- Warren Buffett abstained from the Coca-Cola pay plan vote because he found it excessive but did not want to fight with management.
- Carl Icahn responded in Barron's, saying that if Buffett is unwilling to oppose management, it is unlikely any average board member would.
- Both investors make solid points, and we must continue to work to make boards and management more accountable to shareholders.
Over the past few weeks, the Coca-Cola Company (NYSE:KO) has been subject to unusual scrutiny as investor David Winters urged shareholders to vote against the proposed pay plan. Many wondered how Berkshire Hathaway (NYSE:BRK.B), led by Warren Buffett, would vote its 9% stake. After the vote to the surprise of many, Buffett said he abstained (his reasoning which I quote below is available here). The pay package would go on to pass. Buffett has explained that he found the plan excessive but he did not "want to go to war" with the company. Carl Icahn of Icahn Enterprises (NASDAQ:IEP) has rarely shied away from a fight and voiced his displeasure with Buffett's abstention in this week's Barron's (his article which I quote below is available here).
This vote has turned from a question of executive pay to a broader debate on corporate governance and shareholder voting. It pits arguably the two most successful living investors against each other. While both have enjoyed tremendous success, their approaches have been far different. Buffett has focused on well-run firms and employs a decentralized approach to management where he lets subsidiaries of Berkshire basically run themselves with little interference from headquarters. Conversely, Icahn has looked for companies he thinks are being run poorly and fights to change management and strategy to unlock value. Their conflicting styles are evident in the debate at Coca-Cola.
Buffett is generally positive on Coca-Cola's management but found this plan to be a bit too much, so he abstained. It immediately raises the question of why he didn't simply vote against it. Buffett seemingly pointed to protocol, suggesting disagreeing with the board can make one lose influence and is analogous to belching at the dinner table. Do it enough, and "you'll be eating in the kitchen." Buffet went on to suggest there is no such thing as an "independent" director. When choosing members, most boards "do not look for Dobermans. They look for Cocker Spaniels and then they make sure their tails are wagging." In a sense, management is looking for a bunch of "yes" men.
This is exactly the type of corporate governance that infuriates Icahn. He suggests, "Far too many directors take their responsibilities far too cavalierly, and some don't believe they have any responsibilities at all. This is very dangerous for the future of our economy. Too many board members think of the board as a fraternity or club where you must not ruffle feathers. This attitude serves to entrench mediocre management as well as do away with the meritocracy that has endowed our country with the economic hegemony it enjoys to this day." On this point, Icahn and Buffett seem to have some common ground. Many board members enjoying collecting their check and aren't interested in ruffling feathers, preferring to agree with management on most issues.
This has deeply angered Icahn who has worked to unseat boards at countless companies over the past few decades. Here is the question to consider. If Buffett, one of the wealthiest and probably the most influential investor in the worlds is either unwilling or unable to firmly vote against management, what can the rest of us do? In regards to Buffett's abstention, Joe Nocera of The New York Times put it best, "The need for collegiality trumps good corporate governance, as it almost always does."
Now, Buffett deserves some credit because his abstention hasn't been a total abstention. Typically, one offers no opinion when one abstains. In fact, Buffett has been public in his approval of the plan, calling it excessive and so on. He has functionally voted no even if he technically abstained. His public criticism of the plan has led to speculation that Coca-Cola will curtail it a bit. If he voted "no" to the plan, I expect we would be hearing the same speculation that Coke was considering cutting the size of the plan. However, being too aggressive, as Icahn can attest, can sometimes make management dig in its heels. Perhaps, Buffett's nuanced approach of abstaining but outlining concerns after the fact will make management more receptive to change.
This country needs a robust debate on corporate governance. We need boards that are independent and are not afraid to disagree with management to protect shareholder value. It is worth asking whether we can expect normal board members to effectively oversee management if Buffett fears the optics of a "no" vote. In this case, both Buffett and Icahn have solid points. Their strong track records show both approaches, confrontational and accommodative, can be profitable. Hopefully, this debate will have a wide-ranging impact, not just in regards to Coke's pay plan but to corporate governance and shareholder rights at every S&P 500 company.