96 THE WARREN BUFFETT WAY
Critics have argued that Buffett’s practice of publicly admitting his
mistakes is made easier because, since he owns such a large share of
Berkshire’s common stock, he never has to worry about being f ired.
This is true. But it does not diminish the fundamental value of Buffett’s
belief that candor benef its the manager at least as much as it benef its the
shareholder. “ The CEO who misleads others in public,” he says, “may
eventually mislead himself in private.”^14
Coca-Cola
Roberto Goizueta’s strategy for strengthening Coca-Cola when he took
over as CEO pointedly included shareholders. “We shall, during the next
decade, remain totally committed to our shareholders and to the protec-
tion and enhancement of their investment,” he wrote. “In order to give
our shareholders an above-average total return on their investment, we
must choose businesses that generate returns in excess of inf lation.”^15
Goizueta not only had to grow the business, which required capital
investment, he was also obliged to increase shareholder value. By in-
creasing prof it margins and return on equity, Coca-Cola was able to in-
crease dividends while simultaneously reducing the dividend payout
ratio. Dividends to shareholders, in the 1980s, were increasing 10 per-
cent per year while the payout ratio was declining from 65 percent to 40
percent. This enabled Coca-Cola to reinvest a greater percentage of the
company’s earnings to help sustain its growth rate without shortchang-
ing shareholders.
Coca-Cola is undeniably a superior company with an outstanding
historical economic performance record. In the most recent years, how-
ever, that level of growth has moderated. Where some shareholders
might have panicked, Buffett did not. He did not, in fact, do anything;
he didn’t sell even one share. It is a clear testament to his belief in the
company, and a clear illustration of staying true to his principles.
THE INSTITUTIONAL IMPERATIVE
If management stands to gain wisdom and credibility by facing mistakes,
why do so many annual reports trumpet only successes? If allocation of
capital is so simple and logical, why is capital so poorly allocated? The