The Snowball

by Alice Schroeder

  When corporate board members were surveyed, they unanimously thought Buffett was their dream director. “We would come and wash Buffett’s car to have him on our board…. There’s not a person in the world who wouldn’t take himon their board…. CalPERS’s action shows the stupidity of corporate governance run amok…analogous to an NFL coach preferring an unknown quarterback from a Division II college instead of a Super Bowl quarterback…. If you were a shareholder, given the choice to have Warren Buffett on that board or not, you’d want him.”11 The Financial Times referred to ISS as the Darth Vader of corporate governance, citing a position that “smacked of dogma.”12 With inkwells of backlash spilling all over them, CalPERS and ISS began to look foolish, “somewhere between hideous and self-promoting populists,” as one retired CEO put it on the survey. “How could you bring yourself to a position where you would vote against him as a director and think that was a pro-shareholder thing to do? What a ridiculous piece of advice.”13

  Throwing Buffett off the board to improve the audit committee was like firing your doctor because you were still sick. What Coca-Cola needed was more Buffett, not less. ISS responded by saying that it was not advocating a vote against Buffett. Rather, it was saying to “withhold” votes from him because of his position on the audit committee.14 But withholding a vote was not voting for Buffett, no matter how you parsed the words or why you said you did it. The more ISS explained, the less anyone was convinced.

  The bigger problem was that ISS was not just giving advice. Because so many investors had simply delegated their voting rights to it, ISS was more like a single behemoth shareholder that controlled as much as twenty percent of all the board votes for major corporations in the United States. The securities laws had not anticipated that a situation could arise in which one unregulated, magisterial “shareholder” held so much power over American businesses. But there it was.

  Buffett had a passionate view of corporate board responsibilities, founded in his partnership and based on alignment of interests. “I think owners should behave like owners, and I think they should care about independence. And so those guys are right on two out of three. It’s just that they don’t have the faintest notion of what independence is about or how boards actually work. This checklist approach is totally crazy. If we’d gone out and found somebody in the unemployment line and paid them $125,000 to be a Coke director, they’d be considered ‘independent.’ And CalPERS and ISS would have no problem voting for him, even though he depended completely for his income on that paycheck from Coke.”

  Studies, however, had shown either no correlation or negative correlation between board independence and a firm’s performance.15 But for the Coke board to rail against ISS also lacked a certain credibility and seemliness. Now that Coke’s stock was barbecue, its board members could convincingly summon no more than low to middling dudgeon. The accusations of a “crony board” neared the mark. Although it had factions, one faction ruled; or rather misruled; Buffett admitted that he should have done more to try to steer things right at Coke. Indeed, if Coca-Cola had been run by him, assisted only by a six-pack of Cherry Coke, perhaps many of its woes could have been avoided.

  Instead, a brew of important people—several of them titanic personalities, and all of them accustomed to being in charge—could not sit back and simply allow themselves to be led by a weak CEO; they had spun into a vortex. That Daft had improved Coca-Cola’s profits, sales, and cash flows and had mended poisonous relations with the bottlers were not enough to turn things around for him. In February, Daft suddenly told the board he was resigning.

  Daft was unpopular in many quarters, but his announcement set off dismay at the prospect of more bad publicity for Coca-Cola. This time the next guy in line could not be simply plugged into the job. Some board members viewed that as the chance to finally do the job right. In a move that had instantly attracted controversy, however, concurrent with the announcement of Daft’s resignation, seventy-seven-year-old Don Keough had joined the board; Keough, who had been sometimes referred to as the “shadow” CEO, became chairman of the search committee. He and Buffett now spent hours on the phone trying to find a leader for Coca-Cola.

  The search for a fourth CEO in eight years quickly turned into a spectacle. The board looked at Coca-Cola’s president, Steve Heyer, once considered a shoo-in, but the board members split over him, and once outside candidates were proposed, his chances began to fade. Various celebrity CEOs considered then turned down the job. Each rejection fed the media another bit of Schadenfreudenfodder. Slit-eyed rumors gathered for a chat. Maybe Coke would buy another company. Maybe it would sell itself to Nestlé.

  Buffett flew to the April 20 board meeting in Wilmington, Delaware, the evening before the Coca-Cola shareholder meeting, prepared for two days of intense work. He was not looking forward to the reading of the results of the director election, which would show a significant percentage of the vote withheld from him.

  In the faded grandeur of the old Hotel du Pont, Buffett began with the meeting of the audit committee, which was still conducting the inquisition and preparing to do corporate penance over the SEC investigation of earnings management.16

  “If you don’t come clean the first time you discover it, you’re stuck. And that may mean giving up your job too. I can see how it happened. Roberto was a wonderful guy. He did a good job of running the company. And the rest of them were decent people, pretty much. But if Roberto told them, ‘I want you to ship some extra cases,’ it would have been unquestioned at the Coca-Cola Company.”

  The audit committee felt all this had been concealed from them. Buffett, sentenced to remain on the Coke board for another year, knew of no real solution except: Clean up the damned mess and never do it again. He moved on to the finance committee, then the executive committee. The board had various thorny issues to address. At last the evening ended.

  The next morning, as he was getting dressed before heading down to the meeting, he reflected on the coming day’s events. The Teamsters would already be clogging the street in front of the hotel with their blue tractor-trailer truck parked among the students waving signs that said “Coca-Cola Destroys Lives, Livelihoods, and Communities” and “Killer Cola, Toxic Cola, Racist Cola.” He couldn’t see from the window, however, whether the Teamsters had brought their twelve-foot-high inflatable rat. The Coke shareholder meeting was becoming a rite of brand-building within the activist community.

  Then the phone in his hotel room rang. He picked it up and found the last person he was expecting on the other end of the line—Jesse Jackson. Jackson merely said that he wanted to express his admiration for Buffett. They talked for a minute or two of things of no consequence, and hung up. That’s odd, thought Buffett. In fact, it was the first sign that this was going to be the Coca-Cola shareholder meeting to end all shareholder meetings.

  Downstairs, protesters in the lobby outnumbered the shareholders. The glassblowers’ union handed out bumper stickers to protest the company’s purchases of bottles from Mexico.17 Protesters handed out leaflets accusing Coca-Cola of conspiring with paramilitary groups in Colombia to assassinate labor leaders. College students protested Coke’s presence on their campuses. Buffett quick-stepped across the lobby to the ballroom, where he was recognized and let inside, along with the rest of the directors. He sat down in the front row. The other attendees picked up credentials, then passed through security, their packages scanned by metal detectors as they surrendered cell phones, cameras, recorders. The security check amid the gilded molding and crystal chandeliers gave the place the feel of a crowded and unpleasant government palace in some former colonial outpost that had suffered through one too many dictatorships. The travelers seemed to have arrived at some dreary but dangerous destination. Coca-Cola put little brochures around the lobby highlighting its community projects and offered a cooler of Coke and Dasani water for people to grab on their way to the stiff-backed shoulder-to-shoulder seats into which the shareholders wedged themselves for the t
wo-hour journey through the Kafka novel that a modern annual meeting had become.

  Doug Daft made some brief introductory remarks from the podium between the two long, funereal, white-covered tables behind which the other executives had barricaded themselves. He asked if there was any discussion of the proposal to elect directors. Buffett, seated up front with the rest, turned around when Ray Rogers, president of Corporate Campaign, Inc., an agitator-for-hire group that worked mainly for labor unions, stood up and yanked the microphone from the floater who was working the aisles. Rogers started yelling that he had withheld votes “until a number of terrible wrongs are righted by this board.” Coca-Cola, he said, was “rife with immorality, corruption, and complicity in gross human rights violations, including murder and torture.” Daft was a liar, he screamed, the company’s leadership operated with “unrestrained greed,” and the company was an “utter pariah” in the United States that made its money “on the destruction of a lot of communities.” As Daft tried to reassert control of the meeting with all the success of a substitute teacher, Rogers continued shouting, shuffling through what appeared to be many pages of text. Daft told him his time was up and asked him to stop speaking, but Rogers carried on. The audio people turned off the microphone’s sound, but Rogers’s vocal cords were far too well-exercised to be daunted by the mere absence of amplification. Finally, a group of six security guards wrestled him to the floor and carried him away as the audience stared in shock and Daft stood by helplessly, trying to restore order, pleading, “Be gentle, please,” to the security guards. Then he muttered audibly to a colleague, “We shouldn’t have done that.”18

  After this steer-wrestling session ended, the room settled into a jittery hush. Sister Vicky Bergkemp of the Adorers of the Blood of Christ took the microphone next. She gave a short speech about AIDS and asked the management of Coke to inform the stockholders of the business effect of the AIDS pandemic on Coca-Cola. Since AIDS had nothing to do with Coca-Cola’s business, management agreeably supported this proposal. Then shareholders introduced other proposals having to do with their view of excessive compensation given to management. The company recommended votes against all of these.

  At last, the results of the election of directors were reported. This was the moment Buffett had been dreading. “Each of the nominees for election of director have received over ninety-six percent of the votes,” said the general counsel, “with the exception of Mr. Buffett. Mr. Buffett received over eighty-four percent of the vote.”19

  Being singled out in public as the least-wanted director at Coca-Cola was humiliating. Never before had a group of shareholders rejected him. Even though CalPERS and ISS accounted for virtually all of the sixteen percent of the votes against him, and institutional investors had for the most part ignored CalPERS and ISS and championed him, it didn’t feel like a triumph. Rarely had Buffett regretted serving on boards as much as he did at this moment. However, there was little time for him to dwell on it, because Daft opened the microphone to shareholder questions, and the Reverend Jesse Jackson promptly stood up and hijacked the meeting.

  “Mr. Daft, and members of the board,” he began in rolling tones, “let me say at the outset…that while many disagreed with the first person making a comment…his violent removal…was beneath…the dignity…of this company. It was…an overreaction…. It was…an excessive use of power…. I…would like to know,” Jackson asked rhetorically, “if there is a person of color…in the mix under consideration for the job” of CEO. The college students’ complaints about Coke on campus and accusations that the company had murdered union leaders in Colombia now seemed anticlimactic. Daft struggled to conclude the most disastrous shareholder meeting in Coca-Cola’s history, as board members vowed to themselves that the way this meeting had escaped the CEO’s control must never be repeated.

  After the fiasco, the search for a CEO took on the feeling of an emergency. Steve Heyer, the internal candidate, had been ruled out at the last board meeting and was heading off to pursue other business interests at Starwood Hotels, complete with a huge and controversial severance package that would, once again, embarrass Coca-Cola. Finally, the board reached out to another candidate they had been discussing, sixty-year-old Neville Isdell, who had retired after being clotheslined years before by Doug Ivester. A tall, charismatic Irishman who had been raised in South Africa, Isdell was popular with the board. By then, however, Coca-Cola could do nothing to please its audience. “Bringing in the old guys” was the reaction. “They hired another Daft.”20 Isdell was already presumed a future victim of the board’s ax, for the board had earned a fearsome reputation for irksomeness and whimsical behavior.21

  Yet this was the same board that had sat primly for years as if it were Goizueta’s footstool. It was only after Goizueta’s untimely death left the leadership in shambles that the board, which for the most part consisted of the same people who had served under Goizueta, had split in two. During the six-year interregnum, a small group of directors had grabbed for the reins of the Real Thing’s runaway stagecoach. All the while, the company missed consumer trends and made strategic mistakes. To catch up and correct the problems, Coca-Cola needed a determined and tough CEO who could tame the faction on the board that became overbearing when deprived of a dominant leader to keep them in line. How long Isdell would survive would depend on how strong a leader he turned out to be.

  Buffett gave his speech about managing earnings; Keough started to help Isdell, as he helped every new CEO. Isdell accepted the help, but as it turned out, he wouldn’t need all that much.

  61

  The Seventh Fire

  New York City, Sun Valley, Cody • March–July 2004

  Buffett had spent twenty-six weekends in San Francisco. He and Susie had watched almost a hundred episodes of Frasier together. The family remained protective. She still saw almost no one else.

  She was starting to eat fresh food. Her friend Tom Newman, a caterer and chef, tried to interest her in something healthier than ice cream and chocolate malteds, and made her pureed carrots, creamed spinach, mashed potatoes, egg salad, and “anything where I could get her some proper nutrition.”1

  In March, she went for her first MRI scan since the surgery. Buffett knew the stakes associated with this event. Susie had said she would have no more surgery.

  “She won’t go back into the hospital. She won’t. I think the odds are reasonably good, but…”

  The MRI came back clean. Buffett was overjoyed; he said that Susie’s doctors told her that this meant she had the same odds of a recurrence as if she had never had cancer. Susie may have put it this way to Warren because she thought that this was what he needed to believe, but what Dr. Schmidt had actually told her was that she could probably count on one good year. After that, the future was uncertain.2

  Months of being trapped inside by illness, just as in her childhood, affected Susie predictably. As weak as she was, her pent-up urge to live her life again exploded. “I’m going to see my family,” she said. “I want to see everybody. I’m going to do everything I want to do until Dr. Schmidt tells me not to.”3

  The first thing she wanted to do was go to the Laguna house and have the grandchildren come visit. For Warren’s sake, she wanted to attend the Berkshire shareholder meeting. She wanted to be strong enough to attend the premiere of Peter’s multimedia show, Spirit—The Seventh Fire, which was to take place in Omaha in July. She had a long list of other goals as well.

  Susie’s hair, which had been light-colored for the last few years, was close-cropped now; her youthful face looked a little slimmer but otherwise no different than before. She spoke with a slight lisp, but it was easy to forget what had happened and not notice how little energy she had.

  Buffett’s preoccupation was whether she would be able to attend the shareholder meeting in May. The meeting had taken on such symbolism to him that a measure of how much people cared about him was their willingness to travel to Omaha for this event. Susie’s presence reassured h
im; she was not a spectator but part of the show. If she could not attend, it was as though his leading lady would be missing from the stage.

  The Buffetts had triangulated the shareholder weekend so that Astrid (who considered the whole thing a bore and was pleased to be excused) accompanied Warren only to the backstage social events, just as she did in real life, while Susie attended the “official” public social events in the role of “wife.” She sat in the directors’ section at the meeting and sang onstage with Al Oehrle’s band in the mall at Borsheim’s on Sunday afternoon. Buffett’s supporting cast of loyal Daisy Maes had grown larger over time, and he cared very much that they attend as well. From time to time throughout the weekend, a clanking sound heralded the approach of Carol Loomis wearing her bracelet hung with a collection of twenty-seven matchbook-size gold and enamel charms, facsimiles of the Berkshire Hathaway annual reports—one for each year she had edited Buffett’s words. Sharon Osberg became part of the show by taking on any shareholder who wanted to play bridge with a champion on Sunday afternoon in the big white tent outside Borsheim’s. Buffett had not yet figured out a way to put his latest Daisy Mae, Devon Spurgeon, to work. Spurgeon, the former Wall Street Journal reporter who had covered Berkshire for a while, was starting law school in the fall. Buffett had made Spurgeon one of his new people, a great rarity that now occurred only at intervals of years. Buffett had actually suggested that she get married at the meeting, where he would walk her down the long, long center aisle to the front and give her away as a bride. “Imagine how many gifts you would get from Borsheim’s,” he said. Genuinely touched by his offer—but warily envisioning news stories portraying her nuptials as the Berkshire version of a Moonie wedding—Spurgeon and her fiancé Kevin Helliker decided to get married in Italy instead. Buffett had granted her a seat with the managers in their reserved section;4 Osberg and Loomis, who were de facto family, sat in the section reserved for family and directors.