A Lesson in Restraint: Warren Buffett's "Abstention Heard 'Round The World"
"I think we did take a stand by abstaining," said Buffett. "That’s a very loud voice [of disapproval] coming from Berkshire."
Warren Buffett always seems to find a way to float above the fray.
He has never been one to court controversy and, as such, rarely finds himself on the receiving end of bad publicity. Over many decades, he has carefully cultivated a friendly image — unlike so many other titans of the money game — who freely dishes out wise advice and cares little about extravagance or personal luxury.
Even at times like these, when billionaires are viewed with suspicion in certain quarters, Buffett’s fame hasn’t taken a hit. If anything, he’s only getting more and more popular as time goes on.
That’s not to say, though, that there haven’t been a few bumps in the road along the way.
One of which came in 2014 when Buffett elected to abstain Berkshire Hathaway’s 400 million shares in a vote over Coca-Cola’s new executive compensation plan. After reviewing the proposal, he deemed it excessively generous in awarding gobs of stock options to Coke execs for less than spectacular performance.
Buffett’s feelings on dilutive stock-based compensation and exorbitant bonuses were well-known at the time, so many were left to wonder why he only abstained rather than voting against the proposal.
In a column on April 25, 2014, Joe Nocera of the New York Times called Buffett a “coward” and a “hypocrite” for wimping out with said abstention. That was just the first salvo of a bizarrely aggressive (and personal) series of attacks from Nocera on the matter. In the end, The Gray Lady eventually issued a flurry of corrections on his articles and the paper’s ombudsman even took Nocera to task for his slanted coverage of Buffett’s decision.
But, while Nocera kinda went off the deep end in his criticism, he was far from alone. Even at the usually friendly home cooking of the Berkshire AGM, one shareholder called the abstention “very strange, un-Buffett-like behavior”.
For one of the very few times in his professional life, Warren Buffett found himself on the back foot.
People always want a show.
They wanted to see Warren Buffett, a Coca-Cola cheerleader for 25 years at that point, go for the soft drink giant’s throat. To go to war with one of his conglomerate’s most important holdings and publicly embarrass its board and management by voting “No”.
On the day of the contentious vote — which passed easily — Buffett spoke to Fortune to lay out his side of the story.
“I think we did take a stand by abstaining,” he told Stephen Gandel. “That’s a very loud voice coming from Berkshire. It obviously means we don’t approve of the plan.”
Buffett pointed out that the stock options were more of a “royalty on time” as opposed to managerial performance. Coke executives could earn billions of dollars of stock even if earnings dropped by 10% over the next several years. It’s one thing to write a big check for a big performance — but this was just another corporate giveaway.
“I actually think [Coca-Cola] has a good bunch of directors,” he said. “What was done with their plan is so much ‘the other guys [are] doing it, so we will do the same thing’.”
But, instead of slapping KO 0.00%↑ in the face with a “No” vote, Buffett opted for the financial equivalent of soft power. He had no interest in burning bridges with the Coke folks — and certainly no intention of ever selling his stake in the company — so he chose the path of least resistance to make his point.
Voting against the Coca-Cola proposal, said Buffett, would only make the board dig in its heels and ready for war against one of its biggest shareholders. And that’s not good for anybody. Instead, Buffett pulled exactly the right lever — by abstaining — to keep both sides on amicable terms until a solution could be found.
(If you’ll forgive a brief moment of shameless self-promotion, Buffett gave another lengthy explanation of this situation to Arizona State University’s Jeff Cunningham in 2015 — which just so happens to be the next annotated transcript for paid supporters. Look out for it early next week! The first several questions and footnotes — which amount to more than 2,000 words — will be available for free subscribers, too.)
In that aforementioned Q&A with Cunningham — who coined this the “Abstention Heard ‘Round the World” — Buffett revealed that his soft approach paid off. The Coca-Cola board agreed to amend the compensation plan to pay out the same amount of stock options over a period of twelve years, instead of the original four year term.
“That’s cutting it by two-thirds,” said Buffett. “The abstention accomplished something very significant for Coca-Cola shareholders.”
A proxy battle between Buffett and Coke would, no doubt, sell a lot of newspapers. But it would have come at the expense of both Coca-Cola and Berkshire shareholders.
Instead, Buffett’s actions proved to be a triumph of persuasion and restraint in the face of big external pressure to go nuclear.
At that year’s annual meeting, Charlie Munger had the final word on the Coke affair. “I think you handled the whole situation very well,” he said to his longtime partner.
Circling back to that Fortune interview on the day of the Coca-Cola vote, it’s one of the more fascinating Warren Buffett Q&As that I’ve ever read. Not only because Stephen Gandel hit him with some tough questions, but also because Buffett weighed in on several hot-button issues in surprising ways.
On executive compensation in general…
“I don’t think [executive compensation] is out of whack with the value an outstanding executive could bring. If you run a multi-billion-dollar company, the difference between a 10 and an 8 is huge in terms of value. I don’t think [compensation] is out of line in terms of entertainers or sports figures. Still, almost on a voluntary basis, I think it should be somewhat restrained in some cases.”
Buffett walks the walk here — famously capping his own salary at $100,000 for the past few decades. But he’s also happy to shell out big numbers to vice chairmen Greg Abel and Ajit Jain. Both of whom, no doubt, rank as 10s in his book.
“I actually have written — I may put it in the annual report next year — a memo to the board of directors of Berkshire as to what I think would be a sensible option plan for the CEO of Berkshire who succeeds me. And he would be the only one who would receive options because he would be the only one who is responsible for the overall success of the operation.”
I checked Berkshire’s 2014 annual report and could not find this memo, so it doesn’t look like he included it after all. (It’s a long report, though, so I might have missed it. Let me know.) But, nevertheless, this answer makes it sound like Buffett is okay with his successor receiving some semblance of stock-based compensation. Which, I must admit, comes as a bit of a surprise. 🤯
On taxes…
“I will not pay a dime more of individual taxes than I owe and I won’t pay a dime more of corporate taxes than we owe. That’s very simple. In my own case, I offered one time to match a voluntary payment that any Senators pay … but they never took me up on it.”
“Actually, [Berkshire’s] tax rate is pretty high if you look at it. If it could be lower, I would have it lower. I will do anything that is basically covered by the law to reduce Berkshire’s tax rate.”
Buffett used MidAmerican Energy’s foray into wind power as an example. “On wind energy,” he said, “we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.”
On public pensions…
“The solution is to either change the promises [to workers] or tax more. But the trouble is for any given politician, he’s only going to be there for a year or two. His best solution is to do nothing because he will be gone [soon]. It isn’t the kind of problem that you wake up tomorrow and causes the lights to go out or the streets to not get shoveled. It’s the easiest problem in the world to postpone.”
“In Omaha, I would not like to change the promises that have been made to the people who work publicly — so I think we should probably tax more. But that won’t work in many municipalities or states. The problems are too big relative to the tax base. You can’t tax enough in Detroit to pay the pensions that have been promised. They have gone too far.”
On offshoring jobs and tax shelters…
“It has just gotten way out of hand because tax rates are so low in certain countries. There are some companies, particularly when you’re dealing with intellectual property, where you can set up a rationale to say your earnings are taking place in Ireland or Bermuda or something like that, when they are really originating, in large part, here [in America].”
This isn’t exactly what Buffett is talking about here, but Apple stirred up the water in recent years by recording all of its EU sales in tax-friendly Ireland. The EU later hit Apple with a €13 billion tax bill, though that was overturned in 2020. Both sides are awaiting another ruling from the EU Court of Justice to see if the case will be reconsidered or not.
“Those companies pile up huge cash balances and then they say, ‘Give us a tax-free period and we will bring it back.’ But that would, of course, just induce them to do more of that over there once they find out they can get away with it. It’s a crazy situation. That part of the tax code has really got to be looked at hard at some point.”