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By Root 3189 0

senior members of management had departed during his tenure.5 His subtle tweaking of the four main Coke brands had produced unspectacular results, along with column after column of copy meowing at inept ads.6 Pepsi had pulled off a huge success with Gatorade after Coca-Cola failed to make that deal with Quaker Oats back in 2000. Then, a whistle-blower declared that Coca-Cola rigged a marketing test for a fountain product called Frozen Coke to impress a longtime customer, Burger King. The whistle-blower had also accused Coke of accounting fraud, and the SEC, the FBI, and the U.S. Attorney’s office started investigating. The company’s stock price shrank to $43. Buffett had had enough of the “managed earnings” that underlay these problems, in which the Wall Street analysts’ predictions of what a company would earn enticed managers to dig behind the sofa cushions in order to “make the numbers,” thereby meeting or beating “consensus” expectations to please investors. Because the vast majority of companies had tried to set, then surpass Wall Street’s expectations instead of simply reporting what they earned—making the practice uniform—even a penny-per-share shortfall made them look as though they were having problems and often led to precipitous declines in stock prices. Thus, companies claimed they “must” manage earnings, in a vicious, self-fulfilling game. But “earnings management” was a sort of Ponzi-ing. If carried on long enough, a petty form of cheating snowballed into larceny.

“I can’t tell you how much I hate managed earnings in terms of what they do to people. The nature of managed earnings is that you start out small. It’s like stealing five bucks from the cash register and promising yourself you’ll pay it back. You never do. You end up the next time stealing ten bucks. Once you start that kind of game, it draws everybody in. The organization picks up on it, people get cute and clever, and it snowballs. I gave these speeches after we discovered it. I told them, ‘Now the monkey’s off our back. We don’t have to predict anything to the analysts. Let’s just give the damn handout showing the results every year, and whatever we earn, we earn.’”7

Buffett wanted out of the game. If asked off the record what his worst business mistake was, he no longer listed “sins of omission” instead, he said, “Serving on boards.” He was weary most of all of the way it tied his hands. Coca-Cola had changed its policy of requiring directors to retire at age seventy-four to one that merely required directors at that age to submit a letter of resignation for the board to consider. Leaving the Coke board would have let him tap-dance off into the sunset. But for the savior of Salomon to snub a company in trouble would be like sticking a dagger in the stock. “I wouldn’t stay on the board, except I don’t feel like leaving the other guys” to deal with the mess at Coca-Cola, Buffett said. His pro forma letter was, of course, rejected. This was seen externally as a power play to maintain the coziness of a board of cronies. Buffett had no idea what a plateful of misery he had just ordered.

As soon as the proxy statement was filed with Buffett’s name listed for election as a director, Institutional Shareholder Services, a powerful organization that consulted on shareholder voting and voted proxies on behalf of institutional investors, told its clients to withhold their votes for him. ISS said that Buffett’s independence as a member of the audit committee could be affected by the fact that Berkshire Hathaway companies like Dairy Queen and McLane bought $102 million of Coca-Cola products. At a time when scandals involving conflicts of interest had shaken confidence in institutions ranging from the church to the military, the government, and business and nonprofit organizations, accusations of conflicts of interest and questions of governance were taken with a new seriousness. The cronyism of Coca-Cola’s board could have been attacked on other grounds, but ISS lacked any sense of proportion in applying its principles regarding conflict of interest. Its