Warren Buffett and Corporate Governance

Posted by on Wednesday, April 30, 2014 · Leave a Comment 

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 it. 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”

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Reason I wrote my book “Learn to Whisper”

Click on this link for a more complete description of “Learn to Whisper”

The reason I wrote “Learn to Whisper”:

My conclusion after operating as a Turnaround Chief Executive Officer for more than twenty-five years is that the majority of this country’s top management is far from first-rate. In fact top management, particularly at the chief executive officer level, is at best average with a large number that can be rated mediocre. This lack of management competence has seen this country’s market leaders lose sizeable market share to foreign manufacturers able to export better quality and lower cost products to the USA. It has seen manufacturing and service operations unnecessarily moved to foreign countries. All of which has negatively affected the economy, severely damaged former blue-chip corporations and seen quality jobs lost.

It is quite common to discover that companies struggling with this inability to compete with foreign companies have been simply mismanaged. The once successful business deteriorated because of an incompetent chief executive officer and weak senior management

Why doesn’t this nation have first-rate management? Inadequate training. Chief executive officers and vice presidents learn “on the job”. A number get promoted based on personality, political connections and drive – not merit. They are not carefully screened for the potential to become successful at managing. For some all that is needed is a well-written resume, the right interviewing style and the inability of a new employer to accurately assess skills, performance and potential.

Compare this to the process doctors go through. From medical school to internship to residency to a senior role after years of education, experience and continuous training their progress and capabilities are constantly monitored even after they become senior in the profession. Generals and Admirals go through a similar protocol. They must prove themselves in low-level assignments before they are judged qualified for senior positions. Unqualified applicants in both professions are culled out. What can be done to improve management competence? Education, on-the-job training and job performance monitoring. My book will educate people on the subject of managing. Its 101 management lessons are separated into the 17 subjects managers need to know.