Ethics_and_Compliance_Paper

Ethics and Compliance Paper on Pepsi-Cola FIN/370 May 14, 2012 Richard Jenkins Ethics and Compliance Paper on Pepsi-Cola Ethics and compliance plays a vital role in the success of Pepsi-Cola, Inc. “Based on Pepsi-Cola’s mission statement, their vision and performance with purpose statement, it is evident that Pepsi-Cola believes in doing business the right way; operating responsibly with integrity and with high ethical standards” ("PepsiCo", 2011.) In this paper Team B will appraise the role of ethics and compliance in Pepsi-Cola’s financial environment as well as describe the procedures Pepsi-Cola has in place to ensure ethical behavior. The processes that the organization uses to adhere to the SEC regulations can be identified. An evaluation of the organizations financial performance during the past two years will be given, using financial ratios. Finally, the trend for each ratio will be discussed, including what it tells about the organization’s financial health. Role of Ethics and Compliance Within the scope of business and organizational environment of PepsiCo, this entity has initiated major emphasis on the role of ethics and compliance throughout their financial context. Two authors conclude (Majiluf & Navarrete, 2011) “the rise of ethical scandals in the business world urged corporations to allocate time and resources to emphasize the ethical behavior of their managers and employees” (p. 567). A changing business environment has compelled PepsiCo to focus on the relationship between ethics and corporate character. Not only will it emphasize on ethics and compliance catapult corporate capabilities and company performance, social, and environmental commitments are also potential components for innovative growth. At PepsiCo, merit dictates business decisions. Disbursement or receipt of gift giving, whether directly or indirectly, is a violation of ethical and compliance polices toward gaining any form of unfair advantage at PepsiCo. Outstanding performance at PepsiCo has become intertwined within the areas of Human Sustainability – promise to promote global health and nutrition, Environmental Sustainability – promise to protect Earth’s natural resources, and Talent Sustainability – promise to invest in company personnel. In an effort to sustain a reputation of ethical excellence, candor, and high integrity, PepsiCo has established and implemented a “Speak Up” hotline (available 24 hours a day) where associates, customers, business partners, and the public can report potential violations of conduct, policies, or any applicable law. This instrument has served as a key component to maintaining ethical business practices within the environment and culture of PepsiCo. In a proactive and continual effort to ensure ethical behavior, PepsiCo has developed, published, and launched various polices, which authenticate its approach to dignity, workplace accountability, sustainable development, and an undertaking toward environmental citizenship. According to Hurst, Palya & Mills (2005) “organizations spend a great deal of time, energy, and money trying to communicate and encourage employees to do the activities that will create a flourishing company while working within the rules of good ethical practices and according to the law” (p. 22). At PepsiCo, the following policies and procedures exist, regulate, and are applied daily in an attempt to encourage, adhere to, and express corporate commitment toward supporting internal and external responsible ethical practices: * Quality Organization - agenda designed to support and maintain critical risk areas * Responsible Marketing - proving operating mechanisms to ensure proper compliance with promotional initiatives * Environmental Sustainability - key areas include the * Environment - mandated participants include suppliers, service providers, bottlers, etc. * Agriculture - crop producing supply chains, water savings, waste reuse, soil protection, and chemical usability * Packaging - participants include research and development, innovating, procurement, sales, marketing and public policy who’s primary purpose is to establish packaging strategies, goals, objectives, innovative material automation, and advocate accountable disposal practices * Talent Sustainability – code of conduct * Awareness – edify associates/subordinates on fundamental business ethical operations and conduct compliance * Compliance and Reporting – program effectiveness assessed internally and undergoes periodic independent third party review The United States Financial Markets Many separate markets are found in the U.S. financial market today. There are diverse products offered, which range from trading platforms to exchanges. Some of the products traded in the markets are equities, derivatives, foreign exchange, and fixed income securities. Institutions and procedure that facilitate transactions in all types of financial claims that report price for each good sold is a financial market. Financial markets exist so that they can allocate the supply of saving from economic units with a surplus to those that have a deficit. Every financial market has a different function that it is supposed to perform. The market that supposed to provide a platform for investors to buy shares of ownership from a public corporation is called a stock market. This allows the corporation to sell to investors so that they can raise a good amount of money all at once. The United States economy can grow from the investors making a profit when the companies increase their earnings. When there are mutual funds people are able to buy a lot of stocks at once, which makes them easier to invest in so they do not have to invest in individual stocks. Because the stock market has reduced vitality there has been a calming effect on the United States economy. Paying something today delivered tomorrow is the futures market. When doing this it increases the trader’s leverage to allow him to borrow money to purchase the commodity. Bonds provide some liquidity that keeps the United States economy lubricated. The only thing bad about bonds is that when stock prices go up bond prices go down. Processes Pepsi-Cola Uses to Comply with SEC regulations Pepsi-Cola has developed processes and policies designed to both guide its business and to promote corporate accountability. They strive to adhere to the highest standards of transparency and accountability. According to "U.S. Securities And Exchange Commission" (n.d.), “companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports” (The Laws That Govern the Securities Industry.) “Pepsi-Cola is a $66 billion global food and beverage powerhouse that strictly complies too those regulations” (Nooyi, Indra K., 2011). “The SEC governs the disclosure in materials used to solicit shareholder’s votes in annual and special meetings held for the election of directors and the approval of other corporate action” ("U.S. Securities And Exchange Commission", n.d.) Pepsi-Cola files this information to the SEC in the format of proxy materials as required. Pepsi-Cola’s Board of Directors with the assistance of the Corporate Governance Committee oversees the firm’s public policy processes and activities. The Corporate Governance Committee ensures all legal and regulatory compliances have been properly met. “It monitors changing laws and regulations regarding disclosure and follows applicable rules regarding both political giving and reporting on lobbying activities” ("PepsiCo", 2011.) Publicly available on their website, demonstrating transparency includes a wealth of securities and financial related downloads. Pepsi-Cola Financial Performance for the Past Two Years The financial ratio that was used in determining the ratios for the year 2011 and 2010, Team B used current ratios, and they follow as below: 2011 Current Ratio=Current Assets/Current Liabilities $17,441/$18,154=0.96 2010 Current Ratio=Current Assets/Current Liabilities $17,569/$15,892=1.11 Debit Ratio=Total Liabilities/Total Assets=2011 is $15,983/$72,882=71.3% Debit Ratio=Total Liabilities/Total Assets=2010 is $$46,677/$68,153=68.4% Return on Equity=Net Income/Common Equity=2011 is $6,462/$20,704=31.2% Return on Equity=Net Income/Common Equity=2010 is $6,338/$21,273=29.8% Days Receivable=Account Receivable/Annual Sales=2011 is $6,912/$31,593=21.9% Days Receivable=Account Receivable/Annual Sales=2010 is $6,323/$26,575=23.8% These ratios shows what were made in 2011 and 2010 and how much they made between the two years to determine how much was made for Pepsi, and to determine if they made a profit or had a loss for the company. Ratio Trends and Financial Health Current ratios help determine the relative liquidity of a company by comparing cash and other assets to the amount of debt coming due owned by year end. The Pepsi-Cola company appears to be healthy despite its recent global financial status. Looking at 2008, PepsiCo finished very close to the current ratio of 1, even though PepsiCo rebounded well in 2009. With all the factors of the current ratio examined, PepsiCo’s ability to pay back short-term debts, using short-term assets is exceptionally reputable (PepsiCo, 2009).A company’s debt ratio, total debt divided by total assets, indicates what portion of debt accompany has relative to its assets. This debt ratio measurement gives a view of the risks facing a company’s debt load. Pepsi-Cola’s debt ratio for the fiscal year ending in 2009 was over 56%and a greater value of around 65% (PepsiCo, 2009). “A debt ratio of greater than 1 indicates that a company has more debt than assets, a debt ratio of less than 1 indicates that a company has more assets than debt (Investopedia, 2011, p. 2).”It appears the 2008 fiscal figures of 65%, indicate PepsiCo financed its assets more by using debt than equity, but rebounded in fiscal year 2009, posting a 56% figure. PepsiCo’s 2008figures seem apropos based on the financial quandary the United States’ economy faced. Team B observed PepsiCo’s 2008 debt ratio two ways. First, the company’s financial health may have been the result of a weakening 2008 economy because of peripheral sources. Second, thecompany decided despite possessing available assets to pay bills, the choice was made to focus more on equity than debt in 2009 (PepsiCo, 2009).Return on equity (ROE), which is obtained by calculating net income divided by total equity, will illustrate how well a company utilizes assets to generate income. In the fiscal year ending2009, PepsiCo showed a 34% ROE, and a 40% ROE for fiscal year ending 2008. A larger 2009 PepsiCo Ethics & Compliance 7equity base of $16B compared with a $12B equity base for 2008, may have contributed to the ROE disparity (PepsiCo, 2009). Conclusion In conclusion, this paper has clarified how vital ethics and compliance plays in the overall success of any organization like Pepsi-Cola. Team B has appraised the role of ethics and compliance in Pepsi-Cola’s financial environment as well as described the procedures Pepsi-Cola has in place to ensure ethical behavior. The processes that the organization uses to adhere to the SEC regulations have been identified. Using financial ratios, an evaluation of the organizations financial performance during the past two years has been provided. Finally, the trend for each ratio and what it tells about Pepsi-Cola’s financial health has been discussed. “In an uncertain global economy, Pepsi-Cola believes it needs to control the things it can control while managing through tough economic times” (Nooyi, Indra K., 2011). That sounds a good recipe for success. References Hurst, P. W., Palya, W., & Mills, W. C. (2005). One of the corporate world's biggest headaches: Ethical behavior. Performance Improvement, 44(10), 22-26. doi:10.1002/pfi.4140441006 Majluf, N., & Navarrete, C. (2011). A Two-Component Compliance and Ethics Program Model: An Empirical Application to Chilean Corporations. Journal Of Business Ethics, 100(4), 567-579. doi:10.1007/s10551-010-0696-6 Nooyi, Indra K.. (2011). 2011 Annual Report [PowerPoint slides]. Retrieved from http://www.pepsico.com/annual11/downloads/PEP_AR11_Annual_Report.pdf. PEPSICO. (2011). Retrieved from http://www.pepsico.com/Index.html U.S. Securities and Exchange Commission. (n.d.). Retrieved from http://wwwsec.gov/about/laws.shtml