The Coca-Cola Co. equity compensation plan for executives won the approval of 83% of the shares voted at its recent annual meeting, but left the company with an ambiguous mandate. Some major institutional investors that supported the plan might have reconsidered had they known other pension funds opposed it and known Warren Buffet thought the plan was “quite excessive.”
The episode should have taught institutional investors a valuable lesson: They might well have a better chance of winning such votes if they speak up before the vote rather than afterward. They should announce their voting intentions and the reasons for their decisions in advance, to try to persuade others.
Many observers criticized Mr. Buffett for not declaring his unhappiness with the proposed compensation plan before the vote because they felt his disapproval might have changed many “yes” votes or abstentions to “no” votes. The same reasoning could apply to the votes of the large, highly respected institutional investors, such as public pension funds.
As it was, Berkshire Hathaway Inc., whose CEO is Mr. Buffett and which is Coca-Cola's largest shareholder with 9.08% of the shares, abstained from voting on the issue, and major pension funds were on both sides.
The company won 2.1 billion of the shares voted, 83% of the shareholder vote. But the votes in favor amount to less than half the 4.4 billion shares outstanding.
The compensation plan called for 500 million Coke shares to be reserved for executive compensation, shares that would be paid out to the executives if the company achieved certain goals.
The opposing shareholders were concerned about the potential dilution of their existing holdings, which the State of Wisconsin Investment Board estimated at 20.24%, although other observers put in the range of 14% to 15%. The company estimated that dilution at less than 1% per year.
Coca-Cola also was challenged on its corporate governance and in its compensation package to Muhtar Kent, chairman and CEO, and other top executives.
SWIB, for instance, opposed the election as director of Mr. Kent and 10 other (of 15) directors. Other major pension funds opposed some directors, according to proxy-voting disclosures.
On the equity plan, SWIB's disclosure states the board “does not support plans if dilution is greater than 15%.” Other pension funds voting against the plan cited dilution concerns as well. In addition, SWIB pointed out the equity plan “does not have a defined and significant vesting period for all awards.”
The voting on proposals at Coca-Cola was contentious, even if the voting outcome shows very high levels of support of shares cast. All nominees for director were elected with votes upward of 96.3% — except for Barry Diller, who received 89.3% in support.
Unseating directors is difficult. Last year, among Russell 3000 companies, nominees for director received an average 95.15% level of support, according to Institutional Shareholder Services Inc. data. Only 53, out of 17,369 nominees received less than 50% of the vote in support.
Shareholders could have a better chance to ensure less ambiguous outcomes than that on the Coke equity plan, and more support in opposing directors, by becoming more transparent in their voting by disclosing their votes in advance of a company's annual meeting.
The Department of Labor, which oversees the Employee Retirement Income Security Act, has declared proxy votes to be plan assets. Pension funds and their managers have a fiduciary duty to vote their proxies in a way that enhances shareholder voles for the sole purpose of improving the economic interest of participants and beneficiaries.
Pension funds, by disclosing their voting intentions, and the reasons for them, could help to produce desired outcomes by persuading others of the validity of their viewpoints on improving corporate governance and performance. Academic research has shown companies with better corporate governance tend to outperform.
Mr. Buffett's revelation he abstained in voting while criticizing the equity plan was deliberately timed to avoid influencing shareholders. In defending his abstention, Mr. Buffett said he didn't want to “go to war” with Coca-Cola. He does a disservice to the pension funds and other shareholders voting against the plan. Pension funds have considerable assets invested in the company and seek to improve its performance, not make war. For their part, Berkshire Hathaway shareholders should ask if Mr. Buffett skirted his fiduciary duty to them by not voting against the plan because he considered it excessive.
“I think if Warren Buffett said (in advance) how he was voting, he would have influenced other investors,” said Greg A. Kinczewski, vice president and general counsel at Marco Consulting Group, Chicago, which provides proxy-voting advisory services in addition to investment consulting.
Some major pension funds already post their proxy votes in advance, but most do not. It's time all major pension funds did so, beginning with those that now post their proxy votes after the conclusion of the annual meetings of companies.
When pension funds vote, they should, under their fiduciary duty, want their views to prevail. It is hard to see how they can do so if they keep their voting intentions confidential. They should do whatever they can within Securities and Exchange Commission allowances to persuade other shareholders.
The Council of Institutional Investors, whose mission is to improve corporate governance in order to improve shareholder value, should consider developing a project to move toward greater disclosure. In addition, proxy advisory firms could facilitate more disclosure through the use existing platforms that display proxy votes by funds.
Money managers also should post their voting intentions in advance, and not just in the annual post-meeting reports required by the SEC. Some money managers do so now; they tend to be firms involved in socially responsible investing. Some big managers leak out their voting once in awhile. But for the most part they prefer to wait until the required reporting, which could be in part so as not to offend existing or potential investment management clients.
Such disclosure would help companies, too, by giving a clearer picture of shareholder views on important issues.
In Coca-Cola's case, it would have given the market more confidence in its plan to reward executives for increasing performance. It also might have given the company time to tweak the plan before the annual meeting and avoid the negative publicity.
The vote was fair, but the rewards from the equity plan will unfold over several years, so an engagement with shareholders would not necessarily risk disgruntled executives walking out the door.
Institutional shareholders undermine their own chance to prevail by not doing more to publicize their views, a clarity companies should welcome as helping to shape better compensation plans.
