Coca-Cola Faced a Number of Different Ethical

¶ … Coca-Cola faced a number of different ethical issues. The case outlines some of them. The company had faced charges of racial discrimination at many of its plants, in particular relating to the lack of upward mobility for African-Americans at some of the company's southern plants. The company also faced charges of misrepresenting market tests, manipulating earnings, disrupting long-term contractual agreements with some of its distributors. All of these issues affect different stakeholders, but each has the ability to disrupt the company's reputation as an ethical firm. The new management needs to prioritize these issues and address them, while placing the issues in the context of a new philosophy of ethical management.

Of these issues, the manipulation of earnings is the most important. In order to make that determination, we must examine the different issues from the stakeholder perspective to understand the bottom line. The charges of racial discrimination affect a large number of employees, and can impact on the public reputation of the company. However, this issue is largely internal. Many customers are not likely to know about this issue, nor are they likely to care. Few would be surprised that a company based on Georgia is facing charges of racial discrimination. The issue does have potential negative financial consequences in that the plaintiffs are seeking judgment in the amount of $1.5 billion. Further, if they win the case, the door will be open for future similar suits around the world, regardless of merit. This issue, however, is not as catastrophic as some of the other issues, and should be relatively easy to resolve because of its low public profile.

The issues with the test marketing at Burger King really affect the company's reputation with partners. The strength of the Coca-Cola brand quite frankly is more than enough to overcome this. The downside risk is therefore minor and while the errors in judgment should be addressed this is definitely not the highest priority.

The contamination issue is a much higher priority. This is a high profile public issue. Consumers can readily switch to Pepsi if they lose trust in Coca-Cola. Making children sick has bad optics, no matter what the cause. This issue is a challenge for Coke because it must respond. The issue -- if it escalated beyond Belgium -- could have significant adverse consequences. Contamination can bring a powerful brand down quickly, so even if the problem was a one-off and the solution already found, Coca-Cola faces a public relations nightmare. Also, should another such issue arise anywhere in the world in the next few years, the media will lump the incidents together, resulting in a snowball effect of negative PR. The consequences could be devastating. Also, if the company ran afoul of EU regulations and a pattern of doing so emerged it could find itself shut out of the EU market, which is surely one of the company's largest.

The issue of channel stuffing is the most serious issue. While it does not have the visceral impact of sick children to capture media attention, channel stuffing to falsify earnings is a serious offense under American securities law. A prosecution by the SEC could obliterate share value, and the company could be subject to shockingly high fines. The company had to settle with the SEC, made possible by the fact that it was a first offense. Further offenses of this type could jeopardize the value of the company's equity -- such an impact on shareholders is the worst potential outcome from all of these incidents, assuming that the contamination does not actually kill anybody.

3. Clearly, these issues should have been prevented in the first place. With respect to the contamination, quality control procedures should have identified the problem with the CO2. A human tester would have been made sick, but surely there are methods of testing the product before it goes into the final drink. Some of the other issues come down to having a stronger ethics policy. The Burger King problem and the channel stuffing in particular are ethical issues, where management simply became so focused on having good results to show that they were willing to lie in order to that. Such actions can be significantly curtailed through a combination of having a stronger ethical policy and having severe punishments in place for those who commit such actions -- though accounting fraud does carry with it considerable punishment from the judicial system. The discrimination issue needs to be combatted with education and proper evaluation of managerial staff. Audits of the human resources function could uncover systematic discrimination long before it gets to the class action stage.

4. Coca-Cola's responses to the issues have been moderate, but certainly not stellar or putting the company in a leadership position. With respect to discrimination, the company has put in place a diversity program. With this, and the terms of the settlement, Coca-Cola appears to be trying to buy its way out of the problem rather than addressing it head on. They brought in an outside panel, but still have no auditing function to detect discrimination at early stages.

The response to the contamination was ok. The company investigated the issue and was able to identify the problem. This allows it to show the regulators that it has taken action, and it has solved that problem. How this went undetected, though, is the bigger problem. Coca-Cola did not address that with its actions. Again, it appears to be doing the minimum to avoid further issues, either with regulators or the media. A stronger action would have been to improve quality control of inputs so that such things do not happen again in the future. The company's response will only deal with this one issue, rather than a systematic improvement of all quality issues.

Lastly, the company has done little with respect to the channel stuffing problem. It was able to settle with the SEC, but still faces legal action from shareholders because its behavior put their investment capital at risk. An education program is part of the solution, and so are promises to address the problem. However, deviant behavior in business is not simply a one-off thing, but rather is a reflection of the prevailing corporate culture, which implies that culture change is the real long-term solution (Chen, Sawyers & Williams, 1997).