Management of Ethical and Corporate Governance Factors in PepsiCo

Ganesh Adhikari

ABE membership number: W07304

11 September 2013

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Contents

EXECUTIVE SUMMARY............................................................................................5

1. INTRODUCTION.....................................................................................................7

2. COMPETENCIES OF PEPSICO.............................................................................9

2.1 PepsiCo’s strength.......................................................................................................................9

2.1.1 Distribution channels............................................................................................................9

2.1.2 Strategic alliances.................................................................................................................9

2.1.3 Global operations.................................................................................................................9

2.1.4 Strong Brands.......................................................................................................................9

2.1.5 Human resources................................................................................................................10

2.1.6 Technological advancements..............................................................................................10

2.2 Analysis of the Environment......................................................................................................10

2.3 linkage of competence to the environment via strategy...........................................................11

3. ISSUES OF THE ORGANISATION......................................................................13

3.1 Environmental...........................................................................................................................13

3.2 Ethical........................................................................................................................................14

3.3 Legal..........................................................................................................................................14

3.4 Corporate governance issues.....................................................................................................14

3.4.1 Corporate Governance.......................................................................................................15

3.4.2 Board of directors...............................................................................................................15

3.4.3 The Audit Committee..........................................................................................................15

3.4.4 The Compensation Committee...........................................................................................15

3.4.5 The Nominating and Corporate Governance Committee....................................................15

4. CONFLICT............................................................................................................16

4.1 Tension between shareholder value and stakeholder value.....................................................16

4.2 PepsiCo’s strategy to manage these tensions............................................................................16

4.2.1 PepsiCo's Global Sustainable Agriculture Commitments....................................................17

4.2.2 Food Health and Safety Policy............................................................................................17

4.2.3 Compliance with law...........................................................................................................17

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4.2.4 Human resource.................................................................................................................17

4.2.5 Food for good initiative.......................................................................................................18

4.2.6 Partnerships with earth Institute and H2O Africa...............................................................18

5. CONCLUSIONS....................................................................................................18

5.1 Recommendations.....................................................................................................................18

REFERENCES..........................................................................................................19

APPENDICES...........................................................................................................22

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Declaration

I declare that this assignment is my own work and I have appropriately

acknowledged the work of others. This assignment is produced in accordance with

the ABE regulations and guidelines.

.......................................

11 September 2013

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Executive summary

This report provides an analysis of market environment of the PepsiCo.  The website

of the PepsiCo used to analyse the impact of social, environmental and ethical

issues on the organisation. It is found that different stakeholders has different

interests in the company, one major challenge for PepsiCo is to manage the tension

between shareholders value and CSR activities. Hence the data was useful in

analysing the tool PepsiCo has used to balance such conflicting interests.

Additionally the information from various other journals, books, magazines and

websites were also applied.

The purpose of using different source of data was to establish validity and reliability

of the research. Report shows that the PepsiCo has the excellent track record of

environmental and social initiatives. PepsiCo is developing, reshaping and

rebranding according to the needs and wants of the consumer. PepsiCo is constantly

facing challenge from public and other stakeholders for its ethical dilemmas.

Similarly with the target of being more ethical, transparent and accountable PepsiCo

has the corporate governance policy in place.

The core competencies of PepsiCo are linked with society through strong

communication channels. PepsiCo also use its key capabilities to eliminate any

threat from the environment. PepsiCo has also these strategies to reduce the conflict

among the stake holders. It also is leading the market by effectively engaging with

the consumers and other partners of the business.

However the report also has some limitations because the financial information

about the investment in social and environmental initiatives was not available on

PepsiCo websites.

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Total word count: 3752

1. IntroductionFounded in 1965, PepsiCo is one of the largest food and Beverage Company in the

world with net revenues more than $65 billion in 2012/13. The company operate in

more than 200 countries around the globe with range of brands which include Pepsi,

lays, walkers, Quakers and Tropicana. PepsiCo employs 297,000 people and has

range of operational activities like production, supply and sales all over the world.

Kellogg’s, Kraft foods and Coca-Cola are the major global competitors of PepsiCo.

The company’s’ vision is to put into action through programs and a focus on

environmental stewardship, activities to benefit society, and a commitment to build

shareholders value by making PepsiCo a truly sustainable company (PepsiCo,

2013). PepsiCo have always believed in finding innovative ways to reduce the use of

energy, water and packaging, and providing better place to work for everyone

involved in its business. Additionally, PepsiCo is known for respect, support and

invest in the local communities where they operate, by hiring local people, creating

products designed for local tastes, and partnering with local farmers, governments

and community groups.

PepsiCo is the century old brand with diverse product portfolio and strong distribution

channel around the world. However it’s over dependency on US market and retail

chains has limited its growing opportunities in recent years.

There is opportunity for PepsiCo to expand into the developing markets like China

and India. It also has the required capabilities to expand its product portfolio which

need to be more dynamic according to the different markets.

However PepsiCo faces strong challenge from its competitors to remain competitive.

A change in political situation in the different regions and conflict has result the

decline in its revenue and profitability. Additionally the growing consumer awareness

about the legal, ethical, social and environmental practises has forced company like

PepsiCo to be more transparent, accountable and Ethical.

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Swot analysis of PepsiCo

Increasing public concern about the social and environmental impact of business has

created pressure for the larger organisation to operate as a corporate citizen Carroll

(1979). The power of consumer is rising and the expectations of the consumer are

surging because of the expansion of the information technology. This awareness

among consumers about the firms CSR initiatives has high impact on their buying

behaviour (Sen and Bhattacharya, 2004). Most important challenge though is that

the expectations of the people are different from countries to countries which are

affected by the law, culture, economic level and educational level of the public. For

example the consumers in US will have demand for healthier product whereas

people in Asia or Africa will seek cheaper products. Therefore it is essential for

PepsiCo to analyse the various market environment periodically to fulfil the demand

of the people to ensure the consistent growth. Many of these factors keep changing

time and again to add extra pressure for the company.

PepsiCo is a consumer products company operating in highly competitive markets

and rely on continued demand for their products. To generate revenues and profits, it

must sell products that appeal to the customers and to consumers.

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Market declineGovernemnts regulationscompetition consumer awareness

International development opportunityBroadning product portfolio

over dependence on US market Low productivityDependence on retail chains

brand imagediversificationdistribution

Strenght

Weakness

Threat

Opportunity

2. Competencies of PepsiCoPepsiCo has the diverse and large segment of food and beverage industry

worldwide. PepsiCo is able to gain extraordinary strength and flexibility through

marketing initiatives, financial capabilities and size. PepsiCo has the strong channels

to reach to the wider section of customer according to their needs. According to

Prahalad and Hamel (2003) core competencies are the set of actions that lead to the

development of core products.

2.1 PepsiCo’s strength

2.1.1 Distribution channelsThe worldwide presence of PepsiCo is depending on its distribution channel which

has created the valuable competitive advantage for the business. PepsiCo have the

system in place for each market to deliver products to the retail outlets with

maximum care, visibility and appeal.

2.1.2 Strategic alliancesWorldwide strategic alliance, joint ventures and partnership bring huge amount of

strength in the capabilities of PepsiCo. Through the partnerships with many

companies in different geographic market PepsiCo has been able to spread its

influence and presence in the market.

2.1.3 Global operationsPepsiCo operates in more than 200 countries with more than 297,000 employees.

PepsiCo nearly has 700 manufacturing facilities worldwide, 2100 distribution centres

and 70,000 routes. It has very strong presence in North America, Europe and the

Middle East and now it is investing significantly to create momentum in the critical

emerging markets of China and India.

2.1.4 Strong BrandsPepsiCo has grown significantly in recent years with its product portfolio and global

brands. The company has 16 different products which generate more than $1 billion

in revenue per year. The company has been also successful in merging and

acquiring other brands like Lipton and Tropicana in recent times around the world

and has had success by linking with the own brands.

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2.1.5 Human resourcesPepsiCo attracts, retain and develop some of the best people in the industry which

creates the valuable advantage to the company. By providing financial and non

financial reward to its workforce for their hard work and commitment PepsiCo is able

to satisfy their needs.

2.1.6 Technological advancementsPepsiCo has invested huge amount of money into Research and development in

recent years which has helped organisation to develop more eco friendly production

and distribution facilities.

2.2 Analysis of the Environment

PepsiCo is operating in the highly competitive food and beverage industry. PepsiCo

constantly seek to remain competitive by closely monitoring the price, quality,

quantity, variety and efficient distribution of the products. PepsiCo is facing intense

competition in all major markets from the rival companies.

Consumer buying patterns changes in short period of time which is a major

challenge for the company like PepsiCo. It takes long time to develop, produce and

sell the product as well as the huge amount of investment if the consumer choice

changes in short period of time company has the risk to lose all the invested into that

particular product. Currently the demand for healthier food and drink is rising. People

are also concerned about the way food companies’ source the natural resources.

Similarly the public awareness about the business practice has great impact on their

buying behaviour. It is widely believed that the CSR activities of the firm have the

direct relationship with the sales (Lombardo, 2011). Eco friendly and socially

responsible companies are performing better than the one those are controversial.

Because the public perception is positive for those who invest some amount of

profits into the social and environmental initiatives.

Government policies are the subject to change according to the development of the

social and economic situation of the country. In some cases law can change when

opposition party come into power. Therefore the change in the law and regulation

has great impact on the performance of the PepsiCo. Similarly political instability

across Middle East and changing government policies in Europe and America has

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significant impact on PepsiCo’s business. Conflicts and uncertainty in the market

create unstable business environment and such situation has big influence on

PepsiCo’s operation.

The economic development in the countries like china and India has created more

opportunity for the multinational companies like PepsiCo. PepsiCo is already the

established market in those countries but have the opportunity to expand.

Technological development is another challenge for PepsiCo to remain competitive

in the market. Uncertainty over the scientific developments over the future creates

the sense of fear about the possible investment in any technology or machineries.

Crop like potato, wheat, rice and grains are the major raw materials for PepsiCo.

Shortages in the supply of food have great impact on its business. Natural disaster

and the global warming has caused the shortages in crop supply which help increase

the price of raw material hence has negative impact on PepsiCo profitability.

PepsiCo hold assets and incur liabilities, earn revenues and pay expenses in a

variety of currencies other than the U.S. dollar. However the consolidated financial

statements are presented in U.S. dollars, the financial statements of foreign

subsidiaries are translated into U.S. dollars. In 2010, PepsiCo’s operations outside of

the U.S. generated a significant portion of net revenue. Fluctuations in foreign

exchange rates may therefore adversely impact business results or financial

condition. 

2.3 linkage of competence to the environment via strategy

PepsiCo links its competencies through the various strategies to generate growth for

the company. To enhance the company image as the ethical company PepsiCo’s

believe in responsible marketing.

PepsiCo cancelled its contract with rapper Lil Wayne in 2013 for his use of racial

lyrics in his songs. PepsiCo believes in equality therefore it distances itself from the

controversial celebrity which shows the marketing strategies are directed towards the

ethical responsibility of the company (PepsiCo, 2013). PepsiCo has taken several

important steps to ensure responsible advertising practices which are directly linked

with its reputation. It has joined the International Food & Beverage Alliance (IFBA), a

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Swiss-based NGO, to adopt a worldwide voluntary commitment to advertise to

children under the age of 12 only those products that meet specific nutrition criteria.

PepsiCo used its technological expertise to develop and reshape its products

according to the changing consumer preference. To do so PepsiCo work on

following areas:

Food Safety

Innovation (R&D)

Manufacturing Quality

Responsible sourcing

Eco friendly distribution channels

Furthermore PepsiCo has utilised its competencies in enhancing the brand image

and the reputation of the company by being a responsible company. Similarly it also

uses its human resources to enhance its prestige. In 2012, about more than 33,000

volunteer hours were completed by PepsiCo employees around the world (PepsiCo,

2013). It uses the following social and environmental actions to get closer to the

community to maximise its relationships with them and enhance the trust and image

of the company.

Initiative Description

Green Building 10 new construction building with

Environmental design certification

Renewable energy projects 10 renewable energy projects in 2012

Energy efficiency process Through lighting upgrades in 2012,

PepsiCo America Beverages is saving

14,426,000 kWh of electricity and 47,700

MMBTU of natural gas each year.

Organisation wide behavioural change PepsiCo-wide 2012 Operations

Environmental Sustainability Summit

provided a forum for knowledge transfer,

collaboration, education, networking, and

sharing of best practices on reducing

energy, cutting greenhouse gases and

using water more efficiently.

Energy saving fleets PepsiCo’s electric vehicles have travelled

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nearly three million miles, reducing

carbon emissions by 5,000 metric tons

Third party involvement to verification An independent organization, Bureau

Veritas, was used to verify PepsiCo’s

2012 environmental performance data for

emissions, energy consumption waste

production and water withdrawals. 

3. Issues of the Organisation

3.1 Environmental

In 2003 sales of Pepsi products was banned in India after the level of pesticides in

the drink was found higher (PepsiCo 2013). Similarly Beijing local government

accuses Pepsi one of the most pollution creating factory in china (PepsiCo, 2013).

These issues has created negative publicity for the PepsiCo and had adverse effect

on their business. It is important for the modern business to take responsibility and

take appropriate action to eliminate the impact it has cause to the environment. The

concept of CSR is increasingly important for corporations around the world in this

competitive environment where the expectations are heightened in the way business

is operated (Blowfield and Murray, 2011). Major international companies are the

target for the pressure group, regulatory bodies and media for their impact on

environment.

PepsiCo believe that environmental stewardship and protecting the health and safety

of the consumers underpin their core values. PepsiCo monitors company-owned

operations and joint ventures where it holds a majority share. It encourages

suppliers, service providers, bottlers and other partners to adhere to the policy.

PepsiCo has been able to achieve their goal, four years ahead of schedule, to

improve global operational water-use efficiency by 20 percent per unit of production

by 2015, compared to a 2006 baseline (PepsiCo, 2013). The improvements in

efficiency enabled PepsiCo to save nearly 14 billion litres of water in direct

operations in 2012, which, in turn, enabled the company to save more than $15

million in water costs.

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3.2 Ethical

According to Bowen (1950) social responsibility is the moral obligation of the

business to follow the objectives and values of the society. People across the world

have different cultures, values and traditions. One of the biggest challenges for

PepsiCo is how to successfully enter into other countries, particularly when laws

culture and traditions are different. PepsiCo often faces heavy criticism for products

that are viewed as largely unhealthy and whose packaging contributes to a large

amount of waste. Similarly PepsiCo has been constantly working to create the

working environment where anyone can report the misconduct or inappropriate

business behaviour. "We want people to come forward and ask questions, to create

a culture where people are willing to raise issues and challenge behaviour," says

Pam McGuire, PepsiCo's senior vice president and deputy general counsel of

business practices and compliance.

PepsiCo believe in acting ethically and responsibly while sourcing, processing,

distributing and selling the products. PepsiCo Global Code of Conduct which is seen

as roadmap and compass has been revised on October 1, 2012 to address changing

laws that impact our business. According to the (PepsiCo website, 2013) all the

employee are supposed

To show respect in the work place

act with integrity in the marketplace

ensure ethics in our business activities

perform work responsibly for our shareholders

3.3 Legal

Climate change is the global challenge which is familiar among almost everyone in

the world. Therefore there the law regarding energy use and emissions are getting

tougher. Similarly the health and safety law are different in many countries. New

taxes are imposed on the sugar related drinks in US for the public health initiative

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(Reuters, 2010). Similarly the political conflicts and the change in the government

across many regions have great impact on the performance of the PepsiCo. It is

often likely that the law and regulation will change after the change in government.

Therefore it is a major challenge for the PepsiCo to comply with all the legal

compliance.

3.4 Corporate governance issues

Public, consumers’, investors’ and other stakeholders in current market environment

have concerns relating to PepsiCo's accounting, internal accounting controls or

auditing matters. There is a belief among people that active participation in public

policy is essential and appropriate for companies in open societies (PepsiCo, 2013).

3.4.1 Corporate Governance PepsiCo's Articles of Incorporation provide a legal declaration of its structure and

purpose as a corporation as mandated by law. Its report clearly shows the rules and

procedures by which it operates as well as the rights and powers of company

shareholders, directors, and officers. These principles were adopted to establish a

common set of expectations to assist the board and its committees in performing

their duties in compliance with applicable requirements. PepsiCo has adopted

comprehensive corporate standards and policies to govern our operations and

ensure accountability for our actions.

3.4.2 Board of directors

PepsiCo’s business strategy and affairs are overseen by the board of directors

comprised of one executive director and 12 independent directors. Only independent

directors are appointed to the three standing board committees which are the

following

3.4.3 The Audit CommitteeThe audit committee is comprised of independent directors with the financial literacy

to provide oversight of PepsiCo accounting policies and financial reporting.

3.4.4 The Compensation CommitteeThe compensation committee is composed entirely of independent directors

responsible for overseeing policies on executive compensation.

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3.4.5 The Nominating and Corporate Governance CommitteeThis committee is responsible for nominating new members to the board and

providing policy recommendations regarding corporate governance.

4. ConflictThe business is the combined system of different forces which has different powers

and interests in the company. Difference in interests among stakeholders creates the

situation of conflict.

4.1 Tension between shareholder value and stakeholder value

There is apparent distinction between shareholders’ value and stakeholders’ value.

Shareholder value is directed towards the maximisation of profits and returns to the

shareholders. Many academics argue that the profit maximisation must not be the

only objective of the company. According to Hopkins (2004), “The wider aim of

company should be to create higher standards of living, while preserving the

profitability of the corporation, for peoples both within and outside the corporation.”

However on the other side many people criticise CSR for being just another tool of

publicity and marketing. According to Theodore Levitt (1958) social responsibility is

the harmful approach to business interest. He further argued that the social and

environmental issues are for government and regulatory bodies to solve. Similarly,

Friedman(1970) famously said that the social responsibility is a “fundamentally

subversive doctrine in free society” arguing that profit itself was a social good and

that society was best served when corporation maximize shareholder value.

There was conflict with the farmer in India after the report suggests that the PepsiCo

factories are creating the kind of pollution that is affecting the soil of the farmer.

4.2 PepsiCo’s strategy to manage these tensions

PepsiCo achieve this by following the strategy to return and invest in the society

where it operates around the world. Additionally by serving society as a good

corporate citizen and taking action or aligning itself with leading experts and

organizations focused on emerging social and environmental issues, PepsiCo has

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achieved a high level of stakeholder engagement. By minimal use of resources and

using advanced technology in its production and supply PepsiCo saves Environment

and the money at same time.

By investing on following operations around the world PepsiCo is reducing the cost

of production which will increase the profitability for the longer period of time.

4.2.1 PepsiCo's Global Sustainable Agriculture CommitmentsPepsiCo has used the sustainable agriculture programme in many parts of the world

by reducing the cost as well as using minimum resources. Few examples include

A new way of growing rice in India saved more than seven billion litres of

water

PepsiCo has developed tools to increase the efficiency of fungicide used in

Russia, the UK and Egypt.

In Inner Mongolia, PepsiCo China developed a highly productive method of

growing potatoes, wheat and corn in desert conditions.

4.2.2 Food Health and Safety PolicyPeople in modern market environment are buying more from the firm which is doing

well for the society and environment. PepsiCo has created responsible portfolio of its

product by keeping the health of consumer in mind. Currently, 54% of product

portfolio is defined as healthier, and PepsiCo aims to increase this to 60% by

2015(PepsiCo, 2013).

4.2.3 Compliance with lawVarious governments have different GHG emission policies in places however

PepsiCo has continuously worked with all regulatory bodies to make efficient use of

fuel and other resources. This strategy has helped PepsiCo to save cost as well as

preserve the environment. By keeping constant level of GHG emission PepsiCo was

able to grow its food and beverage production by 7 to 12 percent from 2008 to

2012(PepsiCo, 2013).

4.2.4 Human resourceAdditionally PepsiCo is dedicated to supporting health and wellness of its work force

through a variety of initiatives, including education programmes, activity initiatives

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and health checks to test for body fat content, body mass index and blood pressure.

PepsiCo employees also help make a meaningful difference in the lives of others

and have an enduring impact on the communities where they live and work by

seeking ways to minimise global challenges.

4.2.5 Food for good initiative Through collaborations with community and government partners, the program

provides free, nutritious meals and fun physical activities to kids during the summer

months, when they are out of school and therefore do not have access to

government subsidized meals. 

4.2.6 Partnerships with earth Institute and H2O AfricaPepsiCo and the Earth Institute at Columbia University, an institutions dedicated to

global sustainable development announced a partnership with H2O Africa, which

involves identifying a series of high-impact, community-based activities and practical

solutions across water, agriculture and climate. The effort is focused on improving

water access, increasing water productivity and recommending innovative methods

to deliver "more crops per drop," among other goals. The PepsiCo partnership with

H2O Africa also involves on the ground clean water projects in Niger, Mali, Senegal

and other countries in Africa.

5. ConclusionsPepsiCo is the typical business success story, with the imagination of single mind

and being the largest food and Beverage Company in the world. Yet the challenges

are still there form the environment and competitors. PepsiCo is seeking a way

towards more balanced stakeholder engagement by identifying their needs and

interest to understand and respond. There is the belief among the leaders of

PepsiCo that with the effective use of social activities has helped maximise the

relationship and engagement with the society. As CSR is related to the brand image,

companies with being better in social and environmental initiatives are believed to

receive a positive word of mouth in society (Lombardo, 2011). With the increasing

emphasis in sustainable development PepsiCo’s management has linked

environmental, ethical and Corporate Governance issues with the corporate strategy

of the company.

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Still there are some issues related to its operation on the production facilities in

developing countries. PepsiCo must go beyond law to take extremes actions for the

wellbeing of the consumers. Many of the past challenges face by the company were

due to the reduced engagement with stakeholders and society. Due to the lack of

cultural sensibility PepsiCo shared ethical dilemmas through its marketing campaign

in the past. Even though PepsiCo has worked hard to maintain the level healthy

ingredients in its products it seems PepsiCo has the long way to go before its snacks

can be called healthier. If PepsiCo can learn from its mistakes, there is the possibility

for the company to justify a reputation as a socially responsible company.

5.1 Recommendations

The future of PepsiCo depends upon its actions to provide the product that has

minimum impact on the health of the consumers. To fulfil the health and safety

commitments PepsiCo must comply with all the local bodies in various markets to

ensure the good sustainable business environment for all the stakeholders. PepsiCo

has taken some concrete steps to reduce the level of pollution and use of natural

resources. However the future of PepsiCo depends upon its commitment and value

for the environment. There is still the need of more investment in the infrastructure to

reduce the emission of carbon. Similarly PepsiCo must increase its engagement with

society and stakeholders to develop ethical working environment. The effective

leadership initiatives on the issues of governance and ethical corporate structure will

have great impact on its performance.

Reference

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AppendicesA. The engagement of its leadership into the social and environmental issues has

created the opportunity to balance the corporate interests of PepsiCo. To achieve

both CSR and profitability PepsiCo has developed the sustainable leadership

structure policy. Following figure shows the model where all activities are directed

towards the social and environmental goods.

Goals and commitments Training and Awareness Monitoring and Follow up

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Issues of water, Climate

change, waste elimination,

agriculture, health and

education.

Business policy and

expectation are

communicated to business

associates and partners

through code of conduct,

employee conduct,

environmental policy and

marketing policy.

All PepsiCo-owned

manufacturing facilities are

required to have an EMS

that complies with the

PepsiCo EMS framework

while using a locally

relevant approach.

In 2005, the PepsiCo

Environmental

Management System

(EMS) framework was first

developed with the help of

an independent third party.

Currently, 86 percent of

PepsiCo's manufacturing

locations have an EMS in

place that aligns with the

PepsiCo EMS framework,

and 83 locations have

achieved ISO 14001

certification for their EMS.

B. PepsiCo strategy is to link its competencies through

1. Human sustainability

2. Environmental sustainability

3. Talent sustainability

All the actions within the company are directed to fulfil these three purposes of its corporate strategy.

Similarly with having strong controls over financial reporting PepsiCo is able to provide timely, accurate and understandable information to its investors, customers and other related parties. There is the framework to do so which is internal control-Integrated framework.

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