Toward the end of her radiation, Susie’s mouth was so burned and dry that some days she could not eat or drink. The doctors put her back on the feeding tube because her throat was choked with a thick, dry mucus. She spent most of the time sleeping. But every day, she and her daughter or Kathleen walked a few blocks on Sacramento Street. As spring stole over San Francisco, Susie stayed bundled in a coat, gloves, scarf, and earmuffs to stay warm.
She hated to be alone. “Can’t you just sit on the couch and look at magazines while I’m awake?” she asked Susie Jr. Then she scribbled, “WHT,” her father’s initials, on a piece of paper, a wry reference to the family trait of becoming anxious when alone.
She was cared for by her nurses, Kathleen, her daughter, and John McCabe, her former tennis coach, who, after many years of looking after her once they had both moved to San Francisco, was well-schooled in acting in a one-hundred-percent supportive role. Anyone else, however, was likely to trigger her “giving” impulses and to drain her of energy.1 On the weekends, when Warren came, he sat with Susie in the TV room watching old episodes of Frasier, or simply hung around in his bathrobe, reading the paper. Susie was comfortable with him there; he made her feel secure—but decades of her “giving” and his receiving didn’t disappear overnight. Sometimes Susie was so sick from the radiation that even Warren had to leave. But he was doing his best to immerse himself in the day-to-day needs of his family in a way that he had never done before. To give his daughter a break from endless days in Susie’s apartment, Warren would take her to Johnny Rockets for a burger. The rest of the time he spent with Sharon.
As Buffett grew more optimistic about Susie’s recovery, the business events of the year 2004 began to consume him, in between the trips he made back and forth to San Francisco every weekend. He scribbled away at his letter to shareholders, e-mailing it back and forth to Carol Loomis. He also spent many hours serving as teacher and unpaid father confessor to corporate America. He had become the elder statesman of the business world. CEOs like Jeffrey Immelt of General Electric, Anne Mulcahy of Xerox, and Jamie Dimon of JP Morgan showed up in Omaha to pick his brain.2 The Internet-search-firm Google was going public that summer, and its cofounders, Sergey Brin and Larry Page, stopped in to see him because they admired his shareholder letters. The previous fall, after her indictment for lying to the government in connection with allegations of insider trading—for which she was never charged—Martha Stewart and her CEO Sharon Patrick had come out to Omaha to visit him. Buffett bought Stewart and Patrick a steak dinner, but couldn’t solve Stewart’s legal problems.
The environment for prosecution of white-collar fraud was changing rapidly, partly because there was just so much white-collar fraud to prosecute these days. New York Attorney General Eliot Spitzer, who had launched a merciless attack on corruption in business and on Wall Street, now led the SEC and the Department of Justice in a three-legged race to see which agency could prosecute most zealously. Spitzer was diabolically inventive at using the new electronic tools of the Internet—especially e-mail—as evidence, at harnessing an accommodating press as a weapon, and at wielding an arcane New York statute, the Martin Act, which gave him virtually unlimited powers, checked only by his personal—and virtually nonexistent—sense of prosecutorial discretion.
With these tools, he had forced two prominent CEOs to resign—Buffett’s business colleague Hank Greenberg, who was now the former CEO of AIG, and his son, Jeffrey Greenberg, the former CEO of insurance broker Marsh & McLennan. A pall of fear hung over corporate America; Spitzer was so successful at execution-by-media that the bitter joke had become that he was saving the government the cost of indictment and trial. Juries that formerly treated white-collar malefactors with deference were now routinely sending them to prison like any other criminal; under new mandatory sentencing guidelines, judges were imposing harsh sentences on them. Some of this mayhem was well-deserved. Greed, hubris, and lack of enforcement had given many people in business the impression that the rules did not apply to them. Just as stock options and the Internet bubble had engorged the senior echelons of business’s wallets at an exponential speed, so had the backlash arrived in gargantuan proportions. Buffett—like most of corporate America—had not fully adjusted to this new environment; his view of proportion was shaped by the earlier era: defined by the careful prosecutorial calibrations of former SEC Enforcement Chief Stanley Sporkin and U.S. Attorney Otto Obermaier; by the travails of Salomon, when even Paul Mozer, who nearly brought down the whole financial system after Gutfreund failed to report his crime, had only served four months in prison. His viewpoint would eventually be revised, however, by the outcome of events that had occurred at Berkshire Hathaway itself.
Buffett usually arrived at the airport to pick up his guests personally. He took them on a nerve-racking ride to the office (if, that is, they were not too dazzled by him to notice), spent a couple of hours listening to their issues and throwing out ideas, then usually escorted them to Gorat’s and treated them to a T-bone and hash-brown meal. He told them to be plainspoken with shareholders in annual reports, to pay employees in alignment with shareholders, not to run their business according to the whims of Wall Street analysts, to deal with problems forthrightly, not to engage in accounting shenanigans, and to choose good pension-plan advisers. Sometimes people asked how to manage their own money, but while he gave them some basic ideas, he didn’t hand out stock tips.
To those who felt the life of a CEO was not what it used to be, Buffett talked about “the ninety-eighth floor” in terms a CEO could understand. People who were looking down from the top at everybody else had to keep things in perspective. So what if they got knocked down a few pegs or lost some of their money? Those who still had their family, their health, and a chance to do something useful for the world should try to count their blessings, not their curses.
“If you go from the first floor to the hundredth floor of a building and then go back to the ninety-eighth, you’ll feel worse than if you’ve just gone from the first to the second, you know. But you’ve got to fight that feeling, because you’re still on the ninety-eighth floor.”
He considered himself on the hundredth floor most of the time. However, during the spring, 2004 was definitely shaping up to be a ninety-eighth-floor kind of year. He waited with impatience as Susie suffered through her radiation until the moment later in the spring when her doctors would perform an MRI to determine whether the treatment had knocked out the cancer cells. Business was also problematic on various fronts: Buffett felt that he had “struck out” when it came to bringing home the gingersnaps: new acquisitions and new stocks to buy. Berkshire had around $40 billion in cash or the equivalent, which was “not a happy position.”3
Still, the challenge of finding new investments wasn’t nearly as severe as bird-dogging the ones that Berkshire already had. Coca-Cola was again evolving into a nightmarish preoccupation. Since the death of Goizueta, quarter by quarter, its business had grown steadily worse. New evidence of accounting manipulation appeared; the stock had sunk below $50, from a high in the $80s.
Doug Daft had earned a reputation for volatile moods and byzantine politicking; a number of senior members of management had departed during his tenure.4 His subtle tweaking of the four main Coke brands had produced unspectacular results.5 Pepsi had pulled off a huge success with Gatorade after Coca-Cola—partly thanks to Buffett—failed to make a deal with Quaker Oats 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.
“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.… 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.’ ”6
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. After so many scandals, 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 lack of proportion was in keeping with the lack of proportion shown by most who were attacking business at the time (which, to be fair, some in the business world had more than earned)—but nonetheless, disproportionate it was. Since Berkshire’s purchases of Coke for its businesses were trivial when compared to Berkshire’s ownership stake in Coke, which was huge, how could Buffett’s behavior as a member of the audit committee or the board of Coca-Cola be said to be compromised?7
The rules of ISS, however, were based on a checklist, with no leeway whatsoever for common sense. CalPERS, the powerful California Public Employees’ Retirement System, also decided to withhold support for half of Coke’s directors, among them Buffett, in his case because the audit committee on which he sat had approved the auditors to do nonaudit work.8 While CalPERS was taking a principled stance on auditors, this recommendation was sort of like putting out the candles on a birthday cake with a fire extinguisher.
Buffett made a quasi-joke of it in public, saying that he was paying CalPERS and ISS to rally votes against him as an excuse to get off the board. But in fact he was mad, especially at ISS.
“If I were a wino off the street, those amounts they’re talking about might be significant. But I own eight percent of Coca-Cola. We’ve got so many more dollars in Coke than anything else. How would I possibly favor Dairy Queen’s interests over Coke’s when I own so much more of Coke’s stock?”
Herbert Allen sent an emotional letter to the Wall Street Journal, citing the Salem witch trials, when “reasonably stupid people accused reasonably smart and gifted people of being witches and casting spells. Then they burned them.… Up until the geniuses at ISS said it, nobody knew that Warren was really a witch.”9
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 him on 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.…”10 The Financial Times referred to ISS as the Darth Vader of corporate governance, citing a position that “smacked of dogma.”11 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.”12
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. 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 was 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.
Buffett flew to the April 20 board meeting in Wilmington, Delaware, the evening before the Coca-Cola shareholder meeting. 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.13 Protesters handed out leaflets accusing Coca-Cola of conspiring with paramilitary groups in Colombia to assassinate labor leaders. 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. 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 two-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 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, and the company 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.”14
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 management’s excessive compensation. 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.”15
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.”16 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.17
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.