Coca-Cola Ethical Issue - Essay Example

1. Why do you think Coca-Cola has had one ethical issue to resolve after another over the last decade or so? Coca-Cola had been enjoying market leadership and had been continually increasing its market share and profits up to 2000. For the first time in 2000, Coca-Cola failed to be amongst the top ten “America’s most admired companies’ and it was also dropped from the list of top one hundred from the Business Ethics’ annual list. They had been having a social responsibility focus but the company suddenly demonstrated a change in their leadership, high turnover in top management, and was found to engage in several unethical issues. Corporate citizenship requires the fulfillment of four functions – fulfilling economic responsibilities, legal responsibilities, engaging in philanthropy and fulfilling ethical duties (Carroll, 1998). Coca-Cola has been engaging in philanthropy in the societies where it operates but it has been found guilty of racial discrimination; they discharge their economic and legal responsibilities as well but they have not been able to remain ethical in their stand on several issues. The top mangers and the directors are the ethics teachers of an organization. They serve as role model because their behavior and actions reveal, test and shape the character of the organization. Coca-Cola claims to lead by example (Company website) but reports suggest otherwise. Clement (2006) believes that top management commitment is essential to develop an ethical organizational culture. Ethical decision making has to be integrated into a firm’s culture. The antitrust dispute and the channel stuffing could happen because of lack of top management commitment to the organization. The top management commitment is not surprising given the high turnover of top management. While the firm does have ethics programs and codes of conduct but the success of such efforts is limited unless the support of top management is forthcoming. Because of frequent changes in top management, the company was ill-equipped to handle issues internally. The filing of a whistle-blowing suit by a mid-level employee demonstrates that their procedure for handling internal complaints was inadequate. Whistle-blowing occurs when management and employee relationship lacks professionalism (Kaplan & Kleiner, 2000). Whistle blowing becomes essential for companies such as Coca-Cola where the top management is unaware of events taking place at the lower level. Small issues can be handled as a part of the daily routine but remains neglected. Employees bring it to the notice of the seniors only when the situation becomes difficult. When Whitley disclosed accounting irregularities he sent a detailed report to the President of the company but instead of dealing with it internally and professionally, he was fired (Ford, Stephens & Cooper, 2007). This prompted Whitley to retaliate and make the issue public especially as the Sarbanes-Oxley Act, 2002 contains provision for the protection of employees who report wrong doing. Apart from lack of leadership in top management it also shows that proper agreements with employees may not be in place because companies usually need to have a non-disclosure agreement with the employees at the time of taking up the employment (Camerer, 1996). A professional person is an ethical person and Whitley demonstrated this when reporting the anomalies but the internal reporting mechanism were not in place. Executive greed and the failure of the board of directors to perform as directed are other reasons that led Coca-Cola to be involved in one unethical case after another. The greed of the top executives can be found even in the action of the Chief Executive during the 1920s (Rodgers & Gago, 2004). During that period he planned to avoid paying taxes by issuing shares of common stock to the public at no set value. This shows the desire to maximize profits and gain public attention to attract investors. The company also shows lack of awareness of European laws. Most European countries have very strict antitrust laws but Coca-Cola has used its strong market position to violate the European laws. CEO Roberto C. Goizueta of Coca-Cola was legendary and since his death in 1997 there have been no real changes to the corporate strategy at the senior management level (SD, 2006). The CEOs after that have been justifying stating that since that approach was successful there was no perceived need for changes. However, changes have taken place due to intense competition and globalization. The strategy may have worked well then but it does not reflect the constantly changing market conditions. Consumers have become health conscious, competition has increased but Coca-Cola shows lack of innovation. Changing socio-cultural norms are also responsible for errant employee behavior. As in the case of Burger King, John Fisher, Coca-Cola’s account manager with Burger King, was involved (Ford, Stephens & Cooper, 2007), Joya Williams, the former Coca-Cola secretary, has also been convicted of selling trade secrets to competitors (Sussman, 2008). Employees and directors are well aware of the value of trade secrets but despite the prohibition to protect company information, she engaged in illegal, errant behavior. Incidents such as these emphasize the lack of employee commitment, motivation and supervision. It clearly shows lack of top management involvement and sometimes even top management connivance. The internal operations are not managed efficiently and effectively. It also points towards a need for human bonding and connecting. Thus the company being involved in one case after another clearly points towards lack of efficient management. It shows lack of commitment to the organization by employees at all level, a culture that does not support ethics even though they make tall claims of being ethical and socially responsible. The incidents also reveal that the non-disclosure agreements are not effective, again lack of management practices. Employees are not motivated enough and trained enough to remain loyal and committed to the organization. One has to lead by being a role model and the leadership at Coca-Cola lacks all of these qualities due which the culture of ethics has not trickled down to the lower levels. 2. A new analyst said that Coca-Cola could become the next Enron. Do you think this is possible and defend your answer? Even though the unethical practices and incidents that have taken place at Coca-Cola are similar to the events that occurred at Enron, it is highly unlikely that Coca-Cola would meet with the same fate. It is true that several CEOs in American have connived with the top management and deviated from the norms of corporate governance. In the case of Enron, one of the Big Five auditing firms has been charged of colluding with the management to misappropriate funds and project a picture far from reality (Bhattacharya, 2004). While Enron and Coca-Cola both have demonstrated unethical practices, there is a difference. In the case of Enron, it has primarily been to mislead the public, the investors and the shareholders. It was the greed of the directors to amass the funds and then file for bankruptcy. In the case of Coca-Cola, they have also tried to maximize profits through unethical means. They have engaged in several unethical practices like channel stuffing and racial discrimination. Coca-Cola too has falsified the account which was within the knowledge of the President but the purpose is only to maximize profits and not for amassing personal wealth. The company makes tall claims that they are socially conscious and responsible and they are profitable but they have committed as many as 179 major Human Rights violations (Cairns, 2005). In both cases, attention of the top management was drawn towards misappropriation of funds but in both cases the employees were ignored. At Enron, a senior executive apprised the CEO of the accounting irregularities in 2001 but Enron ignored these pleas and suspended their Code of Ethics (Williams, 2002). When the CEO starts siphoning funds out of the company, the company is bound to crumble. The cost of corruption can be much higher than one can imagine and scandals can weaken the company (Vogl, 2007). When scare resources are wasted and stolen the growth of the company suffers a setback. At Coca-Cola, the employee Whitley was fired when he tried to blow the whistle. The leadership at Enron was concerned only with maximizing shareholder value and hence they hid debts and overemphasized profits (Gardner, 2006). They intentionally blinded themselves to ethics and limited their capabilities to recognize ethical and moral issues even when it was brought to their notice. The top management did not see any harm in their actions and they believed there were no ethical issues involved. This shows that the top management was not committed to an ethical culture. At Coca-Cola, they have accepted certain unethical behavior and even settled claims. They have also engaged in several philanthropic activities which help to enhance the brand image, attract investors and retain employees (Labbai, 2007). In fact Coca-Cola has made education and community improvement programs a top priority and they support the promise of a better lie for the people and the community. They provide educational grants and scholarships and all these efforts have to some extent helped in brushing up the tarnished image. They always work with and for the community in which they have their set up. For instance, in India, they have set up primary education projects for the children of the slums, water conservation projects to support the community-based rain water harvesting projects to restore water levels and promote conservation. Coca-Cola also takes a strategic view of their role in society by linking company resources and operating practices to stakeholder issues (McAlister & Ferrell, 2002). Water quality, water conservation and waste reduction are key considerations for Coca-Cola in the packaging and operational decisions. Hence they provide funds around the world in support of such collaborations thus responding to environment concerns. They are also taking keen interest in helping society fight AIDS in Africa. They partner with government as well as NGOs and have taken initiatives to fight HIV/AIDS epidemic. No such activities or concerns were heard of Enron where the focus was only amassing personal wealth thereby demonstrating the greed of the directors. Both the companies demonstrate a culture of risk taking and aggressive growth. These are no doubt positive values but the need to be balanced (Schuler, 2002). In the case of both the companies their sheer size gave them over confidence that they get away with power. They indulged in risky ventures. Ethical dilemmas haunt every executive and the top management when they have to decide between cost and conscience (Fan, 2005). On one hand Coca-Cola claims “through our actions as local citizens, we strive every day to refresh the marketplace, enrich the workplace, preserve the environment and strengthen our communities” but a former senior vice chairman has stated that their motive was “to encourage as many people as possible to drink as much Coca Cola as possible at the highest possible price so that the company could make even more money”. Enron's former CEO Jeffery Skilling has also admitted that “my job as a businessman is to maximise returns to shareholders. It is the government's job to step in if the product is dangerous” (Fan, 2005). Just before its demise, Enron too had been in the top 100 companies to work with just as Coca-Cola too ranked among America’s most admired companies. Both Coca-Cola and Enron have tried to use CSR as a corporate PR strategy. Thus it can be seen that as far as Enron is concerned, their only concern in the words of Friedman was that the social responsibility of business is to increase profits. Coca-Cola too engaged in many unethical practices but it is a global concern with presence in most nations. It does continue to engage in unethical practices but most of its business is outside the US and it is one of the most recognized brand name and trademark in the world today. Hence it is highly unlikely that Coca-Cola would meet the same fate as Enron. They have faced situations when the shareholders have withdrawn their stakes but the situation is not yet out of hand and can be managed. 3. What should Coca-Cola do to restore its reputation and eliminate future ethical dilemmas with stakeholders? An organization exists in the society and for the society. It cannot exist independent of its stakeholders and has responsibility towards all the stakeholders that are directly or indirectly affected by the company (Joyce, 2005). Carrigan, Marinova and Szmigin (2006) also emphasize that firms exist for the society and have a moral obligation to satisfy the needs of the society. The authors cite Immanuel Kent who states that duties cannot be associated with self-interest and rewards or payoffs. Most large firms in the US have huge CEO compensation which has give rise to objections from the public. Coca-Cola has to place the interest and welfare of the society before its self-interest. They must ensure to behave in an ethical manner as it will adversely affects its brand image. As more and more firms have been found guilty of engaging in unethical practices, the demands of the shareholders, stakeholders and investors are forcing industries to maintain a high morality in how companies conduct business. Coca-Cola has to realize and practice that corporate code should be implemented as a corporate philosophy. Being virtuous does not guarantee success but it is essential for success. Wong and Chung (2003) cite that that in international business relations managers face uncertain situations and tend to fall back on their own values to make decisions. There are several ways that Coca-Cola can restore its reputation. In areas where they are still facing confrontation for instance, Kala Dera in India, they should actually invest in rainwater harvesting (Srivastava, 2008). They claim to be doing so but are unable to produce any reports to satisfy the people. They claim that they have recharged five times the water used but are unable to back up their claims with numbers. Hence to restore its brand image, Coca-Cola would have to first change its objectives. They must produce reports to substantiate their claims which would then fetch them the support of the local people. Wherever there are cases of contamination they should recall their products. They should respond to the complaints and allegations immediately and not after a time lag. Performance is always linked to sales and outcomes but instead Coca-Cola should link performance to ethical standards. Performance should be measured before and after application of ethical standards which would demonstrate the difference in performance. In the long run morality and ethical stand pays. Linking performance to ethics will ensure that employees do not resort to unethical practices. Whistle blowing should also be encouraged and a proper system set up to listen to the employees. Corporate Governance has to improve at Coca-Cola because they must be responsible towards all the stakeholders and not just the shareholders. The top management turnover has been very high at Coca-Cola and this has to be controlled. High CEO compensation is not the answer. The board of directors should have consensus over different issues. The board should have at least one member who is responsible for ethical standards. Training programs should be conducted not just for the junior or middle level employees but for the top management as well. They should be trained to recognize the difference between the good and the bad, between the right and the wrong. They should be able to differentiate between ethical and unethical practices. They must have an ethics department and the Code on Conduct should be regularly discussed and practiced. The company must start a reporting system where people can anonymously report without fear of being reprimanded. The laws and regulations of whistle blowing should be communicated to all so that they are aware of their rights. To keep the company from meeting the same fate as Enron, it is absolutely essential that Coca-Cola takes certain strategic actions immediately. Since the agents and distributors are also a part of the company, Coca-Cola has to ensure proper training to all the upper management, employees and agents. The corporate culture should reflect the corporate values, beliefs and norms (Sussman, 2008). During new employee orientation the importance of maintaining secrecy should be reinforced and they should be screened for trust and allegiance during the recruitment and selection process. Two-way communication should be encouraged in the company so that any errant behavior comes to light before it takes place or causes damage. Annual audits and effectiveness reports should be conducted Coca-Cola should appoint special individuals to oversee the compliance program (Ford et al). They should also start an incident reporting mechanism whereby individuals are encouraged to submit anonymous and confidential questions and information. There should be an opportunity for employees to "seek guidance regarding potential or actual criminal conduct without fear of retaliation". Currently the managers and supervisors are unable to recognize the whistle blowing complaints. This too requires training to be able to respond to such complaints. They should engage corporate lawyers to conduct Sarbanes-Oxley Act training so that employees learn to comply with the requirements. Increasing awareness is essential. Coca-Cola should also conduct research into what the stakeholders including the employees are saying about the company. They must discuss and design a project how to change the image and reputation of the company and for this they must involve the employees. There must also be a crisis management program in place. With the exposure of the contamination of Coca-Cola in Europe in 1999, the career of the chairman came to an end apart from the loss of reputation of the company. They took several days to comment on the problem formally while the timing of communication is very important in saving the reputation of the firm during crisis (Schultz & Werner, 2002). Thus to save the company from facing the same state as Enron, Coca-Cola should make the above changes/amendments to its existing policies. They should most importantly ensure continuity of the top officials and research into what the stakeholders feel about the company. Timely communications matters as does the accuracy of the information disseminated. They also need to take corrective steps where the community has been disadvantaged because of their bottling plants in different countries. There should be no gaps between what is projected to the media and the reality. 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Vogl, F 2007, 'Global Corruption: Applying Experience and Research to Meet a Mounting Crisis', Business and Society Review, vol. 112, no. 2, pp. 171–190 Williams, D 2002, 'Blurred standards: when corporate ethics fall by the wayside, so does the public's trust - Brief Article', retrieved online 30 April 2009, from http://findarticles.com/p/articles/mi_m4422/is_5_19/ai_91213367 Wong, CS & Chung, KH 2003, 'Work values of Chinese food service managers', International Journal of Contemporary Hospitality Management, vol. 15, no. 2, pp. 66-75 Handout The most valued brand name in the world, the most recognized trademark, once America’s most admired companies, Today involved in one unethical issue after another. Unethical issues against the company Contamination scare in Belgium which forced other countries including France to ban the product. Violation of European laws and practicing anticompetitive prices. Racial discrimination in matters of pay, promotions and performance evaluations. Manipulating test marketing resulting in negative publicity, soured relations and loss of stakeholder trust. Channel Stuffing Trouble with distributors and Unions. Employees selling trade secrets. Reasons: High turnover of top management leading to lack of commitment. Lack of control over internal management Lack of awareness of Codes of Conduct as per the Sarbanes-Oxley Act. Lack of training and motivation. Whistle blowing not encouraged. Lack of enforcement of the non-disclosure agreement. Lack of proper employee orientation during the recruitment-selection process. Slow response during times of crises. Recommendations Place the interest of the society before self-interest. Corporate code should be implemented as a corporate philosophy. Change corporate objectives. Back-up claims with facts and figures. Link performance to ethical standards. Top management continuity programs essential. Training and motivation for the upper management, and other employees. Conduct research to understand what the stakeholders say about the company. Appoint individuals to oversee the compliance program Change the corporate culture to abide by the values, beliefs and norms of the company. Create awareness of the ethical standards to be maintained. Allow employees to speak up their grievances. Read More