The Day Warren Buffett Failed His Investors

In abstaining to vote on Coca-Cola's new compensation plan, Warren Buffett failed his investors.

Apr 24, 2014 at 10:15AM

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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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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