Inside Coca-Cola

by Neville Isdell

  The analysts and the press were not being kind and as the Pepsi stock price (not market cap) passed the Coca-Cola price, The Wall Street Journal carried a cartoon of me being kicked by a Pepsi can. I had been asked and agreed to return the company to health for the long term and that is what I intended to do. There were calls for further cost-cutting and while I preached eliminating waste, “chasing pennies down the hallway,” I was not willing to take the knife to costs largely made up of salaries and wages when the morale of the employees was still so fragile. Clearly, these were not comfortable times for me. I was determined not to fail and to maintain our long-term focus, and the board, crucially, held with me.

  Behind the scenes, outside of Wall Street’s skeptical gaze, we began to redefine the Coca-Cola Company. It started on a rainy night in London in August 2004, when I gathered all my direct reports at a hotel, many of them arriving late because the streets of London were literally flooded.

  We were going to develop a total growth plan for the company, not just new strategies and a mission statement. It would be a clearly defined path to growth, underpinned by a strong emphasis on our culture and drawing from our heritage, but also relevant to the future. It would be a road map for how to get the company growing again and sustain that growth over the long term. It would not be dictated from on high but developed organically by the company’s top leaders, who had been disheartened by layoffs, lawsuits, a game of musical chairs in the CEO’s office, and a lingering slump in profits. As I traveled the world, I detected a pent-up annoyance and anger. We needed to get everyone in and get it all out on the table, and then decide what we were going to do about it. We had been through a similar process at CCHBC and it had been very helpful. I asked CCHBC veterans Cynthia McCague and Irial Finan to help as we repeated that process on a much larger scale for Coca-Cola. The mission statement would be called the Manifesto for Growth. I consider it my single most important accomplishment as Chairman and CEO.

  We already knew from an internal survey that many of our employees did not trust upper management. They just didn’t believe we had a strategy or that we could grow. It was also clear that many of the executives had lost faith in our strongest asset, the Coca-Cola brand. In fact, when the chief financial officer, Gary Fayard, and I revealed our lower growth targets, a number of executives thought they were still too high. I remember saying that if we could not even reach the lowered goals, “We should all pack up and go home.”

  We gathered 150 of the company’s top executives for a three-day meeting to kick off the project. As they walked into the hotel ballroom the walls were adorned with posters of cartoon characters that contained the verbatim quotes from the internal employee engagement surveys, which showed the level of discontent at Coke to be far higher than at our peer companies. “We don’t trust management,” read one quote from the survey. “Our marketing is terrible,” read another. “We have no strategy,” said another.

  I went on stage to explain that we were going to spend the rest of the day in small groups of a dozen in order to validate, or not, the research. Essentially, this was the catharsis phase. The next day I opened by saying that the intellectual capacity to change the business was in this room and that together we would redesign the company over the next four months. During one of the first meetings, one executive suggested that the solution to Coke’s financial problems was to purchase another big company just as Pepsi had done many years earlier when it purchased the snack food company, Frito-Lay.

  “Why would we buy another company when we can’t seem to figure out how to run this one?” I asked, rhetorically. “Or,” I continued, “do we need to buy another company in order to run our company because we can’t?” There was silence. This was a necessary intervention on my part and the only occasion when I came down hard.

  As the meetings progressed, and the executives began to realize that they really were able to shape the future of the company, the enthusiasm grew exponentially. It was the realization of the Manifesto for Growth.

  The manifesto was a road map for the company, spelling out, for example, that we would no longer venture outside our core business. We would not, for example, buy another movie studio or a snack food company. Yet it also redefined the company as something much more than an emotionless, profit-producing machine. It built on the power of Brand Coca-Cola and the belief that we could once again become an iconic company.

  The manifesto has five basic principles:

  • People: Be a great place to work where people are inspired to be the best they can be.

  • Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people’s desires and needs.

  • Partners: Nurture a winning network of customers and suppliers, creating mutual, enduring value.

  • Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities.

  • Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities.

  In very simple language, the manifesto provided an honest assessment of where we were as a company and where we needed to go.

  “There’s something very special about the Coca-Cola Company,” the manifesto began. “There’s a sense of pride that comes from building brands people love and making the most of ourselves as a company and as individuals. That’s the magic we need more of today.”

  The manifesto discussed “hard truths” about the Coca-Cola Company.

  “In recent years, we’ve lacked a clear direction and a common understanding of our purpose as a company,” the manifesto stated. “We’ve dealt with challenges reactively and separately, not as a team. We’ve been too focused on the short term.”

  The document also listed “some honorable truths,” including the deep-seated belief that Coca-Cola could be a great company once again: “We believe a greater company lies within us. There’s not a moment to lose as we rebuild our company.”

  Wall Street couldn’t have cared less about the manifesto, which tends to look far beyond the next quarter’s earnings statements. Yet the manifesto absolutely turned the company around in a way that was invisible from the outside. We rolled it out around the world. The top 150 executives were the authors. Yet it was implemented by the employees who, in general, were enthusiastic, even in the U.S., which tended to be jaded about such things. Board member Cathy Black, who had a background in publishing as CEO of Hearst Business Media Corp., was impressed, particularly with the simple language of the manifesto. “You had the courage to do this,” she said. “I love it.”

  The manifesto provided Coca-Cola with a framework for who we are, a clarity of vision, and a clarity of tactics that soon started to permeate the company. Morale increased significantly among the very people we relied upon to produce the profit results Wall Street so desperately sought. It was similar, on a much larger scale, to the results we witnessed during those heady days in the Philippines as we rallied the employees at weekend meetings. I can’t emphasize this enough: A company can’t succeed unless it has its employees behind it. They have to be convinced that the leadership truly has their best interests at heart and can win for them. Now, we had that at Coca-Cola. It seems like an oversimplification to say this and perhaps it is, but the manifesto cemented the turnaround at Coca-Cola. For the first time, our allies were the employees we needed most to achieve our goals. It became their plan; they owned it and believed in it. No edict from the mount or sales job was needed.

  The new program broke the back of negativity and I now had the company in my hands. The employees trusted me and believed in me. Yet this was not about me. It was a long-term strategy. I had agreed to stay no more than five years and by the time we rolled out the manifesto, almost a year had elapsed. I wanted to put in place a strategy that had legs and life and would shape the company–long after I was relaxing again in Barbados—a truly sustainable strategy my successor would embrace and build upon. When asked what my legacy
would be, I always replied that I would not have one unless my successor was successful.

  Coca-Cola had relied too heavily on the success of the past, recalled Tom Mattia, who was my vice president and director of public affairs and communications. With the manifesto, we began looking toward the future.

  The manifesto was realized in many tangible ways, including the expansion of company programs to solve environmental problems. The main focus was on water, which is so vital to the production of Coca-Cola and over which we had been heavily criticized, particularly in India. Water tables there dropped as a result of drought and overuse in agriculture, yet Coke was blamed. In fact, after we closed one plant in India, the water table continued to recede at the same rate. Nevertheless, when water supplies dwindled, Coca-Cola, with its high international profile, was always a magnet for criticism. Water shortages were not good for the company’s image or for the communities we served. It was in the best interest of both Coca-Cola and our customers for the company to employ its resources to preserve the water supply, even if we were not the cause of it being diminished. In 2005, we partnered with the U.S. Agency for International Development and our bottlers to reduce water usage in our plants, preserve watersheds, and build water treatment stations for local villages.

  “No company is doing more than Coke to provide clean water to the world’s poor (and not-so-poor) people,” Fortune magazine wrote of our efforts, which are still ongoing and growing.

  Tom Mattia remembers that the manifesto influenced the decision of where to place a bottling plant in Pakistan. The original site, close to Karachi, was in a water-stressed community. With “planet” a key part of our mission statement, we moved the plant farther from Karachi to an area with more water.

  That was both a business decision and an environmental one, and yet they really are one and the same. Coke’s business could only succeed if the community where we sold our products also thrived. Clearly, a community without an adequate water supply is not going to thrive. The manifesto recognized that the factors were all related and should be incorporated in the company’s day-to-day business decisions. “It was still a pure business decision,” Tom said of the Pakistan bottling plant location. “But it was a pure business decision viewed a different way. The manifesto did give us a very different view of the world.”

  As we went about constructing the manifesto, we still had lingering clouds over our heads. One of the most troubling was the U.S. Securities and Exchange Commission investigation into a practice known as “channel stuffing” in Japan from 1997–1999. It’s fair to say that this controversy was a direct result of the malaise that hit the company after Roberto’s death and the sloppy attempts to fix it through mass layoffs, which created fear and dissension throughout the ranks. When that happens, all sorts of other things go wrong.

  An employee wrote a letter to then president Steve Heyer and Deval Patrick, the general counsel, detailing allegations of wrongdoing including channel stuffing, also called “gallon pushing”—artificially pumping up concentrate sales to bottlers to boost corporate earnings in a given quarter. The complaining employee was scheduled to be fired in the latest round of layoffs.

  Heyer apparently ignored the letter. Deval may have read it but did not intercede to prevent the employee from being fired as scheduled. Firing a whistle-blower is never a good idea since it can legally be construed as retaliation for making the complaint. Gary Fayard, then the company’s chief financial officer, tried to stop the firing, but it was too late. “We fired him this morning,” Gary was told when he called the employee’s division.

  The controversy was now forced into the public arena. Not surprising, the newly unemployed employee filed a lawsuit against Coke. His allegations also sparked a federal investigation. Coke had, it turned out, rigged Burger King’s marketing test of frozen Coke by hiring teenagers to buy them. Coke apologized to Burger King and paid $21 million in damages.

  In the meantime, the company, and Gary specifically, had to deal with the lengthy SEC investigation on channel stuffing. Gary and the company’s top lawyer, Deval Patrick, clashed on this issue.

  Deval left the company shortly after I became CEO when I refused to rescind his resignation, primarily because of the severe friction between Deval and another executive (not Gary). The SEC investigation reached a critical point in December 2004, about six months after I returned to the company.

  As the case progressed, Gary’s lawyer told him it was increasingly likely that the SEC would proceed with a civil action against him. Gary’s lawyer told him he was 99 percent confident they could fight the case and win, but it could take five years to litigate and this could ruin his career. Gary discussed the matter with his wife Nancy, who thought that he should defend his reputation and fight any civil action brought against him by the SEC.

  Gary came to see me and offered to resign. “My lawyer is telling me that the odds of a civil action are fairly high and, based on that, I can no longer function as CFO,” he told me. “I will have to leave. That is the only thing I can do.”

  I refused to accept the resignation. “Gary, you’re innocent and we are going to fight this with you,” I told him.

  Over Christmas, Gary got a call from Herbert Allen, a Coke board member. “I just wanted to call and wish you Merry Christmas and to tell you the board will stand by you,” Herbert said. Don Keough, then retired and serving on the Coke board, also called with a similar message of support. This reflects the caliber of the Coke board I served: men and women of great principle.

  Ultimately, the SEC investigation was resolved in April 2005. All of the company’s accounting disclosures were accurate. Nevertheless, the SEC found that the company failed to disclose the impact of channel stuffing on future earnings, and made false and misleading statements in a public filing. In the settlement, Coke neither admitted nor denied the SEC findings and the company paid no fine, but we did agree to strengthen our internal disclosure review process. Gary was not sanctioned and remains the Coca-Cola CFO to this day.

  There was now one less cloud hanging over the company. Yet others still lingered. In 1999 a group of African American employees sued the company, claiming discrimination in pay and promotions. The company settled the case a year later and agreed to allow an independent task force to monitor our hiring practices. The task force, chaired by former U.S. Labor Secretary Alexis Herman, was scheduled to be dismantled in 2005, but I personally appeared before U.S. District Judge Richard Story and asked him to extend it another year. We were in compliance with the settlement but still lacked adequate commitment to the larger goal of diversity, I told the judge. He replied that he had never heard of anyone asking for an extension of court supervision. Many people thought I had taken leave of my senses. However, I believed diversity was not only the correct moral goal; it was good for business and would make Coca-Cola a stronger company.

  “Our company and our leadership must be as inclusive as our brands … as diverse talent proliferates, ideas and innovation thrive as well,” I wrote at the time.

  We concluded the case a year later on an extremely positive note. Judge Story praised our efforts and invited us to go to dinner with him at his favorite barbecue joint in Atlanta together with the plaintiffs, their lawyers, and members of the task force. In another sign of the goodwill generated from that case, Alexis Herman, head of the task force for six years, joined the Coca-Cola board of directors in 2007 and is still there today.

  Yet another legal controversy ended in late 2004 when we settled the European Commission’s antitrust suit. As a result of our strong and hard-earned market position, the commission was concerned we were stifling competition. In Belgium, for example, we had a 68 percent market share compared to 5 percent for Pepsi. In France, it was 60 percent Coke, 6 percent Pepsi. In the settlement, we agreed to a long list of changes designed to foster competition. For example, we would allow retailers to devote up to 20 percent of the space in Coke bottler–owned coolers to competing products.


  “Consumers will generally have more choice at cafés, pubs, and shops and will, therefore, be in a position to choose on the basis of price and personal preferences rather than pick up a Coca-Cola product because it’s the only one on offer,” the EU’s Competition Commissioner, Mario Monti, said in a statement.

  I met personally with Monti before we announced the settlement. He wanted assurances that we were sincere about fulfilling the agreement. Our meeting had been scheduled for thirty minutes but lasted twice that long. We discussed not only the settlement but also business philosophy. Monti and I warmed to each other. That meeting sealed the deal in terms of us having no fine and admitting no guilt but with administrative agreements for future conduct. We did indeed take the agreement seriously and I would later retire Sandy Allan for, in my opinion, violating the spirit of that agreement. I advised the Competition Commission accordingly.

  After Monti left the Competition Commission, I asked him to join Coca-Cola’s international advisory board, another sign, I believe, of the goodwill we were building throughout the world. I don’t think anyone could have imagined that the competition commissioner who had been pursuing Coca-Cola would later join the Coca-Cola family, but he did. The perception of the company was starting to change for the better throughout the world. As the lawsuits were resolved one by one, former adversaries were joining our ranks, a sign of the company’s growing respect and integrity. The embattled atmosphere of the post-Goizueta era was dissipating.

  There was more good news in October 2006, when a federal judge in Miami dismissed lawsuits against two Coca-Cola bottlers in Colombia for allegedly hiring right-wing paramilitaries to kill union leaders. The company had been dismissed from the lawsuit in 2003 and now the litigation—groundless from day one but a distraction and harmful to Coke’s image—was effectively over.