Flat sales, flat board: there's no fizz in the way Coca-Cola's directors have been acting of late

Directors & Boards, Fall, 2004 by Gary Sutton

MOST OF COCA-COLA'S profits come from selling caffeinated sugar water to teenagers. But a majority of the Coke board is way overdue for Social Security, and that's one reason this company got confused.

Always a solid business, Coca-Cola boomed under a youthful, foreign-born Roberto Goizueta, its first non-Wasp CEO. Goizueta believed there was more international potential. He proved it. Goizueta also spotted financial opportunities by integrating the Coke bottlers. In his 16 years of running Coke, the stock value went from $4 billion to $145 billion--until then the largest creation of shareholder wealth ever, anywhere.

Goizueta was no dummy. He cultivated his board as hard as he worked the markets. Coke acquired Columbia Pictures. Herb Allen, a Coca-Cola director, owned Columbia and pocketed a 16-fold return on his investment for a few years of ownership. That didn't bother anyone. Coke pumped more cash into Columbia and resold it to Sony, eliminating the weird hookup. Allen's firm, Allen & Co., advised on that disposal too. Coca-Cola was doing so well that these conflicts of interest just didn't matter.

Goizueta's compensation for 1991 was set by Allen, alone with Goizueta, and their agreement was announced to the board. Goizueta's $80 million bonus was the largest in world history. He was to become the first manager-billionaire. Shareholder results--governance issues aside--suggest his compensation was earned.

Warren Buffett invested. Coke gained control of most of its bottlers and started slipping debt into these separate entities so it didn't need to be reported. Buffett's son joined the Coca-Cola Enterprises board, the largest collection of bottlers. So there was a chunk of leverage buried there, alongside some nepotism.

Unfortunately, Goizueta smoked. He died from lung cancer in 1997, 16 years after taking over Coca-Cola. Under his leadership, mistakes like the New Coke debacle had been handled, and the company always emerged stronger. But all cola sales were flattening worldwide while non-carbonated drinks were growing, and the international markets, unthinkably, showed signs of saturation.

Goizueta's two lieutenants, Don Keogh and Doug Ivester, were obvious candidates to replace him. Ivester won.

Ivester began to ignore Keogh. Big mistake. Keogh became chairman of Allen & Co. and joined Buffett's board at Berkshire Hathaway.

Coke was hit by an embarrassing European recall. Keogh whispered to Fortune magazine how Ivester bungled that situation. It was a setback, but seemingly not as bad as the New Coke launch had been. (Keogh, a top officer during the New Coke disaster, claimed to have been on vacation when Coke approved its introduction. That settles that.) Despite enjoying a moment of earnings recovery and revenue growth, Buffett and Allen fired Ivester after two years on the job. If Fortune got it right in its recent major story on the company, Buffett and Allen acted without a board vote.

Doug Daft was promoted to the job. Soon Daft was in final negotiations to acquire Quaker Oats when Buffett torpedoed the deal--a public castration. Pepsi acquired Quaker Oats. And Daft was soon to follow Ivester.

Between 2000 and 2004, the quartet of Ivester and Daft and top underlings Steve Heyer and Jack Stahl left the executive suite with severances totaling $204 million.

Donald Keogh, 77, took over the search. CEOs were chased at Mattel, Hershey, Gillette, and Kellogg. The average age of those candidates: 52. All discussed the job. All declined it.

In 2003 Pepsi ran funny ads featuring Ozzy Osbourne having a nightmare, as he discovers Donny and Marie Osmond are his children in disguise. It was the highest-scoring ad of the year.

Coke countered with edgy commercials. One showed a sweating boy cooling off by holding a cold can of Coke in his armpit. This became the highest scoring ad in 10 years, albeit with mixed public reactions.

Most important of all, Keogh objected. The ads were dropped. Keogh hired Neville Isdell, 61, an insider, to become CEO.

Coke's expansion worldwide worked until cola sales in general flattened. Sloppy governance became habit during the glory years. Non-carbonated stuff started selling and one day--gulp!--bottled water became a growth business. Branding water and marking it up a hundred times isn't easy.

Geriatric directors firing CEOs in frustration ... then giving advertising "advice." If results slip further, who's responsible?

Some argue the board is protecting Coke's reputation. Maybe. Losing sales is an interesting way of doing that.

The world changed. This old Coke dog needs some new tricks. Letting a CEO run it might be a start.

Gary Sutton has served as a CEO and director of a number of public and private companies in his career as a specialist in startups and turnarounds. He is the author of The Six-Month Fix.

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The author can be contacted at garysutton@san.rr.com.