By Anupreeta Das and Erik Holm
Berkshire Hathaway Inc. held its annual meeting in Omaha, Neb.,
on Saturday, with Chairman Warren Buffett once again defending his
decision to abstain from voting on a Coca-Cola Co. equity
compensation plan.
"It was the most effective way to behave for Berkshire," Mr.
Buffett said in response to a shareholder question from the floor
of the CenturyLink Center auditorium.
Berkshire is Coca-Cola's largest shareholder with a 9% stake,
and Mr. Buffett said he withheld his vote for two reasons: He
didn't want to "go to war" with the beverage maker's management,
which he supports, and he didn't want to endorse a public campaign
against the equity plan by a smaller Coke shareholder by voting
"no."
Mr. Buffett also expressed support for the management of Bank of
America Corp., another company in which Berkshire Hathaway owns
preferred stock.
Last month, the bank had to reverse course on a stock buyback
and dividend-increase plan after miscalculating capital levels.
"That error they made does not bother me," Mr. Buffett said in
response to a shareholder question. "It doesn't change my feeling
about Bank of America's risk management one iota."
Mr. Buffett invested $5 billion in Bank of America in 2011 in
the form of preferred stock that paid 6% a year, and received
warrants to purchase 700 million shares as part of that deal. The
terms of the preferred stock were renegotiated earlier this year to
allow the lender to include it as part of its capital.
The bank was forced to shelve a plan to repurchase shares and
boost its dividend for the first time since 2008, after discovering
an error that left the lender with $4 billion less in capital than
it thought it had.
Shareholders and analysts asked several probing questions of Mr.
Buffett and Berkshire Vice Chairman Charlie Munger, seeking
information on recent challenges at Berkshire's railroad, how much
the company pays certain top executives, as well as plans to use
its enormous cash hoard.
Responding to a question from Barclays analyst Jay Gelb on how
much Berkshire could spend on an acquisition, Mr. Buffett said he
was willing to spend as much as $50 billion and take on debt or
sell holdings from its stock portfolio if the right opportunity
came along.
However, because Berkshire has more than $40 billion of cash and
about half of that available to use for deals, Mr. Buffett said he
didn't expect to have to sell stocks to fund a purchase. Berkshire
owns multibillion-dollar stakes in companies such as IBM,
Coca-Cola, American Express, Exxon Mobil and Wells Fargo.
Mr. Buffett also praised 3G Capital, the Brazilian investment
firm that Berkshire partnered with last year to buy ketchup maker
H.J. Heinz. 3G is known for being a ruthless cost-cutter that gets
heavily involved in running the companies it owns. That approach is
at odds with Berkshire, where Mr. Buffett gives the managers of
subsidiary businesses wide latitude. However, Mr. Buffett said he
is happy with 3G as a partner and would welcome the chance to do
more deals with them.
Earlier, tens of thousands of Berkshire Hathaway shareholders
traveled to Omaha for a day of discourse with Mr. Buffett and Mr.
Munger, who were scheduled to field questions for over six hours
from shareholders, a panel of analysts and another of
journalists.
The session broke for lunch at noon central time, allowing
shareholders to peruse the display hall nearby, where
Berkshire-owned companies such as See's Candies, Dairy Queen and
Fruit of the Loom were selling their wares. These temporary display
booths collectively do millions of dollars of business over the
Berkshire-meeting weekend, which Mr. Buffett encourages at the
event he has called "Woodstock for capitalists."
The start of the annual meeting follows Friday's announcement of
lower first-quarter profits at Berkshire, which were weighed down
by two of the investment holding company's major businesses,
including the Burlington Northern Santa Fe railroad. The railroad
reported a $724 million first-quarter profit, down from $798
million in the prior year, which the company attributed to weather-
and service-related challenges.
Mr. Buffett said the railroad has recently suffered from service
challenges because of a big increase in volume on a route that
carries oil from the Bakken shale. "We've got a lot of trains
running on that line that weren't running five years ago," he said,
adding that Burlington Northern would spend $5 billion in capital
expenditures this year to fix the problems. The railroad's
executive chairman, Matt Rose, added that Burlington was also hurt
by a severe winter.
However, gains at Berkshire Hathaway's energy and utility
business, as well as its manufacturing operations, helped the
overall results. The $5.6 billion purchase last year of Nevada
utility NV Energy by Berkshire Hathaway Energy, formerly called
MidAmerican Energy Holdings Co., also helped earnings. Mr. Buffett
said during the meeting that the energy business, which this week
agreed to buy a Canadian power transmission unit called AltaLink
from SNC-Lavalin Group for $2.9 billion, would likely be an active
deal-maker.
Berkshire is a holding company that owns dozens of operating
business and a massive portfolio of securities. At its core is an
insurance business that brings in billions of dollars from premiums
paid by customers.
A shareholder proposal that asked the Berkshire board to
consider paying a dividend was roundly defeated, getting less than
2% of the vote and affirming Mr. Buffett's argument that leaving
him and Mr. Munger to allocate Berkshire's capital is a better use
of funds than returning that money to shareholders. He said the
proposal made it sound like "shareholders were bereft of the
necessities of life" because Mr. Buffett was hoarding money in
Omaha.
Mr. Buffett briefly displayed a tally that broke down the vote
by holders of the Class A shares and the much smaller Class Bs,
which showed little variation between the two classes of stock. And
even removing Buffett's own sizable stake from the calculation
failed to lift the number of supporters for a dividend beyond
3%.
One shareholder asked how Mr. Buffett's son, Howard Buffett,
could be trusted to defend Berkshire's "culture and morals that we
hold so dear," given that he didn't stand up for Mr. Buffett's
principles by voting in favor of Coke's equity compensation plan
for executives.
Howard Buffett is a director of both Coca-Cola and Berkshire,
and is expected to become the conglomerate's nonexecutive chairman
after the elder Mr. Buffett is gone. "He's the perfect guy" to
carry out the role of preserving Berkshire's culture and values,
Mr. Buffett said of his son. "The nonexecutive board chairman is
not there to set compensation, he's there to facilitate a change if
the board decides a change is needed."
In defending his son and his stance on Coke, Mr. Buffett also
said it was "almost unheard of" for board members to vote against
pay plans that have been approved by compensation committees. In
his 55 years of being on corporate boards on 19 companies other
than Berkshire, Mr. Buffett said he has never seen directors oppose
a pay plan that had been approved by the compensation
committee.
"I've voted for compensation plans in various places that are
far from what I would have designed myself," Mr. Buffett said.
"That's the way boards work." He said attempting to push changes
amounts to rude corporate behavior: "You keep belching at the
dinner table, you'll be eating in the kitchen."
David Winters, chief executive at Wintergreen Advisers LLC,
which owns about 2.8 million Coca-Cola shares, has argued the
compensation plan, including issuing 340 million new shares and
stock options over four years, could cause nearly 17% of
shareholder dilution. Coke has disputed Mr. Winters's
calculations.
Mr. Buffett previously said that while he agreed with Mr.
Winters's assessment that the plan was excessive, the smaller
shareholder's numbers were inaccurate, and that was reason not to
join Mr. Winters in voting "no" on the compensation plan.
Mr. Buffett said that based on his own calculations, Coke's
plan, which includes stock options that can be exercised in four
years, would lead to a dilution of about 108 million shares, or
2.5%, of the company's shares outstanding.
He based his math on Coke options being issued at the current
price of around $40 a share and trading around $60 apiece when the
options can be exercised in four years. "I don't like dilution, and
I don't like 2.5% dilution," he said.
He added that he discussed the matter with Mr. Munger and both
agreed that abstaining was the best way to proceed. "I think we
handled the whole situation very well," Mr. Munger added.
The Wall Street Journal reported this week that Coca-Cola will
likely revise its executive-compensation plan after it goes into
effect next year, bowing to pressure from Mr. Buffett.
Mr. Buffett aired his reservations about the plan to Coca-Cola
Chairman and Chief Executive Muhtar Kent after Mr. Winters launched
a public campaign against the compensation plan, which nonetheless
was approved by 83% of votes at Coke's annual meeting.
Mr. Buffett's role in the Coke vote is being closely watched by
shareholders of Berkshire Hathaway. Mr. Buffett frequently has
criticized executive pay in the past, including the award of
stock-options, which he says are like lottery tickets that can
provide outsize rewards. At the 2009 Berkshire annual meeting he
said big shareholders can do more to keep executive compensation in
line by speaking out.
At Berkshire's 2009 gathering, he said that if large investors
spoke out against compensation practices, it could be more
effective than having increased regulation. "The way to get big
shots to change their behavior is to embarrass them," he said.
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Several Berkshire shareholders, speaking earlier this week, said
they were surprised Mr. Buffett didn't vote against the Coke plan
as a way of sending a message.
Write to Anupreeta Das at anupreeta.das@wsj.com and Erik Holm at
erik.holm@wsj.com
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