`Cronyism' identified at Coca-Cola

A student at Riverwood High School in Sandy Springs, Georgia, buys a can of coke after school. Analysts and investors fear the elderly members of the board that will select Coca-Cola's new chairman and CEO are out of touch with today's business environment. PHOTO: NYT

As the Coca-Cola Co searches for a new chairman and chief executive, some investors and analysts are as concerned with who is doing the looking as with who will ultimately be chosen.

The selection committee is so dominated by longtime insiders -- on the panel are Warren Buffett, chairman of Berkshire Hathaway (which owns more than 8 percent of Coke's shares), and Donald Keough, a former Coke president -- that it could be nicknamed Coca-Cola Classic. The problem, analysts said, is the inordinate amount of power in the hands of the old guard -- which has run through two chief executives in seven years with little improvement in company fortunes.

"It's cronyism," said Marc Greenberg, an analyst at Deutsche Bank. "In and of itself, that's not a problem." The concern, he said, is that the selection committee "is run by 75-year-old guys that are out of touch."

James Williams, a Coke director since 1979 and a search committee member, said that although the panel members are "close," they frequently receive input from other directors.

"The board chose the members of the selection committee consistent with the best practices of corporate governance ensuring that the committee consisted of directors with exceptional experience and understanding of our business."

Ben Deutsch, a Coke spokesman

"We've been on there a long time, and we think that's a positive," said Williams, the retired chairman of SunTrust Banks. "We all have deep interests in the company financially and personally. "

Coca-Cola said that its full board, which picked the selection panel, would ultimately choose the new boss.

"The board of directors established a transparent process for selecting Doug Daft's successor," said Ben Deutsch, a Coke spokesman, referring to the outgoing chairman. "The board chose the members of the selection committee consistent with the best practices of corporate governance ensuring that the committee consisted of directors with exceptional experience and understanding of our business."

Coke's most influential directors have long dominated both the finance and management development committees, so it comes as no surprise that the selection panel's roster reads like a who's who of Coke's longest-serving directors. In addition to Keough, Buffett and Williams, the panel includes Herbert Allen, chief executive of Allen & Co, the investment firm; James Robinson III, co-founder and general partner of RRE Ventures and chairman of RRE Investors; and Barry Diller, chairman of InterActiveCorp, an online services company. Diller, who joined in 2002, is the only panel member who has been on the board less than 15 years.

Members of the selection committee (average age: 69) own about 16 percent of Coke's shares. Keough, who heads the nominating panel, is also the chairman of Allen's company and sits on the board of Diller's InterActiveCorp and Buffett's Berkshire Hathaway. Daft is a director of SunTrust Banks.

"Some of the more senior board members are either in an ivory tower or they're not concerned with shareholder concerns," said Andrew Conway, a beverage analyst at Credit Suisse First Boston. "Whether fact or fiction, that is the perception among a broad swath of institutional shareholders. The perception of that insularity is leading to nervousness on the shares."

The directors also do quite a bit of business with Coke. Buffett's McLane Co, for example, bought US$103.9 million of fountain syrup last year and received US$11 million in agency commissions relating to the sale of Coke products, according to Coke's proxy. Even so, Buffett is what Coke calls an "independent director."

Allen, Keough and Donald McHenry, president and owner of the IRC Group, a consulting firm, are not independent directors because of business deals or consulting agreements with the company. Corporate governance experts say Coke has assembled a search committee that many companies would envy. Still, they said, shareholders should be concerned about the ties among panel members.

"When there are this many entangling alliances, you have the same kind of inbreeding problems that produces albinos," said Sarah Teslik, executive director of the Council of Institutional Investors. "Even if these people have courage and are properly motivated, they all see the same things and, more importantly, they all fail to see the same things."

Last month, Coke's directors hired Heidrick & Struggles, an executive recruitment company, to conduct the search. The company, which also recruited Steven Heyer to be Coke's president and chief operating officer in 2001, declined to comment on the search.