David Winters’ Wintergreen Advisers, LLC details concerns with The Coca-Cola Company (NYSE:KO)’s proposed 2014 Equity Plan in letters to Coca-Cola shareholders and the Coca-Cola Board of Directors and Warren Buffett.
Dear Fellow Coca-Cola Shareholders,
Wintergreen Advisers, LLC on behalf of its clients expresses its deep disappointment with The Coca-Cola Company (NYSE:KO)’s proposed 2014 Equity Plan. As further detailed in the attached letters to the Coca-Cola board of directors and Berkshire Hathaway CEO Warren Buffett, Wintergreen Advisers believes this plan to be an unnecessarily large transfer of wealth from Coca-Cola’s shareholders to members of the Company’s management team. We can find no reasonable basis for gifting management 14.2% of the share capital of Coca-Cola, worth $24 billion at today’s share price. No matter how well a management team performs, it is unfathomable that they would require such astronomical sums of money to provide motivation. As representatives of the shareholders, it is the number one priority of the board to look after the owners’ interests. This compensation plan appears to place the economic well-being of management far ahead of the interests of the Company’s owners.
Although the Company has a “robust” share repurchase plan, we believe that a large portion of those repurchased shares will likely be allocated to satisfying the issuance demands of the proposed Plan. The purpose of the Company’s share repurchase plan should be to shrink the number of shares outstanding and increase value on a per share basis, not merely serve to offset share issuance to Company executives. We also believe that Article 13.1 of the 2014 Equity Plan, which allows the Compensation Committee to award shares to management “purely as a ‘bonus’ and not subject to any restrictions or conditions” is an excessively large amount of power to delegate to a select few members of the board. While such a practice may be an “industry norm,” we expect a greater show of leadership from one of the world’s preeminent corporations. Coca-Cola should be the industry leader for best practices in corporate governance and pay practices; the 2014 Equity Plan clearly falls far short of this bar.
Attached please see a video from Wintergreen Advisers CEO and Portfolio Manager David Winters discussing these issues.
David Winters’ Letter to Coca Cola Board of Directors
Board of Directors
The Coca-Cola Company
One Coca-Cola Plaza
March 21, 2014
Dear Coca-Cola Board Members,
On behalf of our clients, Wintergreen Advisers, LLC (“Wintergreen”) owns over 2.5 million shares of The Coca-Cola Company (“Coke,” “Coca-Cola,” or “the Company”), Wintergreen Advisers writes today to express our disappointment with the Company’s proposed 2014 Equity Plan (“the Plan”). The Company’s Board of Directors is asking shareholders to approve an equity compensation plan which, we believe, will significantly erode the per-share value of Coca-Cola shares. If approved, this Plan in conjunction with previous equity compensation plans, will dilute existing shareholders by a Company estimated 14.2%. The Company expects that the 2014 Plan will award a mix of 60% options, 40% full value shares, resulting in the issuance of 340,000,000 Coca-Cola shares. At the current share price, these shares would be worth approximately $13 billion. In effect, the Board is asking shareholders for approval to transfer approximately $13 billion from all of our pockets to the Company’s management over the next four years. When combined with awards from previously approved compensation plans, this figure rises to $24 billion. This is a staggering transfer of value from shareholders to management. Shareholders are in effect being asked to give Coca-Cola management, at no cost to management, 14.2% of the Company. These billions of dollars given to management will come at the sole expense of the many teachers, nurses, federal and state government employees, and union members who have invested their hard-earned savings in Coca-Cola shares, either directly or through pensions and mutual funds.
The proposed Plan will meaningfully increase the number of The Coca-Cola Company (NYSE:KO) shares outstanding, reducing the ownership stake of all shareholders in the Company. At a time when Coke is facing slowing growth in both sales and profit, we do not believe it is in the best interest of shareholders to compound the Company’s headwinds by significantly diluting shareholders. Coca-Cola is a mature business in a low-growth industry. By necessity, a large portion of the Company’s growth in per-share earnings and value must come from shrinking the number of shares outstanding, so that each share is entitled to a larger share of the Company’s profits. The Company had been on the path to doing just this, with a share repurchase program totaling 500 million shares, 11% of shares outstanding, announced just 17 months ago. Now instead of meaningfully reducing shares outstanding and growing value on a per-share basis, this share repurchase program will merely help to offset the new shares issued to management under the Plan. Rather than shrinking the number of slices in the pie and increasing the size of each our slices, management wants to take a $13 billion bite out of the pie, at the expense of all shareholders. When the share repurchase program was announced in October 2012, current Coke Chairman and CEO Muhtar Kent said that it “underscores our continued commitment to delivering increased value to shareholders.” It now seems that the Company’s executives are more interested in increasing the value of their own accounts, with shareholders footing the bill.
From a shareholders perspective, the details of the Plan itself are not any more appealing than the idea of transferring 14.2% of the Company to management. For example, the Plan allows the Company’s Compensation Committee to ignore the impact of such things as asset write-downs and impairment, reorganization and restructuring expenses, and extraordinary non-recurring items when determining whether or not management has met their performance goals. Who but management could possibly bear responsibility for these types of expenses, and why should management not equally share the pain of their impact along with shareholders? If a company takes a write-down or impairment charge, it is usually due to past business decisions made by management; why should these decisions then be ignored when it comes time to determine the compensation of those individuals who made those decisions?
The Plan also allows participants to be awarded up to 3,000,000 share options, 3,000,000 stock appreciation rights, and 1,000,000 shares of common stock each year, in addition to their cash compensation. On top of this, the Plan allows the Compensation Committee of the board to grant “without limitation Shares awarded purely as a ‘bonus’ and not subject to any restrictions or conditions.” This could lead to Coca-Cola executive’s earnings tens or even hundreds of millions of dollars in a single year. We do not believe there is any justifiable reason to allow for the possibility of such excessive compensation.
In summary, Wintergreen Advisers believes the proposed Coca-Cola 2014 Equity Plan is a raw deal for all shareholders. It will serve to enrich a small number of Coca-Cola executives, while significantly diluting existing shareholders and diminishing the per-share value of all Coca-Cola shares. Particularly at a time of slowing growth for the Company, shareholders cannot afford to transfer 14% of their ownership in The Coca-Cola Company (NYSE:KO) to management. Coca-Cola remains a world class company with some of the most valuable brands in the world. The economics of the underlying business are as strong as