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									RUNNING HEADER: PEPSICO INC.                                   1




                         PepsiCo, Inc. Ethics and Compliance


                               Darnell Williams FIN 370




                                    Introduction
RUNNING HEADER: PEPSICO INC.                                                                       2


   Ethics and compliance play a tremendous factor in the overall success of an organization.

They are excellent tactics for building organizational trust and transparency. Ethics and

compliance empowers the organization to minimize risk and maximize your culture of

integrity. (Global Compliance and Ethics, para. 1)


   In this paper we will examine the ethics and compliance of Pepsi-Cola. After obtaining the

organization’s annual report and SEC filings for the past three years we will examine and

analyze the data addressing ethical issues; the role of ethics and compliance in Pepsi-Cola’s

financial environment. A description of the procedures Pepsi-Cola has in place to ensure

ethical behaviour will be given. The processes that the organization uses to comply with SEC

regulations will be identified. An evaluation of the organizations financial performance

during the past three years will be given using financial rations for each given year. Lastly, a

discussion of the three-year trend for each ration and what it tells about the organization’s

financial health will be given.


                        Role of Ethics and Compliance in Pepsi-Cola

   The Pepsi-Cola company is strongly committed to delivering sustained growth through

empowered people acting responsibly and building trust, (PepsiCo Inc., 2010). Pepsi-Cola

aspires to be a environmentally and socially responsible company and upholds their

commitment with six guiding principles: Take care of the customers and consumers; sell

high quality products; always speak the truth; equally balance both short-term and long-term

goals; win with both inclusion and diversity, and always respect others and succeed as a

team.

   The compliance committee is responsible for managing Pepsi-Cola’s compliance program,

using issue resolution strategies and making recommendations to support them. W. Scott

Nehs, who is the Chief Compliance Official and Vice President, lead the Pepsi-Cola
RUNNING HEADER: PEPSICO INC.                                                                    3


compliance program, and chairs Pepsi-Cola’s compliance committee. The compliance is

broken down into four sub-committees. These subcommittees include:

   1. “Anti-trust”- which focuses on the organization’s sales;

   2. “Safety and Environment”- which focuses on operations, fleet, plants, and the

       personnel that staffs them;

   3. “Human Resources”- which primarily relates to labor issues and employment;

   4. “Finance”- which encompasses all financial integrity, recent overlay of Sarbanes-

       Oxley, and the requirements that has been placed on the company.

                    PepsiCo - Procedures Ensuring Ethical Behaviour


   PepsiCo is committed to strict corporate standards to ensure accountability for the

company actions. This is evident by the many corporate governance standards in place. The

processes and policies that are in place include the Amended and Restated Articles of

Incorporation, Audit Committee Charter, By-Laws, Compensation Committee Charter,

Corporate Governance Guidelines, Disclosure Committee Charter, Nominating and Corporate

Governance Committee Charter, and the Policy for Audit, Audit-Related and Non-Audit

Services.


   The Amended and Restated Articles of Incorporation states the guidelines of the

incorporation process regarding PepsiCo Inc. This includes the proper name of the company;

that the company is to have perpetual existence; the official address; and the purpose of the

organization being incorporated along with the product description as stated by North

Carolina law (PepsiCo Inc., 2010). The Audit Committee charter is the charter that handles

the financial governance. It is made up of independent directors that have expertise in

financial literacy, which guide and monitor the financial reporting and accounting policies of

the company (PepsiCo Inc., 2010). The next area of governance is the company by-laws. The
RUNNING HEADER: PEPSICO INC.                                                                    4


by-laws are the rules and procedures the company uses to run the company. These by-laws

also document the expectations of the shareholders, officers, and directors of the company

and the rights and power of each position (PepsiCo inc., 2010). Along with setting the rights

and powers of the executive branch of the company is the need for monitoring and setting

policies on compensation; therefore, the compensation committee charter was put into place.

This committee is made up of entirely independent directors (PepsiCo Inc., 2010).


   Another set of guidelines the company has in place are the Corporate Governance

guidelines. These guidelines establish a common set of expectations to assist the Board of

Directors and other committees with their duties and requirements (PepsiCo Inc., 2010).

Occasionally, the company will need to nominate a new board member to replace a current

member, the Nominating and Corporate Governance Committee produces recommendations

along with any new policy recommendations regarding corporate governance (PepsiCo Inc.,

2010). The Disclosure Committee Charter is in place to oversee the timely accurate delivery

of the financial condition of the company to the shareholders and investors (PepsiCo Inc.,

2010). The final governance is the Policy for Audit, Audit-Related, and Non-Audit Services.

This service is provided by an independent auditor who performs audits and tax related

services for the company (PepsiCo Inc., 2010). All of these governance policies and

committees help PepsiCo to be an ethical company.


                        PepsiCo-Legal and regulatory compliance


   Company conduct of businesses, and the production, distribution, sale, advertising,

labelling, safety, transportation and use of many of its products, are subject to various laws

and regulations administered by federal, state and local governmental agencies in the United

States, as well as to foreign laws and regulations administered by government entities and

agencies in markets in which the company operate. As the laws and regulations change with
RUNNING HEADER: PEPSICO INC.                                                                  5


change in the various factors including political, economic or social events the regulatory

environment of the company also changes and these changes in the regulatory environment

include changes in food and drug laws; laws related to advertising and deceptive marketing

practices; accounting standards; taxation requirements, including taxes specifically targeting

the consumption of the company products; competition laws; and environmental laws,

including laws relating to the regulation of water rights and treatment. With the change in

laws, regulations or governmental policy and the related interpretations generally alter the

environment in which the company operates and due to this the company has to change its

policies ion order to meet the compliances. For this the company has set up a legal and

regulatory department to look after all the compliances has been properly meet.


   It has been seen that, governmental entities or agencies in jurisdictions where the company

operates impose new labelling, product or production requirements, or other restrictions. For

this the company has to change its complete operations or modify its operations to meet the

requirements. If we take an example we can find that studies are underway by various

regulatory authorities and others to assess the effect on humans due to acrylamide in the diet.

To keep this in mind the company has to strictly follow the food laws to keep it safe from any

legal proceedings.


   Apart from that the company is also subject to Proposition 65 in California. Proposition 65

is a law which requires that a specific warning appear on any product sold in California that

contains a substance listed by that State as having been found to cause cancer or birth defects.

Keeping this in mind the company will have to put this level on its product to keep itself

abide by these regulations.


   Along with this the other important law is the competition law, in many jurisdictions;

compliance with competition laws is of special importance due to the competitive position of
RUNNING HEADER: PEPSICO INC.                                                                   6


the company in those jurisdictions. And if it is not followed properly the company will have

to face product recall or seizer of its product. So to protect itself from this law the company

has a strict surveillance that ensures that all the required laws and regulations are strictly

followed in or out of the organization.


                                Financial Ratios for PepsiCo


   Pepsi’s Financial Ratio’s for 2009:

Current: Current assets/current liabilities = 12,571,000/23,044,000 = .55 times

Debt: total debt / total assets = 7,864,000 / 39,848,000 = 20%

Return on equity: net income/common equity = 5,946,000 / 16,763,000 = .35 = 35%

Days Receivable: account receivable / daily credit sales/ 365 = average collection period =
4,624M / 18,527M/365 =4,624M/50.8 = 91.0 days

   Pepsi’s Financial Ratio’s for 2008:

Current: Current assets/current liabilities = 10,806,000/23,750,000 = .45 times

Debt: total debt / total assets = 8,227,000 / 35,994,000 = 23%

Return on equity: net income/common equity = 5,142,000 / 12,203,000 = .42 = 42%

Days Receivable: account receivable / daily credit sales/ 365 = average collection period =
4,683M / 18,872M/365 = 4,683M/51.7 = 90.6 days

   Pepsi’s Financial Ratio’s for 2007:

Current: Current assets/current liabilities = 10,151,000/17,303,000 = .59 times

Debt: total debt / total assets = 4,203,000 / 34,628,000 = 12%

Return on equity: net income/common equity = 5,658,000 / 17,325,000 = .33 = 33%

Days Receivable: account receivable / daily credit sales/ 365 = average collection period =
4,389M / 16,670M/365 = 4,389M/45.7 = 96.1 days

The financial ratios were calculated based on the SEC filings and annual reports provided in

the PepsiCo Inc. website (PepsiCo Inc., 2010)


                                 Three Year Trend Analysis
RUNNING HEADER: PEPSICO INC.                                                                     7


  An evaluation of the financial health of PepsiCo Inc. was competed using the SEC filings

and annual reports from 2007 through 2009. To determine PepsiCo's ability to repay short-

term obligations the current ratio was calculated. PepsiCo had a .59 ratio in 2007, declining

to .45 in 2008, and in 2009 was calculated at .55. This shows that PepsiCo would be unable to

repay its obligations if the outstanding debt were to be due immediately. Next, the debt ratio

was calculated for the same three years. This ratio is used to evaluate the proportion of debt

that PepsiCo has in comparison to its assets. The debt ratio in 2007 was 12%, in 2008 23%,

and in 2009 20%. PepsiCo has a low debt ratio which indicated they are conservative and

should have no problems borrowing funds in the future.


   Return on Equity (ROE) is another formula used to determine how profitable PepsiCo is.

Return on equity (ROE) calculations show how much profit is generated with the

shareholders invested money. The ROE for PepsiCo in 2007 was 33%, in 2008 the ROE

increased to 42%, and in 2009 the ROE decreased to 35%. Finally, a Days Receivable was

calculated to determine how many days (on average) it takes PepsiCo to collect revenue after

a sale is made. The lower the number is the fewer days it takes the company to collect the

money as an accounts receivable. For PepsiCo in 2007 the number of days was 96.1, in 2008

the number decreased to 90.6, and in 2009 it rose slightly to 91 days. This ratio can be used to

offer incentives to customers that pay off their outstanding balances earlier.


                                          Conclusion


   In conclusion, it is important to implement successful ethics and compliance guidelines in

any organization. PepsiCo utilizes compliance committees and guidelines which help to take

the guesswork out of building risk reduction and setting forth standards of the highest ethical

standards to ensure that the organization is running at optimal effectiveness comprehensively.

These committees helps the organization to also meet unique ethics and compliance
RUNNING HEADER: PEPSICO INC.                                                              8


requirements that delivers sustained growth through empowered people acting responsibly

and building trust, (PepsiCo Inc., 2010)




                                           References
RUNNING HEADER: PEPSICO INC.                                                                       9


PepsiCo Inc. (2010). PepsiCo. Retrieved from http://www.pepsico.com/Company/Corporate-

Governance.html


PepsiCo Inc... (2010). Pepsico. Retrieved from http://www.pepsico.com/Investors/SEC-Filings.html


PepsiCo Inc. (2010). PepsiCo. Retrieved from http://www.pepsico.com/Company/PepsiCo-
Values-and-Philosophy.aspx
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