Coke faces culture change

Last year, a red-faced Coke paid $21 million (U.S.) to settle charges of deceptive marketing practices in its launch of Frozen Coke at Burger King franchises. Three years before that, Coke paid $192.5 million to settle a landmark race-discrimination class action.

The Toronto Star
July 16, 2004

Coke faces culture change
David Olive

Now that Coca-Cola Co. finally has a new CEO, after an agonizing search that began in February, pressure on a Coke board of directors described by Fortune as "the gang that couldn't shoot straight" is beginning to ease.

Neville Isdell, the 61-year-old Irishman and 35-year Coke veteran who took the helm in May, has quickly asserted himself as a more genial yet more decisive leader than predecessor Douglas Daft. Claiming to have "whistled my way to work" almost every day of his Coke career, Isdell is moving fast to boost morale at a fading U.S. industrial icon whose stock has been dead money since 2000 and hasn't introduced a major new U.S. brand since Sprite in 1960. (The likes of Diet Coke, Cherry Coke and Vanilla Coke are mere line extensions.)

In the midst of Isdell's honeymoon, critics aren't quite ready to put aside their doubts about a board that has presided over countless fiascos, turnover at the top being only the most obvious. Isdell is Coke's fourth CEO since 1997, and none of the firm's 13 senior executives has lasted five years.

Coke wouldn't have mutated from a marketing story to a saga of boardroom governance malaise but for the eyebrow-raising calibre of its directors.

There's Warren Buffett, whose Berkshire Hathaway Inc. has long been Coke's biggest shareholder, with an 8 per cent stake; Robert Nardelli, doing a boffo job of rejuvenating Home Depot Inc.; Barry Diller, Hollywood's uber-dealmaker; James Williams, retired CEO of SunTrust Banks, one of America's best-run regional banks; and Cathleen Black of Hearst Corp., among the savviest magazine executives in the United States.

In other words, "the corporate equivalent of the 1927 Yankees," says Forbes magazine, which also asks: "How can such a smart board preside over such stupid mishaps? It wasn't just the very public and embarrassing search for a successor to chief Douglas Daft, where virtually everyone in the world this side of Kim Jong Il was interviewed for the job."

No indeed. There was also the aborted acquisition of Gatorade (a prize lost to archrival PepsiCo Inc.) and the aborted merger of Coke's Minute Maid with Procter & Gamble Co.'s Sunny Delight fruit juice line. There was the botched European launch this year of Dasani water, found to contain traces of the potential carcinogen bromate — shades of Coke's debacle with tainted Coca-Cola in Western Europe in the late 1990s.

On the regulatory front, meanwhile, the U.S. Securities and Exchange Commission is probing allegations of accounting irregularities. Last year, a red-faced Coke paid $21 million (U.S.) to settle charges of deceptive marketing practices in its launch of Frozen Coke at Burger King franchises. Three years before that, Coke paid $192.5 million to settle a landmark race-discrimination class action.

The crux of the problem is succession planning, a task which, admittedly, is handled badly by many, if not most, firms.

The two sides of that coin might be the Royal Bank of Canada, where CEOs Earle McLaughlin, Rowland Frazee, Allan Taylor, John Cleghorn and Gord Nixon passed the baton effortlessly; and Nortel Networks Corp., where from the autocratic Paul Stern of the late 1980s to the latest incumbent, Bill Owens, who lacks experience in dealing with Nortel's bread-and-butter telecom clients, the firm's board has long struggled to find the right CEO for the times and then provide adequate supervision of its pick.

If many boards are accused of being asleep at the switch, the Coke board tends to be all too alert — or, less politely, meddlesome. It was Buffett, for instance, who reportedly nixed the Gatorade deal as too pricey, and must be surprised it has paid off so handsomely for Pepsico. (Too bad Buffett wasn't of the same mind in green-lighting the purchase by Gillette Co., another big Berkshire holding, when it overpaid for Duracell — an acquisition from which it has yet to recover.)

More irksome by far is director Donald Keough, 77, still bitter at being passed over for the CEO job more than a decade ago, who compensates by meddling in everything from the selection of ads to bottler relations. "The trouble with Keough," who has been a back-seat driver to every CEO since the death of legendary CEO Roberto Goizueta in 1997, "is that he wants to be the bride at every wedding and the corpse at every funeral," a Coke insider told Fortune.

The Coke board bears the hallmarks of coziness and conflicted interests that characterizes so many director enclaves in North America. The New York Times last month couldn't help noticing the contrast between an entrenched Coke board with four members serving more than 20 years, and the eagerness to routinely scapegoat a briefly tenured CEO.

"Coke's celebrity directors have not hesitated to call for regime change in Atlanta," said the Times, "but at exorbitant cost," referring to the more than $200 million in severance payments to deposed executives in recent years. "Shareholders may wonder why the entrenched board keeps failing at its major responsibility: to pick a strong management team in the first place."

Boards at General Electric Co., International Business Machines Corp., 3M Co. and other firms that "get it" have put an enormous effort behind succession planning — not only in grooming potential CEOs, but building bench strength across the organization.

By contrast, it seems Coke's directors are chiefly concerned with maintaining a status quo in which two Berkshire companies — Dairy Queen and food distributor McLane Co. — do extensive business with Coke. And director Herb Allen, who hosts the annual media "mogulfest" in Sun Valley, Idaho, to which Paul Martin repaired after the election, reaps substantial rewards as Coke's de facto in-house investment banker.

Shareholder activists Calpers and Institutional Shareholder Services (ISS) tried earlier to shame Coke's board into scrapping those dubious arrangements, denouncing what has been called the "Coca-Cola keiretsu," a reference to Japan's interlocking corporate boards.

Allen took offence at the agitators' insistence that Buffett surrender his chairmanship of the Coke audit committee. This same Allen owes his board seat of some 20 years standing to a failed Coke investment in Columbia Pictures; the studio was soon unloaded, but not the dealmaker who peddled it to Coke.

It's a measure of how disconnected a corporate director can be from the everyday anxieties of Main Street investors that Allen could go so completely over the top in defending Buffett in a Wall Street Journal op-ed, where he drew a comparison with the Salem witch trials.

Allen wrote, "reasonably stupid people accused reasonably smart and gifted people of being witches and casting spells. Then they burned them … Up until the geniuses at ISS said it, nobody knew that Warren was really a witch. Thank God those folks are here to save those of us who actually have a share in the Coca-Cola Co."

Allen is not, as they say, aligned with ordinary shareholders, as he suggests. A useful addendum to his Journal rant would have identified Allen & Co. and other firms associated with the author as recipients over the past three years of $16.3 million in consulting fees from Coca-Cola.

Even the Kremlin of the dark past might have been a bit more tolerant of dissent than the Coke board, which has placed a gag order on ex-CEOs because, as a company spokesperson explained to Fortune in May, "You have to understand, we're trying to do as little damage as possible. We're trying not to blow the place up." Coke is still so fragile and rife with bureaucratic career assassins that just one stray word could bring down the edifice. Or so too many Coke veterans seem to think, which almost amounts to the same thing.

Here's hoping that a year from now, Neville Isdell is still whistling his way to work each day, and is able to get most of his 49,000 colleagues into the same frame of mind.


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Risks: Deceptive marketing practices, Lawsuit, class-action, Race, Discrimination, Gag order (confidentiality agreement), Canada, United States, 20040716 Coke faces

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