NEW YORK–(BUSINESS WIRE)–Wintergreen Advisers LLC said today that the Board of Directors of the Coca-Cola Company (NYSE: KO) failed to protect shareholders’ interests by introducing secret “bonus shares” for top management as part of Coca-Cola’s 2014 Equity Compensation Plan.

In a letter to the Coca-Cola Board released today, Wintergreen said it believes Coca-Cola’s 2014 Proxy Statement did not adequately identify and explain the concept of secret bonus shares, and as a result, it believes the disclosure in the 2014 Proxy Statement regarding the secret bonus shares fell far short of both the spirit and the letter of the federal securities laws governing proxy disclosure.

Wintergreen called on Coca-Cola to immediately claw back any secret bonus shares that have been granted and to pledge that none will be issued in the future. Wintergreen also requested the resignation of all board members, management and consultants or advisers who assisted in the 2014 Equity Plan debacle.


Board of Directors
The Coca-Cola Company
One Coca-Cola Plaza
Atlanta, GA 30313

January 29, 2015

RE: Secret Bonus Shares

To the Board of Directors of The Coca-Cola Company:
Wintergreen Advisers takes seriously its responsibility to safeguard the interests of its clients. That is why we have spoken out about the issues at The Coca-Cola Company, where investment funds we advise have been committed, long-term shareholders. We have been sharply critical of Coca-Cola’s poor performance, excessive pay practices and weak governance because they harm all Coca-Cola shareholders. Yet Coca-Cola’s management and Board of Directors have failed to address these problems. As a result, we feel we have no choice but to continue to bring important facts to light in the hope that real change will come to Coca-Cola.

One area in which we believe the Board failed utterly to protect shareholders’ interests is the introduction of secret “bonus shares.” Although Coca-Cola’s 2014 Proxy Statement contained only one ambiguous reference to these secret bonus shares, under the 2014 Equity Compensation Plan, Coca-Cola’s Compensation Committee may award secret unrestricted bonus shares that are not tied to any performance goals. We believe:

  • The ability to award secret bonus shares absent any specific criteria is a dramatic and material departure from Coca-Cola’s past practices of paying for performance and is also at odds with descriptions of the 2014 Equity Plan by Coca-Cola’s officers and directors.
  • More seriously, the lack of any detail regarding these secret bonus shares in Coca-Cola’s 2014 Proxy Statement fell far short of what is required under federal securities laws because shareholders could have read the 2014 Proxy Statement and still not have known that the Compensation Committee could award secret bonus shares.
The Ability to Award Secret Bonus Shares is a Material Departure From Past Pay Practices

Prior to the effectiveness of the 2014 Equity Plan, Coca-Cola’s most recent stock award plan was adopted in 2008. In Coca-Cola’s 2008 Proxy Statement, there are numerous references to a pay-for-performance approach. Indeed, the very first two sentences of the Section discussing compensation are “We pay for performance. By this, we mean that rewards are not paid when results are not delivered.” In contrast, the 2014 Equity Plan allows Coca-Cola’s Compensation Committee to grant stock awards on any basis it deems appropriate. We believe this overreaching discretion permitting the issuance of secret bonus shares is a material departure from Coca-Cola’s past pay practices.

Coca-Cola’s 2014 Proxy Statement Did Not Adequately Disclose the Concept of Secret Bonus Shares

We believe Coca-Cola’s 2014 Proxy Statement did not adequately identify and explain the concept of secret bonus shares and failed to communicate that these unrestricted awards were not part of the 2008 Plan. In fact, the only reference to secret bonus shares in the 2014 Proxy Statement appears on page 87, when discussing the types of awards that may be granted under the plan: “…other stock-based awards, in the discretion of the Compensation Committee, including unrestricted stock grants.” [Emphasis ours]. It is far from clear to us what the term “unrestricted” means in this context. We think a shareholder could closely read the 2014 Proxy Statement and still not realize that the Compensation Committee could award secret bonus shares. In fact, shareholders would have to venture all the way to page 14 of the 2014 Equity Plan Agreement itself to fully appreciate the vast discretion afforded to the Board under the 2014 Equity Plan. Unlike the Proxy Statement, which was mailed to all shareholders, the 2014 Equity Plan Agreement was only sent upon request. We think disclosure regarding such an important and novel aspect of Coca-Cola’s compensation practices should have been presented to shareholders front and center, not buried in a supplemental document that most shareholders would not read. As a result, we believe the disclosure in the 2014 Proxy Statement regarding the secret bonus shares fell far short of both the spirit and the letter of the federal securities laws governing proxy disclosure.   The blame for this falls solely on Coca-Cola’s Board of Directors, who designed the Plan, unanimously supported the Plan, and signed off on the disclosure regarding the Plan in the 2014 Proxy Statement.

Coca-Cola Officers and Directors Have Made and Continue to Make Potentially Misleading Statements Regarding the 2014 Equity Plan

We believe Coca-Cola officers and directors made public statements during the proxy solicitation period regarding the 2014 Equity Plan that were inaccurate at best, and potentially materially misleading. Specifically,

  • Mel Lagomasino, the Chair of Coca-Cola’s Compensation Committee, stated in April 2014 that the 2014 Equity Plan “does not result in changes to our pay practices – the 2014 Equity Plan is closely in line with past plans approved by the Board and the shareowners. The second point is that we firmly believe that equity compensation is performance-based. If the Company does not perform, compensation is not realized.” [Emphasis ours]
  • Coca-Cola Chairman and CEO Muhtar Kent stated in April 2014 that “Our new equity program that we have proposed to our shareholders in this coming month in April is completely in line with previous equity programs.” [Emphasis ours]

We believe these statements are simply not true. The new plan has a highly significant element that was not part of the prior plan, namely, secret bonus shares. Further, if Coca-Cola intends to use equity compensation solely to award performance, why did the Board find it necessary to include the secret bonus shares feature?

Equally troubling to us is that Coca-Cola has doubled down on what we believe to be its mischaracterizations of the 2014 Equity Plan. On January 15, 2015, longtime Coca-Cola Director Barry Diller stated in an interview that Coca-Cola intended to issue award shares under the 2014 Equity Plan over a period of ten to twenty years. We believe Mr. Diller is demonstrably wrong as the 2014 Proxy Statement is extremely clear on this point: “Based on historical granting practices and the recent trading price of the Common Stock, the 2014 Equity Plan is expected to cover awards for approximately four years.” No other time frame is discussed in the 2014 Proxy Statement and there is no additional language suggesting a time frame for the plan greater than four years. In addition, the plan itself has a maximum term of ten years, so it is illogical to contend that Coca-Cola intended to grant awards for twenty years.

Mr. Diller also stated that Coca-Cola should have better explained the 2014 Equity Plan, and this is one point we can all agree on. When a shareholder could closely read a company’s proxy statement and not know about a key and new feature of the company’s equity compensation plan, that is a communication issue at best and a deliberate obfuscation of the plan at worst. We wonder which applies to Coca-Cola.

Our Recommendations

We believe investors should have been told in plain terms in the 2014 Proxy Statement as well as in the company’s officers’ and directors’ public statements that the 2014 Equity Plan departed in material respects from previous plans. This would have allowed investors to determine whether the introduction of unrestricted secret bonus shares was consistent with Coca-Cola’s professed policy of linking awards to performance goals that are aligned with the interests of the company and shareholders. As Securities and Exchange Commissioner Luis A. Aguilar told the students and faculty of the Emory School of Law on April 21, 2014: “The underlying corporate governance issue regarding executive compensation is not simply about the amount of the compensation—but whether the decision-making process enables accountability through transparency and through shareholder engagement. To that end, it is important to have corporate governance practices that foster these principles, and that fully and fairly explain the compensation process to shareholders.” In our view, Coca-Cola has failed the tests for transparency and accountability in its communications regarding the 2014 Equity Plan.

To remedy the situation, we urge the Board to:

  1. Withdraw the 2014 Equity Plan, on the basis that a material feature was not adequately disclosed to shareholders in the 2014 Proxy Statement.
  2. Disclose if, when, to whom and how many secret bonus shares have been granted and the rationale for the award. Any such secret bonus shares should be clawed back, to the extent possible, and Coca-Cola should pledge that it will not issue any secret bonus shares in the future.
  3. Represent that future compensation plans will not allow for compensation that is not tied to performance.
  4. Review the 2014 Proxy Statement in light of Coca-Cola’s disclosure policies and present a report of its findings to shareholders.
  5. Request the resignation of all board members, management and consultants or advisers who assisted in the 2014 Equity Plan debacle.

Over the past nine months, we have raised a number of issues at Coca-Cola that go beyond just the 2014 Equity Plan, including what we view as stagnant performance and ineffective governance. However, we feel it is important to address this issue of secret bonus shares again as it epitomizes all of the problems we see at Coca-Cola: overreach and greed at a time of flat performance and a lack of accountability by the Board when it comes to standing up for shareholders. Let there be no doubt – we think the Coca-Cola Board of Directors bears full responsibility for what we view as the serious problems with the 2014 Equity Plan and the far-from-adequate disclosure regarding the 2014 Equity Plan. However, the problems at Coca-Cola go beyond the issues we have outlined in this letter. We believe there is a worrisome pattern of subterfuge, backtracking and changes of direction. The willingness to confer excessive rewards on an underperforming and undeserving management team is a symptom of deeper problems in the leadership of Coca-Cola, a great American institution. Ultimately, if the Directors will not protect Coca-Cola shareholders, then Coca-Cola shareholders will need to protect themselves.

Sincerely,

Wintergreen Advisers, LLC