2014: Why did you abstain from voting on Coca-Cola's compensation plan?

CAROL LOOMIS: The question is from Will Elridge (PH) of New York City.

And he says, “Mr. Buffett, this is a question about Berkshire’s holdings in Coca-Cola.

“This spring, Coke asked shareholders to approve a magnanimous stock option program for its executives.

“Asked about it by the press after the vote, you said the program was excessive. Yet, you did not tell the world prior to the Coke shareholders meeting that you believed the program to be excessive, a disclosure that, had it been made earlier, might’ve made shareholders vote against it.

“And in fact, you did not vote Berkshire’s shares against the plan. You only abstained in the voting.

“I guess you had your reasons. I must say, I don’t expect to agree with them. And I cannot see how they can stand up under examination.

“But I still would like to know why you engaged in this very strange, un-Buffett-like behavior.

“So why did you abstain rather than voting no against a corporate action that deserved to be shouted down?”

WARREN BUFFETT: Yeah. Well, some people, incidentally, think that strange and un-Buffett-like are really not quite right. Strange is frequently Buffett-like. (Laughter)

The proposal was made by a shareholder who’d owned shares for a long time and was opposed to the option program.

His calculations — and I probably should explain this in a minute — but his calculations of the dilution were wildly off. And we did not care to get into a discussion of that or anything else.

But we did talk — or I did talk — to Muhtar Kent. And I informed him that we were going to abstain.

I told him that we admired, enormously, the Coca-Cola Company. We admire the management.

And we thought the compensation plan, although it was very similar to a great many plans, was excessive.

And Muhtar and I had a very good discussion right here in Omaha, as a matter of fact, as well as a couple of telephone discussions. And then immediately after the vote, I announced that we had abstained, and gave the reasons that we thought the plan was excessive.

And I think that in terms of having an effect on the Coca-Cola compensation practices, as well as maybe having an effect on some other compensation practices, that that is the most effective — was the most effective — way of behaving for Berkshire.

We made a very clear statement about the excessiveness of the plan. And at the same time, we, in no way, went to war with Coca-Cola. We have no desire to go to war with Coca-Cola.

And we did not endorse some calculations that were wildly inaccurate, and joined forces with someone that I had really no contact with him. I received several letters in the mail after they’d first been given to the press.

So, I think you have to be — I don’t think going to war is a very good idea in most situations. And I think if you’re going to join forces in going to war with somebody, you’d better be very sure about what that alliance might mean.

So, I think the best result for the Coca-Cola Company was achieved by our abstention. And we will see what happens in terms of compensation between now and the next meeting with Coke.

Charlie?

CHARLIE MUNGER: I think you handled the whole situation very well. (Laughter)

WARREN BUFFETT: And Charlie remains vice chairman. (Laughter)

Charlie, incidentally, was the — Charlie was the only one with whom I talked over the vote before — or the abstention — before I did it.

I called Charlie. And told him about the plan. And we agreed on the course of action.

I should point out one thing. And in fairness to David Winters who may — who led the war — he took figures from the Coca-Cola proxy statement. So it’s hard to fault him for that.

But for those of you who would really — would like to know how to think about calculating dilution, Coca-Cola has regularly repurchased the shares that are issued through options.

And the share count has, thereby, come down just a small bit at Coca-Cola. Not anywhere near as much as if they hadn’t issued as many shares, though, in repurchased shares.

But Coca-Cola has a plan that involves 500 million shares. And they say in the annual report that they expect to issue these over approximately four years. And then they have a further calculation between performance shares and option shares, but I’ll leave that out. Make this a little simpler.

And that’s a lot of shares.

Let’s assume for the moment that Coca-Cola’s selling around $40 a share now, which it is. And that when — and that all the options are issued at $40. And that the — when they’re exercised, we’ll say the stock is $60.

Now, at that point, there has been a $10 billion transfer of value. Twenty dollars a share times 500 million shares, a $10 billion transfer of value.

Now, the company, when that is done, gets a tax deduction — and at the — for 10 billion — and at the present tax rates, that would result in 3 1/2 billion less tax.

So if you take 20 billion of proceeds from exercise of the options, and you add 3 1/2 billion of tax savings, the Coca-Cola Company receives 23 1/2 billion.

And if they should buy in the stock at $60 a share, which it would be selling for then, they would be able to buy 391,666,666 shares.

So, in effect, the Coca-Cola Company, net, would be out a little over eight — 108 million shares. And that’s on a base of four-billion-four.

So the dilution — assuming all the proceeds from the option exercise and the tax refund were used to buy shares — the dilution would be 108 million shares on 4.4 billion, or about 2 1/2 percent.

And I don’t like dilution and I don’t like 2 1/2 percent dilution. But it’s a far cry from the numbers that were getting tossed around.

It’s a long explanation, but I’ve never seen the math written about. I mean, I’ve seen people throwing out claims and all of that.

And you can change my supposition from 55 — 60 to 55 — or 65. It doesn’t change things very much.