Today's Opinions, Tomorrow's Reality
Death and the Benevolent Dictator
By David G. Young
Washington, DC, March 12, 2013 --
Boardroom abuse will always exist, so shareholders must know about executive pay.
It's never a surprise to hear outrage about rising executive pay at left-leaning events or watching the talking heads on MSNBC. It's quite another thing to hear such outrage at the Berkshire Hathaway shareholder's meeting, an annual gathering of over 30,000 small investors often called the "Capitalist Woodstock". But that's exactly what happened at the event this year.
At issue was an executive compensation package at Coca-Cola, which featured a stock option plan that Berkshire CEO Warren Buffett calls "excessive." In a marathon five-hour question and answer session in an Omaha basketball stadium, Buffett said Berkshire expressed its opposition to the plan, but abstained from voting its 9 percent share1 of the Coca-Cola corporation during the formal vote. Explaining the decision not to vote no, he said "we had no desire to go to war with Coca-Cola" and added that there are other ways to effect change.
Many Berkshire investors attending the event did not drink this Kool-Aid. (Although by the looks of things, thousands of them were drinking the free Coke handed out for breakfast at the event.) Variants of the question about the Coke pay package kept coming up throughout the day, as well as other more general questions about executive pay. At one point, Buffett said he opposed disclosing the salaries of the highest paid executives of Berkshire Hathaway's subsidiaries because it would stoke envy and discord among executives, causing them to ask for more money, possibly leading to higher overall compensation.
The overall mood of the meeting was certainly upbeat. Many Berkshire investors may disagree with Buffett on particulars, but are happy to trust him given his impressive track record that has made many of them millionaires. Listening to his frank, off-the-cuff, no-nonsense answers to questions is a stark contrast to what comes out of the mouths of CEOs, chairmen, and other executives speaking to large audiences, where their words are rehearsed, tortured, empty and often non-sensical.
Investors rightfully trust Buffett to make the right business decisions and keep executives compensation in check for Berkshire Hathaway's growing portfolio of companies. But the simple truth is that Berkshire represents only a tiny percentage of the American economy. Most companies have no equivalent of a Warren Buffett. And even Berkshire subsidiaries cannot count on his oversight forever, given the eventual mortality of the 83-year-old "sage of Omaha."
Activist investor Carl Icahn, a far more confrontational figure than Buffett, argued in a Sunday op-ed that Buffett was wrong not to vote against the Coke compensation plan.2 He says that boardrooms are almost always too apt to go along with self-serving executive decisions to the detriment to smaller investors. And this is indeed the core problem. Buffett, with his great influence and knowledge of his companies' confidential information is in an excellent position to make sure that executives act in the long-term interests of the company and its investors. But what happens with companies that don't have a Buffett? And what will happen to Berkshire companies when Buffett is gone?
Buffett is, in essence, a benevolent dictator who generally can be trusted to make the right decisions for his people, even if it is done in secrecy behind the scenes. But benevolent dictators are often succeeded by corrupt, self-interested tyrants who forsake their people and seek riches at their expense. In the political sphere, this is precisely why democracy and openness are necessary tools to keep such dictators in check. This is no less true in the business world, where small time investors who attended the Berkshire meeting are aware that their money is at risk from such corporate tyrants, who seek to enrich themselves, and their executive and board member friends at the expense of small shareholders. Keeping rising executive pay secret from these shareholders makes executive tyrants more, not less, likely.
Is the cost of the discord generated by revealing executive pay worth the benefits of openness to small investors and the public as a whole? Warren Buffet says no. But that may only be because he knows he has a Warren Buffet on the case. Those of us who invest elsewhere, as well as those who will outlive him, aren't quite so lucky.
2. Barron's, Why Buffettt Is Wrong on Coke, May 3, 2014