Pepsico,_Inc._Ethics_and_Compliance_Fin_370

PepsiCo, Inc. Ethics and Compliance FIN 370 Introduction 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 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 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 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 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 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 requirements that delivers sustained growth through empowered people acting responsibly and building trust, (PepsiCo Inc., 2010) References 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