance to embarrass some major big shots — namely his fellow board members at Coca-Cola, a company where he is the largest shareholder, and whose equity compensation plan he felt was unjustifiably rich — he chose instead to punt. His reasons for doing so illustrate exactly why it is impossible to rein in excessive compensation.
The controversy over Coke’s equity compensation began about a month ago when one of the company’s investors, David Winters of Wintergreen Advisers, wrote a letter to the Coca-Cola directors complaining that the plan was excessive. “The Company expects that the 2014 Plan will award a mix of 60% options, 40% full value shares, resulting in the issuance of 340,000,000 Coca-Cola shares,” he wrote. Winters estimated that this would result in a transfer from shareholders to management of around $13 billion — and combined with previous equity awards, “this figure rises to $24 billion.” He called it an “outrageous grab.”
The equity compensation plan had to be approved by shareholders, so Winters began a campaign to get big institutional shareholders to vote it down at the annual meeting. In the weeks preceding the meeting, he ratcheted up his attack on the plan, complaining, among other things, that the performance targets that had to be met to get the equity awards were adjustable. (“In football terms, this allows the Compensation Committee to move the goal posts closer once the ball is in the air.”) Coke, of course, disputed Winters’ assessment and urged shareholders to vote for the plan.
“We thought Buffett would be a natural supporter of our position,” Winters later told me. To that end, he sent a separate letter to the Oracle of Omaha: “Like Jiminy Cricket,” it read, “you sit on our shoulders reminding us to do what is right.” He then laid out his rationale for why he believed the plan was excessive and a “no” vote was justified.
As Buffett would later acknowledge, the Winters letter prompted him to take a closer look at Coke’s equity compensation plan. And, sure enough, he came to the same conclusion as Winters: It was excessive — “you can give away too much of a company,” he told Becky Quick of CNBC on April 23, in the wake of the annual meeting. But he didn’t divulge his views to anyone on the Coca-Cola board. And when it came time to vote with Berkshire Hathaway’s 400 million shares, he abstained.
Quick, who is one of Buffett’s favorite journalists, seemed stunned when he told her what he had done. She pressed him for his rationale. Essentially, it was cowardice.
“I love Coke,” he said. “I love the management. I love the directors. So I didn’t want to vote no. I didn’t want to express any disapproval of management. But we did disapprove of the plan.”
Buffett went on to say that he had been on 19 boards in 55 years — “and I’ve never heard of a vote against a compensation plan voted by the compensation committee” — though he acknowledged that sometimes board members grumbled about compensation plans outside of the board room. When Quick asked him whether he had ever voted for things he disagreed with, Buffett replied: “Sure. I’ve voted for compensation plans that I haven’t agreed with.”
“I’m still trying to get my head around this,” Quick said. So am I. This was potentially a teachable moment — Buffett could have shown other directors that it is OK to dissent from an executive compensation plan and still “love” the company.
“He could have shown that you can separate out feelings of liking management with disagreeing with something management does,” said Gary Hewitt, head of research at GMI Ratings. “That doesn’t mean it’s a betrayal.” He added, “That is leadership Buffett could have provided.”
Instead, what Buffett showed was how impossible it is for directors — even billionaires known for speaking their minds — to rock the boat. The need for collegiality trumped good corporate governance. As it almost always does.
How sad. If Warren Buffett won’t use his unparalleled clout to rein in excessive compensation, how can we expect anyone else to?
Joe Nocera is a columnist for The New York Times.
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