Warren Buffett: Coca-Cola Is Bulletproof | May 5, 2014

TL;DR

Buffett opposed Coca-Cola’s proposed equity compensation plan because he considered it excessive, but Berkshire abstained instead of voting against it. He believed private discussions would be more effective than a public battle because Coca-Cola was a strong company with candid management, and the plan could be moderated by spreading its authorization over more years.

Transcript

berkshire hathaway chairman and ceo warren buffett we are live this morning from the nebraska furniture mart which is one of many berkshire businesses warren this uh this business in particular really sees a huge surge of business on the shareholders weekend what kind of numbers have come through here and how many shareholders do you think we're ac... Read More

Key Insights

• Coca-Cola’s proposed equity compensation plan was excessive in Buffett’s judgment, but Berkshire chose to abstain because it wanted to register concern without initiating a public conflict with a company and management team Buffett respected.
• Private engagement was Buffett’s preferred method for addressing Coca-Cola’s compensation proposal because management had been candid with Berkshire and appeared willing to listen carefully. He expected constructive discussions before the company implemented the authorization.
• The compensation plan could become less excessive by spreading the authorized stock across more years. Buffett emphasized that the proposal’s ultimate effect depended on management’s later actions because its use had not been permanently fixed.
• Berkshire’s decisions are not driven by modest changes in interest rates or short-term macroeconomic predictions. Buffett said the company relies instead on the long-term expectation that the country will perform much better over time.
• Lower interest rates make bond issuance more attractive to Berkshire, especially for longer maturities. Even so, rate movements within the range discussed would not cause Buffett to alter Berkshire’s underlying business behavior.
• Board committees exercise substantial practical influence because the full board usually accepts recommendations after delegating detailed work to a committee. Buffett said he had never observed a compensation committee’s formal recommendation receive a dissenting vote.
• Corporate boards are partly social organizations, so directors commonly behave in socially acceptable ways rather than acting solely to maximize business outcomes. Buffett attributed this tendency to habits developed over decades and the ordinary human desire to maintain agreeable relationships.
• Selective opposition preserves a director’s influence because constant objections can cause colleagues to stop paying attention. Buffett argued that directors have limited opportunities to challenge proposals effectively, so they should reserve forceful resistance for matters that truly count.

Questions & Answers

Q: Why did Buffett abstain from Coca-Cola’s compensation vote?

Buffett said Berkshire abstained because it held two views simultaneously. Coca-Cola’s proposed equity compensation program was excessive, but Coca-Cola remained a wonderful company with candid management and the right leader. Berkshire therefore expressed its concerns privately and avoided a public battle. Buffett believed constructive discussions with management could improve how the authorization was ultimately implemented.

Q: How did Buffett think Coca-Cola could fix its equity plan?

Buffett said the plan could be made non-excessive by spreading the stock authorization across more years than the period discussed in the proxy. He stressed that the authorization’s actual effect would depend on management’s subsequent decisions. Coca-Cola had not permanently committed to using all the authorized stock within that shorter period, leaving room for a more measured implementation.

Q: Why did Buffett prefer private engagement over an activist fight?

Buffett believed his cooperative style would be more effective because Coca-Cola did not have a fundamental business or management problem. The disagreement concerned a specific compensation proposal that could be adjusted relatively easily. Coca-Cola’s management had treated Berkshire well, communicated candidly, and listened to its concerns, so Buffett saw no reason to approach the matter as a war.

Q: Why do corporate boards rarely reject committee recommendations?

Buffett said boards delegate specialized work to committees, whose members spend considerable time studying an issue before presenting a recommendation. When that recommendation reaches a crowded board agenda, other directors generally do not claim to possess a better answer without reviewing the same figures or consulting the same advisers. Rejecting it may also appear to usurp the committee’s delegated authority.

Q: Why should directors save their objections for major issues?

Buffett argued that directors have only so many effective opportunities to object. If someone challenges proposal after proposal, colleagues may eventually stop paying attention. A director can preserve credibility and influence by choosing carefully when to resist. Buffett used this reasoning to explain why voting for an imperfect plan does not necessarily show an inability to protect an organization’s culture.

Q: How does social behavior affect corporate governance?

Buffett described boards as both business organizations and social organizations. Directors usually arrive with behavior shaped by decades of learning how to cooperate and maintain standing among other people. They do not suddenly abandon those habits in a boardroom. As a result, socially acceptable conduct and the desire to get along can sometimes outweigh strict business-maximization behavior.

Q: How can one director change a board’s decision?

Buffett said a proposal can be stopped when one person becomes the first to state openly that it is flawed. That initial objection may give other directors enough confidence to join the opposition, even if they lacked the courage to initiate it. The outcome depends on the situation, since colleagues may either follow the dissenter or distance themselves from the challenge.

Q: How does Berkshire respond to interest-rate changes?

Buffett said Berkshire does not alter its business behavior because interest rates move modestly higher or lower. Lower rates do make the company more interested in issuing bonds and extending their maturity, but macroeconomic forecasts do not guide its core decisions. Berkshire instead relies on the long-term premise that the country will perform substantially better over time.

Summary

In this video, Warren Buffett discusses various topics including the success of Nebraska Furniture Mart, interest rates, Coca-Cola's equity plan, corporate governance, Berkshire Hathaway's cash on hand, Bank of America's recent regulatory issue, Pfizer's acquisition of AstraZeneca and the topic of inversions in corporate tax.

Questions & Answers

Q: How much business has Nebraska Furniture Mart done in one week?

Nebraska Furniture Mart has done over $40 million in one week, which is a lot considering most furniture stores don't reach that amount in a year.

Q: How many shareholders attended Berkshire's shareholders meeting this year?

The numbers were estimated to be between 38,000 and 40,000, making it the biggest meeting in the company's history.

Q: Why does Warren Buffett think interest rates will change in the future?

Warren Buffett believes that interest rates will change in the future because historical trends show that rates do not remain constant, and it is unlikely they will stay at the current levels of 2.57%.

Q: Does the declining tenure rate catch Warren Buffett's attention?

Although it is surprising, Warren Buffett is used to being surprised in Parkinson and it does not significantly affect his business decisions. Lower rates actually benefit Berkshire because it allows them to issue more bonds at more favorable terms.

Q: Would a tenure rate at the current level change Berkshire's behavior?

No, Berkshire does not alter its behavior based on macro factors like interest rates. Their guiding principle is the belief that the country will do well over time, which guides their decision-making process.

Q: What is Warren Buffett's outlook for the tenure rate at the end of the year?

While he does not spend much time thinking about it, if he had to make a guess, Warren Buffett believes that the tenure rate will be higher at the end of the year.

Q: Why did Berkshire raise concerns about Coca-Cola's equity plan?

Berkshire had concerns about Coca-Cola's equity plan being excessive, but they did not want to go to war with the company. They expressed their opinions privately to the management and abstained from voting at the meeting.

Q: What does Warren Buffett think about Carl Icahn's criticism of his stance on Coca-Cola?

Warren Buffett believes that his style of engagement will be more effective in the situation compared to Carl Icahn's style. He believes that their styles differ as Icahn goes into businesses with problems, while Coca-Cola did not have a problem, just an excessive plan.

Q: Has Warren Buffett spoken with Coca-Cola CEO Muhtar Kent since the shareholders meeting?

No, Warren Buffett has not spoken to Muhtar Kent since the meeting, but he expects to have constructive discussions with Coca-Cola before they implement any plan.

Q: Should shareholders be concerned about Howard Buffett's voting for Coca-Cola's equity plan?

No, Warren Buffett explains that he has voted for plans he did not like in the past, and it is common for directors to vote in favor of proposals they may not fully agree with to maintain their effectiveness.

Q: Why does Warren Buffett believe that corporate boards are not more strident in challenging management?

Warren Buffett points out that boards are both business organizations and social organizations, and individuals on boards tend to behave in a socially acceptable way rather than maximizing business decisions. He believes that individuals' behavior is influenced by their past experience and their desire to get along with others.

Q: Should corporate governance be different in terms of individuals being more strident in expressing their views?

While it would be ideal to have more open and transparent dialogue, Warren Buffett believes that people's behavior will not change significantly in board meetings due to their past experiences and the desire to get along with others.

Q: How does Warren Buffett handle situations where the board opposes a proposal?

Warren Buffett explains that he has been in situations where the board rejects proposals, but it requires someone to initiate that opposition. The first person to speak up often faces resistance initially, but once one person challenges a proposal, others may join.

Q: Should board members be more willing to challenge proposals?

Warren Buffett believes that boards should encourage dialogue and constructive criticism, but it is challenging to change the behavior of individuals who have decades of experience. He asserts that it is necessary to pick battles wisely and save objections for situations that genuinely matter.

Q: Would Berkshire consider pursuing a deal like the inversions seen in certain mergers?

No, Berkshire would not pursue a deal like an inversion because they do not meet the criteria of having a significant number of shareholders outside the US.

Q: Why wouldn't Berkshire pursue an inversion to lower taxes?

Warren Buffett explains that Berkshire does not feel burdened by federal income taxes and believes that they are not at a competitive disadvantage with the rest of the world. He acknowledges that some companies are engaged in inversions to pay even lower taxes, but Berkshire has a wonderful business under US corporate tax rates.

Q: Would Warren Buffett support overall corporate tax reform?

Warren Buffett believes that corporate tax reform will be a significant source of contention in corporate America, as companies have different viewpoints on how tax rates should be changed. He suggests that changes to corporate taxes will face opposition and further lobbying efforts from different companies.

Takeaways

Warren Buffett discusses various topics including Berkshire's successful event at Nebraska Furniture Mart, interest rates, Coca-Cola's equity plan, corporate governance, and inversions in corporate taxes. He highlights Berkshire's financial position and its relationship with 3G Capital. Furthermore, he expresses his confidence in Bank of America's CEO Brian Moynihan, discusses the purpose of inversions, and shares his perspective on corporate tax reform.

Summary & Key Takeaways

• Buffett said Nebraska Furniture Mart experiences its strongest business period during Berkshire’s shareholder gathering. Attendance also appeared to exceed earlier meetings, filling the main auditorium, overflow rooms, and additional spaces. He described growing shareholder enthusiasm and joked that some attendees thanked him for the meeting before revealing their excitement about shopping.

• Buffett said Berkshire does not change its business decisions in response to modest interest-rate movements or other macroeconomic factors. Although lower rates make issuing longer-term bonds more attractive, Berkshire’s guiding assumption is broader and more durable: the country will perform substantially better over time, so short-term forecasts do not drive company strategy.

• Buffett considered Coca-Cola’s equity compensation proposal excessive but preferred private engagement and abstention to a public fight. He also described boards as both business and social organizations, where committee recommendations rarely face opposition. Directors often preserve influence by challenging management selectively and saving their strongest objections for issues that matter most.