Buffett & Boardroom Belching

More belching is needed in corporate boardrooms.

Do not take this literally. As a matter of fact, the metaphor itself belongs to the legendary investor Warren Buffett who chose to use this phrase. At the time, he was comparing it to the act of voting “no” on a corporate board. It had nothing to do with the emission of gas.

“It’s a little like belching at the dinner table,” said Buffett to Becky Quick on CNBC. “I mean, you can’t do it often. If you do, you find you’re eating in the kitchen pretty soon.”

Warren Buffett was talking about the decision at Berkshire Hathaway, where they are a 9% shareholder of Coca-Cola stock, and they chose to abstain from a shareholder vote instead of voting against the new equity compensation plan of the company created for its executives. David Winters, an activist investor, says that Coca-Cola is going to massively dilute shares with the amount of shares that they plan to give the management. While the plan passed with an overwhelming majority, the company is still potentially going to reconsider the plan, we learned according to information from the Wall Street Journal. So Warren Buffett may have achieved his goal, and done so rather tactfully.

What troubled many people was the way that Buffett discussed the philosophy of a “no” vote, and the way that it could apply to how a corporate board works instead of a shareholder election. Buffett told CNBC that over his 55 years in business he has been on 19 public company boards and never heard of a “no” vote in regards to a compensation plan. And he voted for mergers and compensation plans that he did not agree with.

“There’s only so many bullets you can use in the gun,” he said in a different CNBC interview. “If you start objecting to this, and this, and this, pretty soon people don’t pay any attention to you. You want to save your bullets for when they really count.”

In keeping with the gun metaphor, the problem is that just about every corporate director seems to have disarmed.

We should not want or expect corporate boards to begin behaving like dysfunctional city councils with preening politicians casting endless 4-3 votes, and always looking for attention. There should be more consensus and collegiality in a corporate boardroom.

But one would think not so much that the vote is almost unanimous. Think of all of the crappy mergers that have happened over the years – and whether or not you have seen a deal announcement that mentions anything other than “the boards of both companies approved the merger unanimously.” We often believe that Canadian business conduct is overly polite, especially when compared to the rough-and-tumble of the US world. But there is an apparent inherent docility across all North American boardrooms.

Buffett tells us that corporate boards are “in part business organizations and in part social organizations,” and the type of people that are selected for board service have reached a definite level of social status because “they have learned how to get along with other people. They don’t suddenly change stripes when coming into a board meeting, so there’s a great tendency to behave in a socially acceptable way and not necessarily in a business maximization way. The motives are good.”

This is perhaps true, but the final result is not necessarily so. Nell Minow, former president of Institutional Shareholder Services based out of New York, and a longtime corporate governance specialist, tells us that board members who vote “no” are going on “a suicide mission.” Sometimes voting a “yes” with reservations isn’t even enough: “I had lunch last week with a director who was recently taken off the board because she questioned a CEOs pay,” said Minow.

“It’s got to fall to the shareholders, and that’s why we need a more robust system for shareholder input on pay,” Minow says. “It’s ridiculous – just in the last couple of weeks we’ve had a $4-billion [U.S.] correction at Bank of America with no announcement of a [pay] clawback, the CEO of Target fired with a $70-million goodbye package, and the CEO of Cheniere Energy getting $142-million before the company has made a dime. Unless shareholders are allowed to play more of a role, and that includes getting rid of directors who pay too much, I don’t expect to see any progress in this.”

Buffett finishes up his thinking on this matter by saying “generally you don’t get invited on boards if you are a person who loves a fight.” With this type of peace, shareholders are however losing the war.

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