by Jeffrey Bronchick and Ben Claremon
We have been thinking about this issue for a few weeks, tempering our urge to dash out some heated thoughts of the moment. We have gotten over it.
Ignoring for a moment the details of Coca Cola’s magnificent excessiveness in its executive compensation plan, the issue here is Buffett’s decision—as Coke’s largest shareholder and long-term confidante of the management team-to express his viewpoint that the pay package is indeed excessive by abstaining from a shareholder vote on the pay package instead of voting against it.
Using a different strategy, Mr. Icahn took it upon himself to draft a “Dear Warren” editorial in the Wall Street Journal suggesting that Buffett’s behavior highlights exactly what is wrong with U.S. corporate governance. Specifically, very few people are willing to actually address the issues regarding pay for performance and the ongoing transfer of outrageous sums to executives—at the expense of shareholders—due to fear of “rocking the boat.” Buffett responded that maybe Carl is used to dealing with a slightly different type of management team and Board, rather than the hoi polloi that flies around on Berkshire’s Net Jets and hobnobs with Warren.
Our point is simple: Icahn is 100% right. Buffett does not own all 500 of the S&P 500 stocks and is limited by the fact that there are only 24 hours in a day—as are the rest of us. Thus his suggestion that the way to go about expressing disapproval is to privately chat with said management team about the right way to go about things is disingenuous at best. He has spent a lifetime talking about setting examples and the example he is bizarrely defending here is awful. He made his point about Coke management years ago in print: he admitted that he was simply not the kind of guy who was going to eat and go to the bathroom at the same table. That is perfectly acceptable advice, but runs into a wall of practicality if no one—and particularly The Oracle—is going to say a word as Coke’s compensation plan gets more egregious every year. If Buffett won’t speak quietly in private to his “friends,” then the rest of us dirty wretches are apparently going to have to speak up and fend for ourselves.
At the annual meeting last weekend, Buffett was asked why Coke board member Howard Buffett did not vote against the pay package if his father was against it. Further, he was asked why Howard would be a good Chairman for Berkshire if he was not willing to stand up against egregious compensation. Buffett’s honest answer was indicative of a sad truth that a lot of investors do not fully appreciate. What he said (and we paraphrase) was that Boards are both social and financial animals. In other words, if you raise hell at a Board meeting you are unlikely to be invited to play golf with the other members or asked to be on another Board that would allow you to collect a few hundred thousand dollars a year just for showing up. Buffett even explained how, in most cases, the members don’t even review the proposals until right before the meeting and thus are in no position to protest. In summary, Buffett said that his son did exactly what was expected of him given the Board’s dynamic and that this incident shouldn’t make us question Howard’s ability to protect Berkshire’s culture. I guess we will find out but it doesn’t appear that we can expect Howard to be any more of an “activist” than is his father.
For the record, shareholders heard a slightly different message at the 2009 annual meeting, when Mr. Buffett said large shareholders in companies should “speak out on the most egregious cases” of CEO compensation abuses. “The way to get big shots to change their behavior is to embarrass them,” he said then. “It would act as a restraining factor that might set in corporate America…The restraining factor isn’t there right now.”
Should we all look forward to Icahn vs. Buffett next year in Omaha? Having Icahn replace Carol Loomis would sure be a good way to spice up the meeting!