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Crony Capitalism and the Oracle of Omaha

Vitaliy Katsenelson's picture




 

I am back from the Berkshire Hathaway annual meeting in Omaha, Nebraska, and my brain is still spinning from the dozens of meetings and stimulating conversations. In a series of articles over the next few weeks, I’ll try to download the thoughts that were triggered by this trip, a lot of them unrelated to the main event — the Warren Buffett & Charlie Munger show — but rather by-products of the conversations I had.

After I wrote about my disappointment with Buffett’s mishandling of Coca-Cola Co.’s “excessive” compensation plan, I got an e-mail from Carol Loomis asking me if I wanted to ask Mr. Buffett a question about Cokegate. Loomis is the Berkshire Hathaway CEO’s longtime friend, editor of his annual shareholder letter and one of three reporters at the annual meeting who ask Warren and Charlie questions submitted by readers.

Here is the question I submitted:

I’ve been coming to shareholder meetings for seven years, and for the first time I’m seeing two Warren Buffetts: The first is the moral compass of corporate America — the standard of corporate ethics and integrity (the one we see in the Salomon Brothers scandal intro video year after year).

 

And then last week a second Warren Buffett emerged, the one who commented on Coke’s excessive compensation plan: “We didn’t agree with the plan. We thought it was excessive.” But then as a significant shareholder he abstained from voting on the plan, saying, “I could never vote against Coca-Cola.” The second Buffett behaved like just another middling American politician — the common type that all of us respect so little, the one that votes not for what he believes in but for what is going to keep him reelected.

 

Forty thousand people did not come to Omaha to see the second Buffett, the one that chose crony capitalism; they came to see the first one, who knows the difference between right and wrong. So I would like the first Buffett to judge the behavior of the second one. — Vitaliy Katsenelson,

 

Chief Investment Officer, Investment Management Associates, Inc., Denver, Colorado

Loomis ended up using someone else’s question on that topic, which asked (I am paraphrasing), “This spring, Coca-Cola proposed a large option program for its top managers. Why did Warren Buffett not say he was against the plan beforehand? Why did Berkshire Hathaway abstain rather than vote against?”

Buffett said that the proposal from a shareholder (mutual fund manager David Winters) opposing the plan made incorrect calculations and that the actual dilution from share issuance will be lower than a total of 16 percent over four years. With ease, Buffett went through a hypothetical example that showed that annual dilution would be 1 or 2 percent. He still believed it was excessive, he said, but not as excessive as Winters claimed. (Here is a link to Winters’ presentation.)

Estimating the true cost of stock option compensation is difficult because you have to make myriad assumptions about the future: where the stock price will be in four years (good luck) and how many stock options will actually be earned (deserved). You even have to guesstimate the average strike price (Coke has disclosed the strike price for the current plan, but compensation plans from the past are still active, and proxy disclosures are very vague). We don’t own Coke’s stock, thus my interest was very academic, but I went through Coke’s proxy, and by my calculation the dilution from stock options is closer to Buffett’s than to Winters’.

“We had no desire to go to war with Coca-Cola, and we did not want to endorse calculations that were wildly inaccurate,” Buffett stated, then noted, “I don’t think going to war is a very good idea in most cases.”

I understand why Buffett did not want to team up with David Winters or endorse his calculations. But Winters was not a loudmouthed activist who was proposing to break up Coke; he was just asking Coke’s shareholders to vote against a compensation plan that Buffett, before and during the annual meeting, had repeatedly called “excessive.”

All Buffett had to do was to check the “No” box on the proxy statement.

There may be some quirky nuances in the alternate universe of corporate governance to which I am not privy, but voting against a compensation plan is not considered going to war in the universe where I live. Buffett has been one of the loudest and most respected critics of exorbitant corporate compensation, but when it came time to lead by example, he did not — unless his message was, when you disagree with excessive compensation, abstain.

But you, dear reader, have heard nothing yet. In another question, Buffett was asked about his son Howard, who sits on the board of Coke and did not vote against its cushy executive compensation plan. Though the elder Buffett did not directly answer that question, his nonanswer sent chills up my spine.

He explained that independent directors are not necessarily independent. Though they don’t work for the company, they make $300,000 a year for attending six meetings. It’s a sweet gig, and they typically do very little to rock that gravy train. Aside from the financial benefit, there is a lot of prestige in being on a major corporate board. Boards don’t look for “dobermans,” Buffett said, “they look for cocker spaniels.” Then he added that when he served on many boards, he approved compensation plans and mergers he did not like.

Pause for a second to digest this. What Buffett told us (I truly applaud him for his honesty) was that corporate boards are not there to protect and serve the interests of shareholders. Their incentives — lavish compensation without any accountability for their actions or nonactions — have created an environment where board members are chosen not by how much value they’ll add to protecting the interests of shareholders but on their pedigrees and, more important, their ability to sing “Kumbaya.”

For a long time I could not understand how Hewlett-Packard Co.’s board — packed with talent — could vote to buy U.K. software maker Autonomy for more than $10 billion. The price tag was slightly insane, but, more to the point, a Google search or just some primitive, scuttlebutt research would have shown that some serious questions had been raised about Autonomy’s accounting (questions that proved to be valid and led to a significant write-off a year later).

What is slightly depressing about all this is that if even Warren Buffett voted for compensation plans and mergers he did not like in order not to upset the harmony of the corporate boardroom, what can we expect from the rest? For a long time the term “crony capitalism” held little meaning for me; but today, with great sadness, I look at corporate boards, I look at the vote to abstain by Buffett, and I realize that crony capitalism is defined by the corporate boardrooms of this country.

Suddenly, Carl Icahn, whose annual meeting doesn’t attract 40,000 people, looks like a crusader against crony capitalism. I never thought a visit to Omaha would trigger an appreciation of the role Icahn and other activist investors play in corporate America.

 

This article was
originally published on InstitutionalInvestor.com.  
See also my
post on Warren Buffet's mishandling of Coca-Cola's compensation plan
.

 

To recieve my future articles by email, go to contrarianedge.com 

 

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Fri, 05/16/2014 - 09:25 | 4766103 Sutton
Sutton's picture

Did you ask Buffett about his giving a billion dollars to abortion providers/

At 82 with cancer, the ghoul might suffer a late term abortion.

Good thing he didn't get his hands on the Quicks.

Fri, 05/16/2014 - 07:28 | 4765737 hot sauce technician
hot sauce technician's picture

You don't like Buffet? Stop drinking Coca Cola.

Fri, 05/16/2014 - 07:23 | 4765723 Notsobadwlad
Notsobadwlad's picture

Maybe they are both the same hypocritical Warren Buffet. Maybe there is no kindly old grandfather, just the lying slimeball who can do a decent acting job when called upon.

You won't find me building any statues for Warren.

Fri, 05/16/2014 - 00:04 | 4765378 pupdog1
pupdog1's picture

I used to think Warren was great until he started whorin' for Golden Sacks a few years ago.

That's all the calibration you need.

The Oracle is one Dilly bar from vapor locking, and he hasn't figured out that he can't take it with him.

Fri, 05/16/2014 - 02:12 | 4765545 sodbuster
sodbuster's picture

He's not known as the "Orifice of Omaha" for nothing!!

Thu, 05/15/2014 - 23:49 | 4765351 RichardParker
RichardParker's picture

"“I think government has to play a part in housing,” Buffett said. “The 30-year fixed-rate mortgage is very good for the American public and I think that you will need government participation in some way to bring the costs down.”

-Warren Buffet

http://www.bloomberg.com/news/2014-04-23/buffett-open-to-future-housing-...

I wonder if he would make anything off of this... (sarc)

Thu, 05/15/2014 - 23:41 | 4765336 ebworthen
ebworthen's picture

The real problem is that corporations serve the board first, the primary shareholders second, regular investors third, customers fourth, and employees fifth.

That's the problem with the whole nation.  Just replace "corporation" with "government" or "military" or "police" or "judiciary" or "insurers" or "banks" or what have you.

The line between governments and corporations are blurred, and the line between right and wrong gone.

Thu, 05/15/2014 - 21:58 | 4765024 whidbey-2
whidbey-2's picture

We have feet of clay, it is just takes time to see them for what they are: us.

Thu, 05/15/2014 - 20:06 | 4764705 MeBizarro
MeBizarro's picture

This is turn is praise for a pure ghoul like Icahn?  Utterly baffling.  I would Icahn as a classic example of what is entirely wrong with the American model of capitalism and why in many ways it has become so broken and off-kilter.  Icahn is about Icahn only and everyone else is a distant second. 

Thu, 05/15/2014 - 19:44 | 4764638 Ban KKiller
Ban KKiller's picture

Oligarchy in action. As per usual. Serfs pretend like their vote matters....in anything!

Thu, 05/15/2014 - 21:30 | 4764960 All Risk No Reward
All Risk No Reward's picture

Start doing independent research.  Buffett's accomplishments include..

1. Berkeshire owes $1 billion in back taxes and that piece of trash Buffett tells Muppets their taxes need to go up? 

http://www.huffingtonpost.com/2011/08/29/warren-buffett-taxes-berkshire-...

2. Buffett's banks laundered up to $378 billion drug money (in one bust)...

http://www.theguardian.com/world/2011/apr/03/us-bank-mexico-drug-gangs

3. Warren Buffett owns major portions of the criminal banks that committed fraud up to their eyeballs AND THE CRIMINAL RATINGS AGENCIES, TOO.  HE OWNED BOTH AS PUPPET MASTER.

4. Warren Buffett looted society by fraudulently selling the "bailout" as good for society (as he pocketed billions personally - more than he's ever paid in taxes making him a net welfare recipient) WHEN IT WILL ENSLAVE MILLIONS OF PEOPLE TO INEXTINGUISHABLE DEBT.

Buffett is a fascist PIG.  He belongs in jails for playing a key role in CRIMINALLY BLOWING THE WORLD'S BIGGEST CREDIT BUBBLE CONTRARY TO THE BLACK LETTER LAW IN SECTION 2A OF THE FEDERAL RESERVE ACT:

Weapons of Mass Debt:

http://www.keepandshare.com/doc/3324744/wmdebt-graph-3-79k?tr=77

The definition of "reality" is not "oligarichal sophistry."

HItler said that tyrants benefit from Muppets not using their brains to think.

Buffett agrees.

The difference is that Buffett actually learned some lessons from history and the Muppets did not.

Thu, 05/15/2014 - 21:32 | 4764966 All Risk No Reward
All Risk No Reward's picture

He isn't an "oracle," he's an insider trading fascist pig managing the Debt Star so that implodes on every day Americans who value slobber time above understanding how systems work...

Weapons of Mass Debt...

http://www.keepandshare.com/doc/4768883/debtmoneytyranny-6-1-pdf-60k?tr=77

It.

Is.

All.

Fraud.

From the ground up.

Fri, 05/16/2014 - 09:06 | 4766016 Pee Wee
Pee Wee's picture

Well said.  Buffet is a fraud, just like his faux marriage.

They all are.  One day you will open your eyes and all you can see is the rich are corrupt. 

EVERY SINGLE ONE, they are all exactly alike.

USA burning.

Thu, 05/15/2014 - 19:22 | 4764550 Reaper
Reaper's picture

This oracle lies for the highest bidder.

Thu, 05/15/2014 - 18:45 | 4764406 shovelhead
shovelhead's picture

I don't care how much money they give each other as long as I can get my GMO high fructose corn syrup.

I like being Round-Up ready.

Thu, 05/15/2014 - 18:20 | 4764299 I am a Man I am...
I am a Man I am Forty's picture

Good post, I was pretty disgusted as well.  Charlie and Warren are getting too old to manage.  Buffett would have never have said something so dumb a few years ago.  Opened himself up for such an easy attack.  The shit that comes out of his mouth doesn't make any sense.  I have much more respect for Icahn, he knows the bullshit games these guys play and won't stand for it.  Warren is a giant vagina.

Thu, 05/15/2014 - 18:17 | 4764284 b_thunder
b_thunder's picture

You made up your opinion about krony Kapitalism after listening to Warren Buffett?

The same Buffett that in October 2008 negotiated "sweetheart" deals to invest in GS and BAC, while pleading with Paulson and Bernanke for the bailout?

The same Buffett that keeps selling hundreds of billions of S&P puts and other derivatives, while calling them "weapons of mass financial destruction?"

The same Buffett who happened to be the single greatest beneficiary of TARP, ZIRP and other Fed bailouts, by way of being largest shareholder of Berkshire that happens to have most of its portfolio in financial companies such as Wells and US Bank.  Had it not been for the bailouts, the value of the banks and insurance firms would havebeen greately reduced, and the derivatives would have likely FINISHED Berkshire outright.  Without bailout this Krony Kapitalist and former wealthietst person in the world woudl have ended up bankrupt financially, just as he is bankrupt morally.

 

 

Fri, 05/16/2014 - 09:09 | 4766028 Pee Wee
Pee Wee's picture

Your bailout, his bonus.

But then again you took out a Countrywide mortgage and have direct deposit into BAC.

Admit it, all the pimply faced complainers on ZH have actually done nothing but talky talk talk.

Thu, 05/15/2014 - 18:28 | 4764216 ThisIsBob
ThisIsBob's picture

Since Jan 3, 1995, BRK/A is up 769.80%  The SnP is up 409.16%.  I'd say that the randy old goat is earning his payceck.

Fri, 05/16/2014 - 07:06 | 4765709 Jack Sheet
Jack Sheet's picture

And Becky QuickAsShit is up 253.2%.

Thu, 05/15/2014 - 17:50 | 4764186 Jack Sheet
Jack Sheet's picture

You sound genuinely shocked. How naive can one get.
As a cure, try a 6 month subscription to Jim Willie's Hat Trick Letter, probably the only publication that addresses the criminality and corruption straight on.

Thu, 05/15/2014 - 17:46 | 4764173 therearetoomany...
therearetoomanyidiots's picture

Hmmm, that's what bothered you.  Not that he routinely fucks obama and sniffs after the wookie to get the pipeline delayed/stopped so his trains can keep on running.   Or any other multitudes of millions and billions spent to purchase favors.

This is what bothers you?

I think Warren number 1, as you call him, went the way of the dodo about 20 years ago

Thu, 05/15/2014 - 19:58 | 4764685 Dickweed Wang
Dickweed Wang's picture

I think Warren number 1, as you call him, went the way of the dodo about 20 years ago

Dodo? Or did you mean dildo?

Thu, 05/15/2014 - 17:38 | 4764147 kurt
kurt's picture

This was a very simulating conversation

Simulating Conversation

Fri, 05/16/2014 - 08:14 | 4765825 what's that smell
what's that smell's picture

carl icahn is a what?

if you stick your head far enough up carl's anus you might find a munger or a quick.

hey carl! Vitaliy Katsenelson's tongue is looking for a job.

smells like crony ass to me.

Thu, 05/15/2014 - 17:33 | 4764134 Dick Buttkiss
Dick Buttkiss's picture

Warren Buffett is a traitor to the man he named his son after:

http://en.wikipedia.org/wiki/Howard_Buffett#Political_philosophy

Fri, 05/16/2014 - 09:38 | 4766152 AmCockerSpaniel
AmCockerSpaniel's picture

Lets just take this as the truth, the real world. It's a world were inside info is gotten, by keeping everyone that can give to you, happy. Or;

it's ALL about money! Did knowing that the keystone pipeline would be stopped, make buying CXN a good idea? If people must die, well it just part of God's game. I fear for all of us in this world!

Fri, 05/16/2014 - 09:11 | 4766031 Pee Wee
Pee Wee's picture

Pick anything and Buffet is proven as corrupt and lawless without principle as the next.

Thu, 05/15/2014 - 18:08 | 4764249 John Law Lives
John Law Lives's picture

He is an outspoken advocate of an onerous Federal Estate Tax.  That is revolting (imo).  He can go piss up a rope.

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