No, Carl Icahn and Warren Buffett Aren't Enemies

NEW YORK (TheStreet) -- Not to steal Warren Buffett's thunder or anything, but billionaire activist investor Carl C. Icahn published a criticism of the "Oracle of Omaha" just about the time he took stage at Berkshire Hathaway's (BRK.A) annual shareholder meeting in Omaha on Saturday morning.

Icahn, in an op-ed in Barron's, criticized Buffett for his reticence to vote against Coca-Cola's (KO) executive compensation package, even though he believed the plan to be "excessive" and far more than was needed over its time horizon. Buffett said in an interview on CNBC when first discussing his aversion to the compensation plan he hoped it would last far more than four years.

>> Read More: Buffett Calls Coca-Cola Compensation "Egregious"

"I think we did take a stand in abstaining. That's a very loud voice coming from Berkshire. It obviously means we don't approve of the plan," Buffett later said.

Buffett's comments sparked a debate because they come at a time of an apparent widening pay disparity between top executives and rank and file workers. While executive pay has surged in the past decade, wages have fallen when adjusted for inflation. Stock market returns, meanwhile, haven't performed strongly enough over the past 10-years to put private and public retirement plans in a position of strength.

These are major issues for the U.S. economy and the future obligations of governments, corporations and citizens. For a week, Coca-Cola, one of the most identifiable American brands, has stood out as a perfect metaphor.

Icahn, a billionaire many times over, argued in his op-ed that an investor with Buffett's influence should speak his mind. Instead of abstaining to voice objections to Coca-Cola's pay plan, Buffett should more openly discuss his views and take a stronger stand.

"I and other activists have for years stated that our corporate governance system is dysfunctional. Most boards do not really care about management accountability. It's almost as if they believe the company is not their responsibility. I only wish that large institutions with the power to vote for boards could attend board meetings and experience what a travesty many of them are," Icahn wrote.

Icahn's op-ed and its release during Berkshire's shareholder meeting, might cause some in the media to believe there is a brewing battle between the two investing icons. I'd argue that there is tremendous common ground between Icahn and Buffett.

Ultimately, Icahn and Buffett see similar problems in the management of America's largest institutions and corporations, however, it appears each investor has slightly different methods at accomplishing change. Buffett, a long-time investor in strong management teams and businesses with clear competitive advantages by way of Berkshire Hathaway, has offered solutions.

Berkshire Hathaway's stock market returns have outperformed the S&P 500 over the long haul and provided many investors the kind of long-term appreciation they can retire on. Meanwhile, Berkshire's business units are run with the thrift and long-term vision that has created jobs, and without egregious executive pay. Were one to have invested in Berkshire, they would have generally supported strong management teams, good governance and economic growth.

Icahn Enterprises (IEP), the holding company of Carl Icahn's businesses and investments, has a similarly impressive track record. Icahn, however, has focused his investment on replacing under-performing CEO's, eradicating poor governance practices and allocating corporate capital to sound growth investments.  

Were one to have invested in Icahn Enterprises, they would have been a supporter of corporate change and a re-alignment of management and shareholder interests. Investors would also have seen strong returns.

Common Ground

"With the 'right' CEO, the assets of our companies could be made more productive, which would result in more affordable products, and therefore more consumption, and therefore more employment. My record has proven time and time again that when mediocre managements are replaced or at least held accountable, companies become more productive and shareholder value is greatly enhanced," Icahn wrote in Barron's, reflecting a common refrain of his.

"Additionally, increased productivity will help cure our unemployment problem and make our companies more competitive. But under the present dysfunctional system, too many companies do not have the 'right' CEO," Icahn added, while noting in his article a belief public pension plans will go bankrupt as a result of sub-standard investment returns and large deficits.

Buffett expressed similar concerns in his 2013 letter to shareholders.

"Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans," Buffett wrote.

"During the next decade, you will read a lot of news -- bad news -- about public pension plans," he added.

In a comment to Barron's reacting to Icahn's critiques, Buffett said, "Carl's exposure to boards likely involves some adverse selection; he's probably focused on companies he considers to be poor performers. But I agree that his observations about board behavior are correct in certain cases. I've certainly witnessed some of the behavior that he talks about in my 55 years of directorship, though I've also witnessed much excellent board behavior."

"I would suggest, however, that there's more than one way to effect change," Buffett concluded.

Bottom Line: Buffett is right and so is Icahn. There are many ways to impart corporate change to the benefit of shareholders, employees and the wider economy. Coca-Cola's compensation plan also was "egregious." Let's hope that changes.

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-- Written by Antoine Gara in New York.

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