Coca-Cola Company

Issues for Corporate Governance

Questions are

• List the corporate governance changes at Coca-Cola that are internally Sarbanes-Oxley initiated and discuss: how they are presented in HBS case?

• How has Coca-Cola performed strategically and financially since 1999? How do you explain this performance and how does compare with Pepsi Cola?

Governing Process and Factors

Agent Problem between Ownership and Management

Changing in biz structrure, group governance, etc.

Rule set-upagainst major influncers(SH)

Change of mgt goalsrevenue, s.prices, dividends etc.

Check and balance againstthe market

Change in mgt styleDecision making, transactions

Increase in transparency

Change in Governance Impact on Management

• Internal Mechanism (Organization) : board meetings, shareholders’ voting • External Mechanism (Market): stock market, ownership market

Development of Corporate Governance

CEO World(Ownership)

Corruption/Problems in CG

(Enron etc.)

The Lawless(Beginning of

20, no govern.)

Systematic Survaillance

on CG

Regulation on Rampant Evil

Rules onExternal Board

MembersSarbanes-Oxley

????Perpet byFinancial

Committee

Compliance tothe board

DictatorshipAdvanced

Governance/Management

Austin andGoizueta

IvesterDaft1

Woodruff Daft 2

Features of Board of Meeting

Controlled byfinance com.representing

Woodruff,Increasing

conflict/changegrowth, M.fiasco

communcative/decisive/Adatingperiod,

Tough time/confrontationagainst Pepsi

Listening????peppet/no governing,

ExpansionIn the wars

Introduction ofnew standards/

advanced/cooperative/

inclusive

18 (70?)Internal 40%,firm CEOs /

after ’83, more diversified

13 (58)most from

external firmsexcept CEO

18 (no info)Internal cir 38%,

holding coms(local investors)

16 (age 63)well balancedwith experts

Austin andGoizueta

Ivester/Deft1(1997)

Woodruff(1923)

Daft 2(2002)

Bo

ardR

un

nin

g &

Interest

CE

O

Direction of Corporate Governance Changes

• Complying with NYSE standard, Independent board directors• Expensing the stock options and grants• Discontinuation of earnings estimates• Disclosure committee,Internal reviewing committee • Independent auditing committees, Expanded responsibilities by

Financial expert• Procedures for handling whistleblower complains

Corporate Governance after Sarbanes-Oxley1. Accounting/auditing standards have demonstrablybeen less good

than we might reasonably wish them to be2. Regulatory environment is not perfect3. Ethical and cultural dimension is more fundamental Human frailty rather than human law lies at the heart of the

corporate governance problem

Investing for Growth and Strategy• Sales Force And Sales Capability; Marketplace Execution • Route To Market • Supply Chain • Portfolio Expansion

• Key Strategy

Coca Cola Business vs. Pepsico Business

Pepsico• Franchise system (No equity investment)

– Authorised bottles– Independent distributors

• Party bottlers – Below 50% ownership no control

Coca Cola• Equity Investment in bottlers• Manage bottling operations• No divestiture until acquirer has

– Aligned, Long-term Strategy For The Business – Strong Financial Capability – Depth Of Management Talent

Coca-Cola vs. Pepsico Governance

• When Coca-Cola was facing charges about accounting irregularities and had disappointing earnings:– I.e.Forbes gave Pepsico A+ in corporate

governance.

• Tom Lardieri, general auditor of PepsiCo:– "companies that have stronger governance

practices generally demonstrate stronger financial returns ”

Coca-Cola vs. Pepsico Governance

• Independent board– Board nominated by outsiders– Meet frequently separately from management– 12/14 directors are considered independent – Shareholders vote on the full board each year

• Driving corporate governance– Web-based training programs– Reporting of misconduct made easy (internet, toll free numbers)– Database for tracking complaints at facilities– More documentation and controls testing to ensure sound

processes – Processes for vendors– Third party auditing

Coke vs. Pepsi Share Prices

Sales to Net Income

0.005,000.00

10,000.0015,000.00

20,000.00

25,000.0030,000.00

35,000.0040,000.00

Y1996 Y1998 Y2000 Y2002Y2004Y20060.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

Sales

Net Income

Sales to Net Income

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

Y1996 Y1998 Y2000 Y2002Y2004Y20060.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

Sales

Net Income

Pepsico

Coca Cola

Coke vs. Pepsi Operations

Comparison

Source: ValuEngine analyst report

Goverance and Market Performance

• McKinsey’s Global Investor Survey• 80% of the institutional investors would pay a

premium for a well governed company• Well-governed companies, may benefit from a

lower cost of capital

• Companies scoring high in corporate governance have outperformed markets in the 1990s

• No link between a single standard (like board composition) to performance

Thanks