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-up against major influncers(SH) Change of mgt goals revenue, s.prices, dividends etc. Check and balance against the market Change in mgt style Decision 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 on External Board Members Sarbanes-Oxley ????Perpet by Financial Committee Compliance to the board Dictatorship Advanced Governance/ Management Austin and Goizueta Ivester Daft1 WoodruffDaft 2

Features of Board of Meeting Controlled by finance com. representing Woodruff, Increasing conflict/change growth, M.fiasco communcative/ decisive/ Adating period, Tough time/ confrontation against Pepsi Listening ????peppet/ no governing, Expansion In the wars Introduction of new standards/ advanced/ cooperative/ inclusive 18 (70?) Internal 40%, firm CEOs / after ’83, more diversified 13 (58) most from external firms except CEO 18 (no info) Internal cir 38%, holding coms (local investors) 16 (age 63) well balanced with experts Austin and Goizueta Ivester/Deft1 (1997) Woodruff (1923) Daft 2 (2002) Board Running & Interest CEO

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-Oxley 1.Accounting/auditing standards have demonstrablybeen less good than we might reasonably wish them to be 2.Regulatory environment is not perfect 3.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

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

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