Wednesday, April 30, 2014

Warren Buffett and Corporate Governance

Coca-Cola’s $13 billion management equity compensation plan was recently assessed as excessive by Warren Buffett and investment advisors, according to a NY Times article, “Buffett Punts on Pay”. Buffett is Coca-Cola's largest shareholder, owning 400 million shares.

Apparently Mr. Buffett disagreed with the equity compensation plan, believing it to be excessive, counter to the best interests of the shareholders. Yet, he did not vote against. Oddly, he abstained.

Mr. Buffett provided his reasoning via CNBC: “…I love the management. I love the directors. So I didn’t want to vote no…But we did disapprove of the plan.”

Ironically, in 2009, on the subject of excessive executive compensation, he said, “The way to get big shots to change their behavior is to embarrass them.” Investors should,  “speak out…”.

The NY Times concluded regarding the Coke vote: “The need for collegiality trumped good corporate governance.”

The National Association of Corporate Directors and the Corporate Governance Center at the University of Delaware once provided me with guidance on how to participate as a member of a Board of Directors.
--> Their advice seems applicable to a major shareholder.

They advised: Board members should be assertive, pleasant and straightforward. When they disagree with a subject before the Board they must 'push' to make sure everyone understands the pro and con prior to a Board vote. If Board members do not do this, they are not acting responsibly, may even be considered 'legally out of whack'. A member of a Board of Directors has a fiduciary obligation to operate in a manner that assures shareholders that they are providing the best representation possible.  Boards can lose liability lawsuits if it’s discovered that they do not function in this manner.

Warren Buffett did not need to go to the extreme of embarrassing or offending anyone. Would a presentation of the facts by one of this country's most respected businessmen have resulted in Coke's Board rejecting or modifying the equity compensation plan? Would Mr. Buffett's 'no' vote have sent an important leadership and corporate governance message to the Board and this country's business community?

Warren Buffett’s follow-up interview on CNBC: “Buffett: Coke will listen to shareholders on equity plan”

Mr. Buffett responds again - he seems embarrassed: “Buffett Bites Back”