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Vitaliy Katsenelson
Vitaliy Katsenelson
Articles (126)  | Author's Website |

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

April 24, 2014 | About:

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 (NYSE:BRK.A)(NYSE:BRK.B) largest and oldest stock holdings, Coca-Cola Co. (NYSE:KO), held a proxy vote yesterday, and its management clearly decided to award itself too much stock. Warren Buffett (Trades, Portfolio) 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 (Trades, Portfolio), 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 (Trades, Portfolio), 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 (Trades, Portfolio). 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.

About the author:

Vitaliy Katsenelson

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).

Visit Vitaliy Katsenelson's Website

Rating: 4.7/5 (18 votes)



Blue Cove Partners
Blue Cove Partners - 3 years ago    Report SPAM

Well said, fully agree with your view

Warrensc11 - 3 years ago    Report SPAM

one does not need to be hostile towards its wonderful associate of 25 years to voice its view.. he abstained from voting is not a cowardly act but a balancing act between maintaining good relationship and voicing disagreement..

Investor77 - 3 years ago    Report SPAM

Sad but true...

Vgm - 3 years ago    Report SPAM

The author is expressing the obvious, and expected, herd-like response. I disagree. When two of the greatest, most experienced and most ethical, investors and businessmen of all time (Buffett and Munger) take a considered decision on a major and very visible matter, then I try to look under the surface and understand their approach - and not just throw stones. Abstaining is not a cop out. It's a subtle but unmistakable expression of disapproval which Coca Cola will not have missed. Buffett also spoke with Kent to explain why he was abstaining and no doubt gave him a few pointers, thereby avoiding a public spat. Buffett, Munger and Kent are highly sophisticated and ethical operators. That has not changed for me. (Winters' mistaken claim of huge dilution was refuted by Buffett who also explained how the dilution could be mitigated by extending the timeframe)

SeaBud premium member - 3 years ago

VGM - you call somebody's opinion "obvious and herd-like" and say they are "just throwing stones." Why would you take a well-reasoned, calm analysis and attempt to denigrate it through aspersion rather than rationale? I happen to agree with the author based on two primary rationales:

- Buffett has long spoken against excessive executive compensation in America.

- As a shareholder, would we be ok with granting across the board bonuses to delivery drivers that were not needed for retention? If wasting company resources is not ok, why is it ok when it comes to pay for executives?

You explain that Buffet still made his point by not voting - and voice your opinion that this approach is more effective. I respect your view - and address it respectfully - but, I respectfully disagree. To me, Buffett is at the forefront of the issues outlined above and as a major shareholder and leader in American business, I would have preferred he take a firm stand and am disappointed he did not.

Just can't fathom the need for you to attack the author not with facts but with derogatory comments.

Fekafiemd premium member - 3 years ago

agree 100 percent!

Vgm - 3 years ago    Report SPAM

Seabud -- Correction. I do not attack the author. My first line is clear on that. The opinion expressed by the author is one which is ubiquitous in the media. It's the first thought we all have about the matter under discussion.

When dealing with characters of the caliber and integrity of Buffett and Munger, we should be prepared to go deeper and give them the benefit of the doubt and think again. More than Buffett, Munger has been vocal, and often in an extreme way, about compensation. Do you think they don't see the obvious? The fact that they decided in unison on their chosen path to abstain tells us what they believed to be the superior course of action in this case. In my opinion, that's what should get our attention. That's what's fascinating here and worth pondering for me. I believe they saw the word as mightier than the sword, so to speak. Buffett will always do what's best for shareholders (including himself!) - in the long run. To believe he opted out of his responsibility is simply not a credible argument to me.

The majority view is clear. I beg to differ. I know I'm in the minority. Thanks for commenting.

"If everyone is thinking alike, no-one is thinking." Benjamin Franklin

Jsoumilas premium member - 3 years ago

Totally agree with the author. Mr. Buffett's inaction on this specific issue is heart breaking.

Denarius - 3 years ago    Report SPAM

I think Warren may have had a "momentary lapse of reasoning" during which his actions did NOT follow his words. He is getting up there in age, so I'll have to give him a "pass" on this one.

I agree with Vitaly.

Use13usa premium member - 3 years ago

Buffett says "that's just the way [he] feels about the people there" as to his reason. It feels like his decision is somewhat based on emotion/attachment to the company and people who work for it. He might be thinking the employees deserve it but the decision is not the best one for the company in the long run. So he abstained from voting.

Praveen Chawla
Praveen Chawla premium member - 3 years ago

We don't know what is going on behind the scene at the board. I don't think Buffet is interested in throwing a hand grenade into the debate and making management look like crooks. Let us give him time and see how things evolve - meanwhile I will hold on to my small KO position (which has been a dissapointment).

Snowballbuilder - 3 years ago    Report SPAM

Totally agree with autors. This time warren is not walking is talk.

if a management want align his shoe at the shoe of the owner they simply have to buy the stock , on the market , at market price with THEIR personal - family money .

that what any other shareholder do.

stock option is a different situation : good i win a lot , bad i dont lose (its quite like a lottery ticket)

And the KO plan is really huge ... Lot of dilution for the shareholder and please dont tell me that buy back mitigate the effect . We are not childreen . The shareholder money are not free money !! And the company money are not free money !!

" if Coke uses the share repurchase program to offset the issuance of these shares as they have done in recent years, shareholders will be further damaged. The company may have to divert approximately $2 billion per year (one-quarter of its free cash flow) from productive uses to offsetting dilution. To a business with a 27% return on equity, the opportunity cost of spending $2 billion per year to offset dilution is ENORMUS"

Batbeer2 premium member - 3 years ago

While I think the plan is terrible, I think it's worth considering the second-order efects if Warren had done precisely what Winters said he should have done.

1) Buffett's vote wouldn't have made any difference. Most of the shareholders voted for the plan. Management can't not adopt a plan that has been voted for by the majority.

- There could have been no winners. None.

Had Buffett publicly joined Winters before the vote, he may have swung the vote. That's a nice battle to win but Buffett would subsequently be consulted about any decision at any of Berkhire's many investments. Every board of directors at any company would rue the day Berkshire got a 6% stake. David Winters wins bragging rights and Berkshire loses many billions worth of goodwill.

As it is, Warren has a fair chance of getting what he wants. The board can now do what they need to do and everyone can bow out gracefully. FWIW, I think they will.

2) Had Buffett acted acording to the wishes of Winters, the next day he would have found a truckload of letters on Berkshire's doorstep. All sorts of fund managers with a problem with any one of Berkshire's many holdings, would have copied Winters' behaviour.

Buffett had to ignore Winters or he would have created a whole new (and unprofitable) line of business at Berkshire. Einhorn alone would be writing two letters a day about one of Berkshire's many holdings. Now that Buffett has ignored Winters, fund managers know what to expect:

- Berkshire is not your megaphone. Even if you're right.

IMHO Winters is a great fund manager but he's proven himself a lousy diplomat. He left Buffett no choice.

In short, this may be a rare instance of Buffett doing something dumb and inconsistent or it may be just another case of Buffett doing something smart that's poorly understood.

To be clear, I think the lady who wrote the letter defending the plan doesn't have a clue what it means to think like an owner. That's inexcusable for a board member.

Just some thoughts.

Camue01 - 3 years ago    Report SPAM

FWIW, I agree with VGM and Batbeer that there must have been some second-level on the side of Berkshire.

If you watch the interview and the way Buffeett answers the questions, you can see that he does feel comfortable about the situation. In all, he has been brought into a situation in which he cannot win anything and his actions and interview answers clearly display a damage-containment strategy.

I agree that Buffett probbly wanted to signaliye that he does not intend to be utiliyed by Winters & Co. In adition, he does not have a lot to win if a conflict breaks out at KO deriving attention and energy away from the normal business towards political fighting. Buffett probably can think of better uses of his time than haggling about an incentive plan. Finally, as also mentioned in the interview, Berkshire generally seem happy with Kent`s management and they neither want to have him replaced nor seriously hurt or made lame duck in such a fight.

So in my view, Buffett's behaviour is purely loss-cutting and avoiding trouble as there is nothing to win from the fight.

The one aspect I wonder about is whether he could have avoided trouble altogether, i.e. convinced management to propose with a more modest plan even before they suggested anything. That way, potentially, no discussion would have come up at all...

Marbella112 - 3 years ago    Report SPAM

In fact, the official vote count filed with the SEC late yesterday showed that less than half of the outstanding shares voted for the plan -- 49.77%, to be precise, with the rest opposing, abstaining, or simply not voting. This calculation uses all of Coke's shares outstanding (4.4 billion, according to SEC filings). Coke's calculation ignores abstentions and shares not voted.

Batbeer2 premium member - 3 years ago

In fact, the official vote count filed with the SEC late yesterday showed that less than half of the outstanding shares voted for the plan -- 49.77%, to be precise, with the rest opposing, abstaining, or simply not voting.

Didn't know that, thanks!

Should be intersting to see what KOs board does next.

AlbertaSunwapta - 3 years ago    Report SPAM

I also agree with VGM and Batbeer that Buffett is thinking beyond just the numbers and the spectacle of him voting against the board. Buffett has long shown a capacity for multivariate thinking and those that take simpler approaches to issues should stop and try to understand Buffett's often more holistic view towards many issues.

SeaBud premium member - 3 years ago

Alberta - Neither you nor anybody with a differing opinion has the mind of Buffett or has probably considered this as deeply as Buffett. However, an opinion differing from Buffett's is not "simplistic" by definition, nor is it wrong. People who disagree with Buffett may have, indeed, "stopped and tried to understand Buffett's often more holistic view", and just disagreed. I

Not a huge deal but stick to the issue rather than saying thinking differently from Buffett must be "simpler" or is a product of not "stopping and thinking." A better way to say it might be "Buffett deserves the benefit of the doubt, not you are simple for disagreeing with him.

LwC - 3 years ago    Report SPAM
Forune interview

Warren Buffett (Trades, Portfolio): We took a stand on Coke's pay package

By Stephen Gandel, senior editor April 28, 2014


Vgm - 3 years ago    Report SPAM

Seabud -- I think we can all agree simple is not necessarily wrong. But there can be little doubt that we are all thinking simpler than Buffett in investing matters. He is on a superior level, and has proven it repeatedly over many decades. So, when he apparently makes what looks like an obvious unforced error in a very public way, and on a topic which is very close to his and Munger's heart, we should stop ourselves from drawing the obvious simplistic (negative) conclusion. Most have not.

The author tells us "By failing to vote against something that was clearly wrong, Buffett...became another middling American politician — the common type that all of us respect so little". The author then proceeds to link Buffett's behavior to that of Russians who live in fear of speaking out in his homeland. So Buffett goes from hero to fearful weak yes-man afraid to speak up in public, overnight? This is exceptionally simplistic. Not to mention naive. And it embodies a remarkable extrapolation.

In the link provided by LwC (thanks!) Buffett reiterates that Berkshire's abstention was a very strong voice expressed against the proposal. This is the second-level thinking that some of us alluded to in comments above. It could never have been very complicated. There were not that many options.

Batbeer2 premium member - 3 years ago

>> "By failing to vote against something that was clearly wrong, Buffett...became another middling American politician — the common type that all of us respect so little"

Also, it's Berkshire that owns the stock, not Buffett. Using the capital of Berkshire's shareholders to become (perceived to be) better than the average American politician, would make Buffett a bad CEO.

I don't think Berkshire should be run for the benefit of the CEOs image. In fact, I think it is not.

Instead, I think Buffett, as any good CEO would, maintains an image that benefits Berkshire and its shareholders.

Shadowman73 - 3 years ago    Report SPAM

The majority opinion here seems to be that by abstaining from voting against the comp package Buffet "did nothing". I totally disagree with that assessment. I think he has been very vocal about his opinion that the options package was "excessive", and suspect, as has been mentioned by one or two commenters above, that he and Munger have chosen to use means more politically expedient to make their point rather than to participate in an ugly proxy war that was doomed to failure from the outset. Buffet is far from perfect, but he usually (not always) gets the big ones right. I'm willing to give him the benefit of a doubt on this one.

Vgm - 3 years ago    Report SPAM

Buffett getting it done diplomatically?

"Coke Says Pay Plan Offers 'Flexibility' Amid Buffett Criticism"

"The Wall Street Journal reported yesterday that pressure from Buffett would probably prod Coca-Cola to revise the pay plan before it goes into effect next year."


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