For God, Country, and Coca-Cola

by Mark Pendergrast

  Coke continued to make exclusive contracts with school systems, offering a variety of products, with schools typically receiving a 30 percent commission for soft drinks versus 15 percent for non-carbonated beverages. Thus, when a South Carolina high school banned soda sales, its profit from vending machine sales dropped from $40,000 to $6,000 a year. “We do not believe that having vending machines in schools represents a commercial presence in the classroom,” said a Coke health and nutrition spokeswoman, “because the machines aren’t in the classroom.” They were merely in the hallways.

  At the end of the year, Coca-Cola Enterprises announced that it wouldn’t sell soft drinks inside elementary schools during school hours and would urge bottlers to limit vending machine hours in middle and high schools. It would also stop giving out book covers splashed with the Coke logo. These were small retreats, token efforts that didn’t have much impact on sales.

  In December 2003, in a relatively rare appearance, Doug Daft told colleagues that obesity represented the biggest challenge the industry had faced in half a century. But it was “absurd and outrageous” to attempt to solve it through simplistic legislation against soft drinks. Instead, the Coke CEO said beverage companies should provide choices and encourage healthy, active lifestyles. Ultimately, it was parents and teachers who must help children make “sensible choices.” Coca-Cola paid for a school program called “Step With It!” distributing red pedometers and encouraging kids to take at least 10,000 steps a day. Increasingly, though, soft drinks seemed out of step with the times. Sales of Coca-Cola Classic fell by 3 percent in 2003, with total profits down by 4 percent.

  WORN OUT

  As 2004 began, Doug Daft must have felt the weight of the Coca-Cola world on his shoulders. For four years, he had faced seemingly insurmountable problems. As soon as one was settled (the racial discrimination lawsuit), two more popped up (murders in Colombia, water depletion in India), like the hydra-headed monster of Greek myth. And now one of those heads seemed to be coming directly at him.

  On January 14, the Securities and Exchange Commission revealed that it was moving beyond a mere probe to a formal investigation of the charges raised by the Matthew Whitley whistleblowing case. FBI agents descended on Atlanta as well, questioning current and former employees about channel-stuffing in international markets such as Japan. According to two ex-Coke men, the agents were particularly interested in the role Daft had played as head of the Asian business at that time. “They’re serious about this one,” said one former employee. “They’re gathering as much info as they can, and they’re going to turn it over to the U.S. attorney.” One subordinate claimed that Daft had angrily dismissed attempts to tell him about the illegal Japanese practices.

  Three weeks later, on February 19, 2004, Daft informed the board that he planned to retire at the end of the year. Though some speculated that he was being forced out, the board was apparently taken completely by surprise. Daft was just worn out. He said later that his health had been shattered by the stress and that he “wouldn’t have survived” if he had remained as Coke’s CEO.

  Steve Heyer was the obvious heir apparent. In December, he had forced out Jeff Dunn, the head of Coke’s North American business, and taken on his responsibilities. Even though Heyer had been at Coke for only three years, he had more longevity that any other serious contender, since executive ranks had been thinned by massive layoffs and attrition.

  Yet the Coca-Cola board didn’t immediately anoint Heyer. Instead, it appointed a search committee, headed by Don Keough, seventy-seven, who had just rejoined the board after its age restriction was lifted. Wanting to avoid the sort of hasty choice that had resulted in an ill-prepared Daft taking over in 2000, the board hired a search firm to find potential candidates. As analysts and media pundits second-guessed likely choices, the search process dragged through March, with a hundred possible candidates in consideration.

  In the lame duck interim period, more blows hit the Company. On March 9, 2004, as protestors continued their chants, the Coke bottling plant in Plachimada, India, was forced to close down after the High Court of Kerala upheld a government order prohibiting Coke from drawing groundwater from the village wells, at least until the June monsoon season. In defiance of the court, the Plachimada village council once again denied the plant’s license renewal.

  In England, where Coke introduced Dasani in early March, a furor ensued when newspaper revealed that the bottles merely held municipal water drawn from the River Thames, then filtered and treated at the CCE plant at Sidcup, a London suburb. “It’s the real thing,” sneered the London Times, “Coke’s tap-water from Sidcup.” The British Food Standards Agency questioned whether the Company could legitimately put “pure” on Dasani labels.

  On March 19, only weeks after the product introduction, Coca-Cola ordered a recall of 500,000 Dasani bottles in England after it found excess levels of bromate, a chemical linked to a higher risk of cancer after long-term exposure. It turned out that British regulations required adding calcium to bottled water. Coke’s addition of calcium chloride, in conjunction with an ozonation process, inadvertently created the bromate. Dasani was dead in the UK, and the company scrapped plans to introduce it in Germany and France.

  Then, just nine days before the annual shareholder meeting, Coke general counsel Deval Patrick, the highest-ranking African American in the Company, announced that he was resigning. The Wall Street Journal reported that Patrick was leaving because some unnamed Coke board members were unhappy with the way he was handling the ongoing SEC and FBI investigations into channel-stuffing. A few days later, the Company reversed itself, saying that Patrick would remain at Coke through the end of the year. Daft reaffirmed that “Deval has my and the board’s confidence and support.” Patrick later revealed that he had quit out of frustration that Daft had reversed his initial approval of an independent investigation into the murders in Colombia.

  On Wednesday, April 21, 2004, Daft presided over the annual shareholder meeting at the Hotel du Pont in Wilmington, Delaware. Early in the meeting, activist Ray Rogers of the Killer Coke campaign strode to the microphone. “The Coca-Cola system,” he began, “is rife with immorality, corruption, and complicity in gross human rights violations, including murder and torture.” He accused Daft of lying about the Colombian situation and recounted the story of Isidro Gil’s death and the subsequent disbanding of the union. He revealed that New York City Councilman Hiram Monserrate had recently returned from a fact-finding mission in Colombia and had concluded that plant managers may have been working with paramilitaries.

  Rogers went on and on in a kind of Coca-Cola filibuster. After five minutes, Daft told him that his time was up. “Please do not interrupt me, Mr. Daft,” he said, and continued, shifting to talk about water issues in India. Daft ordered his microphone turned off. Plainclothes security officers, who turned out to be off-duty Wilmington police hired for the occasion, converged. “I was attacked by Coca-Cola’s thugs, their security,” Rogers recalled a few days later on television’s Democracy Now! “First one came up behind me, clothes-lined me, tried to put a choke hold on me. When that didn’t work, four then jumped me, pulled my legs out from under me, threw me to the floor.”

  Roger, sixty, was only 5'7", but he had once held a weight-lifting record for New England, and he still worked out regularly. He had no intention of leaving voluntarily. “Just be gentle, please,” Daft begged from the podium. As six security officers now struggled with Rogers, Daft ordered, “Security people, please stand down.” But they continued to drag the activist from the meeting. “The fact of the matter is,” Rogers told the TV reporter, “I was not involved in disorderly conduct. The Coca-Cola Company was.”

  Black activist Jesse Jackson then came to the microphone and said that dragging Rogers out was wrong and “beneath the dignity of this company.” He went on to complain about the resignation of Deval Patrick, “a man of tremendous integrity.”

  Doug Daft’s final shareholder meeting had devol
ved into a circus. He said that the claims against Coca-Cola were “false and outrageous,” and that the Killer Coke campaign on college campuses was “twisting the facts.”

  Mercifully, the meeting finally came to an end.

  ”A CASE STUDY IN BUSINESS DYSFUNCTION”

  April passed without any resolution to the search for a new CEO. Many Wall Street analysts and bottlers still wanted inside candidate Steve Heyer, but within the Company he had developed an unsavory reputation as a harsh taskmaster who ran through too many secretaries, fired Jeff Dunn unnecessarily, and was not a team player. He had ditched chief marketing officer Steve Jones and hired Dan Palumbo, but then Heyer basically took over his job.

  It may in fact have been one of the new television spots that finally iced Heyer’s chances. In the spring of 2004, Berlin Cameron made a new “Real” ad in which two boys play a fierce game of one-on-one basketball on a hot summer day. Drenched in sweat, one of the players finds two cans of Coke in the kitchen refrigerator. He gulps down one of them, then uses the other to cool himself, rubbing it on his face, inside his waistband, and under his armpit—after which he gives it to his friend to drink. The ad had been running for a week when Heyer proudly showed it to the Coca-Cola board of directors. They were appalled, and Heyer frantically called the admen and told them to pull it off the air.

  Don Keough, the venerated chair of the search committee, thought the ad represented everything that was wrong with recent Coke ads. It was jarring and negative. Though he had applauded Heyer when he arrived at Coca-Cola, Keough was having second thoughts. He had also heard about Heyer’s temper. “Castigating somebody publicly—it’s obscene, in my view,” Keough told a reporter that April.

  On the short list of outside candidates were Robert Eckert, the Mattel CEO; Rick Lenny, head of Hershey Foods; Carlos Gutierrez of Kellogg; Bob Nardelli, a Coke board member and Home Depot CEO; Kerry Clark of Procter & Gamble; and Steve Burke of Comcast. But by late April, the board had settled on Jim Kilts, the head of Gillette, who had previously worked at consumer food firms Kraft and Nabisco. The Atlanta Journal-Constitution ran an article full of glowing testimonials to Kilts, calling him “a solid leader” who had “a relentless focus on the business.” But when the board offered him the job, Kilts declined. He didn’t want to move to Atlanta.

  Bob Nardelli and Steve Burke also turned the job down. Then it looked like Jack Welch, the legendary General Electric leader who had retired in 2001, might take the Coca-Cola challenge. At his wedding on April 24, he said he would seriously consider the job. But during his honeymoon, he decided against it.

  As the turmoil and indecision continued, observers began to snipe at the Coca-Cola board itself. How could they have allowed Daft to announce his resignation without a clear successor in mind? Maybe the board was too powerful and was scaring off potential candidates. Some shareholders agitated for Warren Buffett, Coke’s major stockholder, to get off the board because of conflicts of interest.

  In a scathing article in Fortune, business writer Betsy Morris called the board an “old-boys club” that was “ineffective to the point of farce.” She quoted a P&G executive who mused that the bumbling search for a new CEO was “one of the strangest processes” he’d ever seen. Morris called The Coca-Cola Company “a case study in business dysfunction,” featuring “a story of byzantine maneuverings and warring tribes, of spin and counterspin, of old grudges and character assassinations.” She then indulged in her own brand of character assassination, labeling Don Keough a Machiavellian “shadow CEO,” a meddler acting out of his own “thwarted dreams, outsized ego, and overt, old-fashioned cronyism.”

  Yet Keough was arguably the keeper of the flame, one of the few left who could remember what Coca-Cola once had meant and might mean again. The first person Keough called after Daft announced his resignation in February was Neville Isdell, a Coke veteran who had lived on five continents in the service of the soft drink. At sixty, he was enjoying his retirement on Barbados, finally finding time to spend with his family. Keough wanted to know if he would throw his hat into the ring for the CEO position. Isdell, whose wife hated the idea, agonized over the decision but finally concluded, “Could I live with myself if I turned down the ultimate challenge?”

  After he told Keough he was interested, Isdell waited for over two months, still thinking that he was a leading candidate. On April 28, Coke board member Herb Allen called to ask if he would consider serving as the president under Jack Welch for a year or two. He refused. A few days later, after Welch had backed out, Keough finally called to offer Isdell the job. After the close of the business day on May 4, 2004, the Company announced that dark horse candidate Neville Isdell would be the next Coca-Cola CEO and chair of the board.

  __________________

  * The 6,000 figure was an overestimate. In the end, 5,200 people lost their jobs.

  * Daft was wrong. Coke volume grew only 4 percent in 2000.

  * The lawyers for the case—Terry Collingsworth of the International Labor Rights Fund and Dan Kovalik of United Steelworkers—brought suit under the Alien Tort Claims Act, an obscure law passed in 1789, arguing that it allowed foreign rights abuses to be tried in U.S. courts.

  * The Company would later portray Ray Rogers as a mercenary propagandist who cynically used Coca-Cola for self-promotion, but Rogers received no money from the lawyers and managed his campaign on a shoestring, relying on donations. A vegetarian bachelor, he lived a semi-monastic life, and his staff consisted of a retired junior high teacher, part-timers, and a homeless man who sometimes lived in the office, along with a cat rescued from a shelter.

  * Richard Kirby, who also owned parts of other Colombian bottling plants, refused to discuss the murders when the union contacted him. “I’m not interested in politics,” he told a reporter. His son Richard Kirby Kielland was actively involved in running the plant and allegedly hired a manager with close ties to the paramilitaries. He and his father later said that they had tried to sell the Bebidas plant in 1997 after the killings, but The Coca-Cola Company wouldn’t sanction the sale. “Nobody tells the paramilitaries what to do,” Richard Kirby said. “They tell you.” He said that they had burned four of his trucks and kidnapped his wife’s sister.

  * In fact, during 2003 Coke would eliminate 3,700 employees worldwide.

  * The 2000 case filed by a shareholder against Coca-Cola for allegations of channel-stuffing in Japan in the late 1990s was still pending, and now it was amended to include newly revealed information.

  * In 2001, The Coca-Cola Company gave $200,000 to the Center for Consumer Freedom, a front organization initially funded by tobacco giant Philip Morris. CCF lobbied against controls on soft drinks.

  ~ 24 ~

  Turnaround

  The best corporate partnerships, in fact the only sustainable ones, are those that are focused on a company’s core business. For Coca-Cola, the most important issue is water. . . . When challenged at an analysts’ meeting, all I had to do was hold up a can of Coke to illustrate the importance of that key ingredient.

  —E. Neville Isdell, Inside Coca-Cola

  After the prolonged, embarrassing search for a new CEO, in which over a hundred people were considered, some analysts were underwhelmed by the choice of a retired Coke lifer like Neville Isdell. The appointment signaled a yearning to “return to the pre-1998 days,” said one skeptic. “We respectfully disagree.”

  Yet many Coke observers thought that Isdell might just be the savior the Company needed. At 6'5", the red-haired Irishman was smart, charming, and a good listener, but he was also no one’s pushover, and in 1981 he had proven his ability to revitalize the ailing business in the Philippines, where he donned army fatigues and hurled a Pepsi bottle against a wall while screaming a Filipino obscenity. The son of an Irish policeman (a ballistics and fingerprint expert), Isdell grew up in Northern Ireland until age ten, when in 1954 his father took a job in Northern Rhodesia (renamed Zambia in 1964).

  At Cape Town University, Isdell
was a star rugby player and anti-apartheid activist planning to become a social worker, until his former girlfriend’s father, a Coke bottler in Zambia, offered him a job as a manager trainee. He subsequently switched to work for The Coca-Cola Company, rising in the ranks, stationed in South Africa, Australia, the Philippines, West Germany, Atlanta headquarters, and England. He had retired in 2001 as vice chair of the Coca-Cola Hellenic Bottling Company.

  A hands-on manager, Isdell enjoyed talking about his days of driving Coke delivery trucks on a horrendous African road called the “Hell Run,” and though he enjoyed the good life at his part-time home in Provence, sipping fine French wines, he never minded getting his hands dirty in the field. One of his fellow rugby players recalled that Isdell had liked to call the plays. “He was a great strategist.”

  The day after the announcement that he would be the new CEO, Isdell flew in from his home in Barbados to Atlanta to meet with 2,000 employees on Wednesday afternoon, May 5, 2004, in the courtyard of the North Avenue headquarters, as the old disco hit “We Are Family” played. Isdell told them that this was the third most special day in his life, after his wedding and the birth of his child. He said that his new job was “a mountain I had to climb.” Then he flew back to Barbados until June, when he would move to Atlanta to take the reins.

  By that time, the mountain he had to climb seemed nearly insurmountable. “Morale is in the dumps,” a recruiter noted. “It’s a great brand, yes—but lately, people are saying it’s become a lousy place to work.” The FBI and SEC channel-stuffing and European Union anti-competitive practices investigations were ongoing. So was the Killer Coke campaign. U.S. soft drink sales were flattening in what appeared to be a saturated market, while sodas provided 80 percent of company revenues. Aside from Dasani, Powerade, and Minute Maid, Coke’s attempts to branch out into alternative drinks were often flops. Concerns over sugary soft drinks’ role in the obesity epidemic were escalating. Super Size Me, a documentary in which thirty-two-year-old Morgan Spurlock gained twenty-four pounds in a month by eating only at McDonald’s fast food outlets, debuted two days after Isdell’s Atlanta employee rally. The film shows Spurlock eating a Super Size meal, washing it down with a forty-two-ounce Coke, then vomiting in the parking lot.