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The Day Warren Buffett Failed His Investors

Yesterday broke a six-day winning streak for U.S. stocks, but investors can expect the market to get back to its winning ways on Thursday in the wake of solid earnings reports from technology heavyweights Apple and Facebook. The benchmark S&P 500 was just above breakeven at 10:20 a.m. EDT, while the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) was down 0.07% and the technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  )  rose 0.17%. However, today's topic is a controversy that involves two low-tech blue chips: Coca-Cola (NYSE: KO  ) and Berkshire Hathaway (NYSE: BRK-B  ) .

Warren Buffett. Source: Work of Mark Hirschey.

Respected value investor David Winters of Wintergreen Advisers has since March been publicly lobbying other Coca-Cola shareholders to reject the company's new equity compensation plan, calling it a "raw deal." As part of his efforts, Winters naturally contacted Buffett directly. Not only is Berkshire Hathaway Coca-Cola's largest shareholder, with a 9.1% stake at the end of last year, according to S&P Capital IQ, but Buffett's pronouncements on corporate governance carry much authority and he has longstanding relationship with the soda maker (his son, Howard Buffett, is a Coca-Cola director). However, Buffett missed an opportunity to use the full weight of his authority on behalf of his (and Coca-Cola's) shareholders.

In a televised interview yesterday, Warren Buffett told CNBC that although he and Berkshire Vice Chairman Charlie Munger disapprove of the plan, they refused to vote against it, abstaining instead. Here is how Buffett justified that decision:

Well, we abstained because we didn't agree with the plan. We thought it was excessive. And -- I love Coke. I love the management. I love the directors. But -- so I didn't want to vote no. It's kind of un-American to vote no at a Coke meeting. So [laughs] that's -- but I didn't want to express any disapproval of management. But we did disapprove of the plan.

The plan, compared to past plans -- was a significant change. And there's already a 9% or so overhang in terms of options outstanding relative to the amount of shares outstanding, 8% to 9%. And this authorization of another 500 million shares -- not all of which would've gone on options -- but that's another 11 percent of the company. And -- and -- I thought it was too much. And -- I talked to my partner Charlie Munger, and he thought it was too much. So we abstained.

That justification is irrational -- if Buffett disapproved of the plan, he ought to have voted against it rather than abstain. Shareholders were asked to vote specifically on the plan; voting no need not signal a broad rejection of Coca-Cola's managers, it simply indicated that they should review the compensation structure. Why avoid expressing "any disapproval" of management, if you clearly disapprove of management's actions on a specific issue? (And what's this "un-American" nonsense?)

Not only did Buffett decline to vote against the plan, but he was unwilling to make his opposition public ahead of the vote, saying that he "would not want to be in a position of campaigning on either side." How about campaigning on the side of his shareholders? The plan ultimately received 83% approval among shareholder votes cast.

In his 2007 letter to Berkshire shareholders, Buffett wrote:

Irrational and excessive comp practices will not be materially changed by disclosure or by 'independent' comp committee members. Reform will only occur if the largest institutional shareholders -- it would only take a few -- demand a fresh look.

In a statement yesterday, David Winters said. "We are surprised that Warren Buffett had the opportunity to take a stand against excessive management compensation and failed to seize it." As a tremendous admirer of Buffett and a student of his writings on corporate governance, I couldn't agree more.

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Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 24, 2014, at 11:14 AM, malekin wrote:

    As a long-time Buffett supporter and admirer, I find this troubling. Apparently, he is too much of an insider at Coke. The "un-american" comment was a joke, but I'm not sure what purpose abstaining serves.

  • Report this Comment On April 24, 2014, at 12:34 PM, dreamimmigrant wrote:

    Buffett has always been a cameleon when it suits his interests.... the bigger surprise is that people are lemming enough to believe his every word

  • Report this Comment On April 24, 2014, at 12:35 PM, jpanspac wrote:

    I've always wondered why TMF adores Buffet so much. After this, I wonder even more.

  • Report this Comment On April 24, 2014, at 8:27 PM, xzc9 wrote:

    Lame. Buffett falls in my estimation. Not voting against a plan you disapprove of because you "love" the people putting forward the plan? Perhaps he should retire.

  • Report this Comment On April 25, 2014, at 12:54 AM, sliderw wrote:

    Buffett is all BS in this instance!

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Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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