Buffett even tangled in push for corporate reform

Posted: Friday, April 16, 2004

NEW YORK (AP) Shareholders used to relish the chance of having Warren Buffett involved in the companies that they invest. Now, some seem to be ready to show him the door.

Some powerful investor groups have been urging Coca-Cola Co. shareholders to withhold their votes for Buffett to the company's board of directors. It's not that they think the famed billionaire isn't up for the job, but instead worry over the conflicts of interest that could stem from the business relationships his companies have with Coke.

Welcome to a new era in corporate reform, when even the biggest business moguls are under close scrutiny.

The issue here really comes down to the definition of independence. In the wake of the recent corporate scandals, there has been an intense push to increase the presence of outside advisers on company boards.

On many levels, Buffett's credentials should make him the ideal board candidate. As chairman of the Omaha, Neb.-based holding company Berkshire Hathaway, he is one of the world's most successful businessmen. He has also been a strong proponent of governance changes, speaking out against excessive executive pay and pushing for the expensing of stock options.

And he is a major Coke investor, holding more than 8 percent of its outstanding shares. Having a significant ownership stake is something Buffett himself cites in his company's 2003 annual report as an important qualification for a director to have.

Those look like pluses. But some shareholders see some minuses.

The advisory firm Institutional Shareholder Services is questioning how Buffett, who has been on the Coke board since 1989, can be classified as an independent director on the company's audit committee given his many business ties to Coke.

Coke, in its proxy statement filed last month, disclosed that Berkshire Hathaway's grocery distribution subsidiary McLane Co. paid $103.9 million last year for Coke fountain syrup and other products. Coke also gave McLane $11 million in commissions in 2003 related to the sale of the company's products to customers.

In addition, fast-food and ice cream chain Dairy Queen, another company Buffett owns, paid Coke $2.2 million for fountain syrup and other products. Coke last year gave Dairy Queen and its subsidiaries $688,000 for promotional and marketing incentives for corporate and franchise stores.

Coke also has ties to a handful of other Berkshire subsidiaries, including FlightSafety International, which provided training for pilots, flight attendants and mechanics for the Atlanta-based soft drink company.

Another group that would like to see Buffett off Coke's board is the $165 billion California Public Employees Retirement System, also known as CalPERS.

The giant public pension fund is concerned that Buffett, along with five other audit committee members, authorized the company's auditor, Ernst & Young, to perform lucrative ''non-audit services,'' which could include such things as tax advice and planning or consulting.

Investors have been wary of accounting firms providing other services to the companies they audit because the danger of losing that additional business could cloud their judgment. That was a problem at many of the companies involved in the recent business scandals.

Still, Coke is asking investors to stick with Buffett when voting at its annual meeting next week. In a recent Securities and Exchange Commission filing, it pointed out that his independence is consistent with rules set forth by the New York Stock Exchange, on which Coke's stock trades.

''Mr. Buffett is a man with an eminent reputation for integrity and his effectiveness as an audit committee member is widely regarded,'' the company said in the filing. ''Given his substantial ownership in our company, there are few people more closely aligned with the interests of our shareowners.''

The ultimate decision in all this lies in the hands of Coke shareholders. Buffett may not be a truly independent voice, but they'll have to weigh that against whether his talents and expertise are really worth giving up.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

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