Warren Buffett Wasn't Wrong About Coca-Cola. Here's Why

Warren Buffett was widely criticized for not taking a stronger stance on the Coca-Cola compensation plan. But the outcry may have been overdone.

May 26, 2014 at 7:00AM

Warren Buffett may have missed the perfect opportunity with Coca-Cola (NYSE:KO). Or, at least, that's what many contended after he took a pass on voting against Coke's new compensation plan.

Since Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) is a major Coca-Cola shareholder, Buffett had a very real seat at the table for this issue -- not to mention that his son, Howard Buffett, is on the Coke board. But for an outspoken critic of excessive executive compensation, it appeared that Buffett whiffed on the chance to drop the hammer on Coke's plan to lavish insiders with share compensation. 

But what seemed obvious on first blush may not be the case.

Hedge fund manager Whitney Tilson was initially critical of Buffett's response to the Coke plan. But as he discusses in the video below, Tilson changed his mind after hearing Buffett's explanation of his position during the Berkshire Hathaway shareholder meeting.

A transcript follows the video.

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Tilson: This is, I think, my 16th or 17th consecutive meeting, so ...

Koppenheffer: It's hard to surprise you.

Tilson: Hard to get a lot of new stuff. As someone who owns a little bit of Fannie Mae stock, I thought their commentary near the end about the GSEs was interesting. I'd say, really, the very first question right out of the box this morning was about Coke, and Buffett abstaining for the compensation package. He got a lot of criticism, "Why didn't you vote against it?"

I came into the meeting thinking, "You know what I wish? I wish he had voted against it. It would have sent a good, strong signal about the excesses of corporate comp in America and all." But after hearing them explain it, I'm satisfied that they did the right thing -- that he did send a very strong signal.

For Warren Buffett to abstain is a big deal, and they also clarified that the compensation package ... there were reports out there that management was getting like 16% of the company over five years or something, that it would be horribly dilutive. Buffett went through some math that explained it was sort of 2.5% dilution.

Koppenheffer: Not quite the same.

Tilson: Yes. If it were 16%, Buffett would have voted against it. At 2.5%, he abstained -- and Coke, he has personal relationships there. He's obviously by far the most influential shareholder, and so forth, so he quietly and privately communicated with Coke's management, and I think they are going to clean up that comp plan.

I think they did the right thing. It's a very interesting commentary he and Munger had, about the difficulties of trying to bring about change when you're on a board, or a shareholder, and how a board of directors is partly a business entity, but it's also a social club.


As Charlie has said in the past, and said again today, "You belch too many times at the dinner table, you'll be eating dinner in the kitchen." There's a lot of social pressure to get along, and it makes it difficult to really bring about change and rein in comp, and so forth.

It was interesting to hear the most powerful, respected, influential businessmen on Earth say that even their ability to try and change the way things are, is very limited.

Matt Koppenheffer owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway and Coca-Cola. The Motley Fool owns shares of Berkshire Hathaway and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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