Board of Directors
The Coca-Cola Company
One Coca-Cola Plaza
March 21, 2014
Dear Coca-Cola (KO) Board Members,
On behalf of our clients, Wintergreen Advisers, LLC (“Wintergreen”) owns over 2.5 million shares of The Coca-Cola Company (“Coke,” “Coca-Cola,” or “the Company”), Wintergreen Advisers writes today to express our disappointment with the Company’s proposed 2014 Equity Plan (“the Plan”). The Company’s Board of Directors is asking shareholders to approve an equity compensation plan which, we believe, will significantly erode the per-share value of Coca-Cola shares. If approved, this Plan in conjunction with previous equity compensation plans, will dilute existing shareholders by a Company estimated 14.2%. 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. At the current share price, these shares would be worth approximately $13 billion. In effect, the Board is asking shareholders for approval to transfer approximately $13 billion from all of our pockets to the Company’s management over the next four years. When combined with awards from previously approved compensation plans, this figure rises to $24 billion. This is a staggering transfer of value from shareholders to management. Shareholders are in effect being asked to give Coca-Cola management, at no cost to management, 14.2% of the Company. These billions of dollars given to management will come at the sole expense of the many teachers, nurses, federal and state government employees, and union members who have invested their hard-earned savings in Coca-Cola shares, either directly or through pensions and mutual funds.
The proposed Plan will meaningfully increase the number of The Coca-Cola Company (NYSE:KO) shares outstanding, reducing the ownership stake of all shareholders in the Company. At a time when Coke is facing slowing growth in both sales and profit, we do not believe it is in the best interest of shareholders to compound the Company’s headwinds by significantly diluting shareholders. Coca-Cola is a mature business in a low-growth industry. By necessity, a large portion of the Company’s growth in per-share earnings and value must come from shrinking the number of shares outstanding, so that each share is entitled to a larger share of the Company’s profits. The Company had been on the path to doing just this, with a share repurchase program totaling 500 million shares, 11% of shares outstanding, announced just 17 months ago. Now instead of meaningfully reducing shares outstanding and growing value on a per-share basis, this share repurchase program will merely help to offset the new shares issued to management under the Plan. Rather than shrinking the number of slices in the pie and increasing the size of each our slices, management wants to take a $13 billion bite out of the pie, at the expense of all shareholders. When the share repurchase program was announced in October 2012, current Coke Chairman and CEO Muhtar Kent said that it “underscores our continued commitment to delivering increased value to shareholders.” It now seems that the Company’s executives are more interested in increasing the value of their own accounts, with shareholders footing the bill.
From a shareholders perspective, the details of the Plan itself are not any more appealing than the idea of transferring 14.2% of the Company to management. For example, the Plan allows the Company’s Compensation Committee to ignore the impact of such things as asset write-downs and impairment, reorganization and restructuring expenses, and extraordinary non-recurring items when determining whether or not management has met their performance goals. Who but management could possibly bear responsibility for these types of expenses, and why should management not equally share the pain of their impact along with shareholders? If a company takes a write-down or impairment charge, it is usually due to past business decisions made by management; why should these decisions then be ignored when it comes time to determine the compensation of those individuals who made those decisions?
The Plan also allows participants to be awarded up to 3,000,000 share options, 3,000,000 stock appreciation rights, and 1,000,000 shares of common stock each year, in addition to their cash compensation. On top of this, the Plan allows the Compensation Committee of the board to grant “without limitation Shares awarded purely as a ‘bonus’ and not subject to any restrictions or conditions.” This could lead to Coca-Cola executive’s earnings tens or even hundreds of millions of dollars in a single year. We do not believe there is any justifiable reason to allow for the possibility of such excessive compensation.
In summary, Wintergreen Advisers believes the proposed Coca-Cola 2014 Equity Plan is a raw deal for all shareholders. It will serve to enrich a small number of Coca-Cola executives, while significantly diluting existing shareholders and diminishing the per-share value of all Coca-Cola shares. Particularly at a time of slowing growth for the Company, shareholders cannot afford to transfer 14% of their ownership in The Coca-Cola Company (NYSE:KO) to management. Coca-Cola remains a world class company with some of the most valuable brands in the world. The economics of the underlying business are as strong as ever. The proposed 2014 Equity Plan, however, presents a headwind that we believe will harm Coca-Cola as an investment. The proposal is an excessive transfer of wealth from its shareholders, the true owners of Coca-Cola, to Company management, and we believe it should be voted down by shareholders.
David Winters (Trades, Portfolio)’ Letter to Warren Buffett (Trades, Portfolio)
Warren E. Buffett
Berkshire Hathaway Inc.
3555 Farnam St.
March 21, 2014
On behalf of our clients, we are fellow shareholders of The Coca-Cola Company (NYSE:KO), as well as Berkshire Hathaway (NYSE: BRK.B). As the largest owner of Coca-Cola stock, you are almost certainly aware that the company is seeking shareholder approval for a new equity compensation plan at their 2014 shareholder meeting. It is our belief that Coca-Cola will be best served by shareholders voting against approval of the new plan, for the reasons laid out below. Over the course of your career, you have spent a great deal of time discussing the importance of management compensation and proper alignment of managements interests with those of shareholders. The excessive compensation of management and the expense it imposes upon long-term shareholders has been a topic you have frequently touched upon. As you review the details of Coke’s new equity compensation proposal in their proxy statement, I believe you will find that it contains elements of both misalignment of management and shareholder interests and excessive compensation. This new equity compensation plan, when combined with existing equity compensation plans, could dilute existing shareholders by more than 14% according to Coca-Cola’s own calculations. You will not need your calculator to estimate the worth of that 14% stake and the value the share issuance could transfer from shareholders to management. It will likely also negate much of the Company’s current 500 million share repurchase program, making it all the more difficult to grow Coca-Cola’s value on a per-share basis.
On top of the sheer magnitude of dollars of this plan, the proposed plan allows The Coca-Cola Company (NYSE:KO)’s Compensation Committee to exclude things such as write-downs, impairments and other extraordinary nonrecurring items when deciding whether or not management has met the performance goals required to trigger their pay day. They can, in effect, move the goal posts closer once the ball is in the air. Buried deep within the plan document (and seemingly excluded from the proxy statement itself) is the fact that the proposal also allows the Compensation Committee to award “bonus” shares which are “not subject to any restrictions or conditions.” This hardly appears to be the “pay for performance” type of compensation which is so critical to incenting management to create long term per-share value for shareholders.
You have often decried how excessive compensation is so difficult to reign in precisely because shareholders have no direct voice in the negotiation with management and because Compensation Committees are often comprised of lap dogs rather than Dobermans. In this situation, with Berkshire as the largest shareholder of the company in question, you hold significant sway over the process. We believe Coca-Cola is setting a poor precedent with regard to corporate pay practices with this proposal, and as a leading global corporation, others will inevitably and unfortunately follow their lead.
We believe that the shareholders of The Coca-Cola Company (NYSE:KO), including Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), will be best served by shareholders voting down Coca-Cola’s Equity Plan proposal.