Welcome to the return of Sherlock Holmes week (I know I’m starting mid-week but we are in the midst of a crisis and so much is akimbo). Over the next few posts, I will be using a Holmes story to illustrate a compliance lesson or issue. Today we begin with the very first Sherlock Holmes short story, A Scandal in Bohemia. Although it was the first short story, it was the third overall, following the serialized novels, A Study in Scarlet and The Sign of Four. This tale also introduces the most famous woman in the entire Holmes oeuvre, “that woman”, Irene Adler, one of the very few protagonists who bests Holmes.
A masked visitor arrives at Baker Street, Wilhelm Gottsreich Sigismond von Ormstein, the Grand Duke of Cassel-Felstein and hereditary King of Bohemia. He is to be married but desires to regain some letters and a compromising photo from a fling he had with an American opera singer, Irene Adler. Holmes gains entrance to Adler’s home and concocts a story about a fire, getting her to reveal the hidden location of the incriminating photo. Holmes returns the next day to find Adler, who had been secretly married, has fled to the Continent with her new husband but left behind another photo and note for Holmes in the incriminating photo’s hiding place. Holmes keeps the photograph as a reminder of Adler’s cleverness and of being beaten by a woman’s wit. Watson relates that since this encounter, Holmes always refers to Adler by the honorable title of “the woman”.
As the first Holmes short story I thought it was a good way to introduce the topic of how to change a corporate culture. What is corporate culture? Eric R. Feldman, SVP at Affiliated Monitors Inc. (AMI), has said it comprises the mission, vision and values of an organization. A similar way to consider it might be as a company’s values, visions, norms and beliefs. Whichever way you define it or look at it, corporate culture affects how groups within a company interact with each other. What does a Chief Compliance Officer (CCO) and compliance professional have to do to make a change in a corporate culture?
I was inspired by a Harvard Business Review (HBR) article by Indra K. Nooyi, former Chief Executive Officer (CEO) of PepsiCo, Inc., and Vijay Govindarajan, entitled Becoming a Better Corporate Citizen, that explores this issue and how one might think through doing so. While CEO at PepsiCo, Nooyi was an early adopter of the philosophy adopted by the Business Roundtable, in its Statement on the Purpose of a Corporation, that companies needed to focus more on long term sustainability for a variety of stakeholders rather than simply short-term profits for shareholders and Wall Street. Their article related the story of PepsiCo moving to a new vision, which Nooyi called “Performance with Purpose (PwP)”.
Early on, Nooyi recognized that changing the company’s focus would require a different type of effort. PepsiCo’s journey and the HBR article provide some very good insights and lessons for the CCO and compliance practitioner who must navigate a company through almost any culture change. Nooyi wanted PepsiCo’s contribution to society operationalized in its core business model. It was not simply designed to be a fund for charitable programs. Nooyi said it was PepsiCo’s “social responsibility to evolve away from corporate philanthropy and toward a deep sense of purpose that would also drive shareholder value.” Nooyi wanted to move how PepsiCo made its profits and not simply change the manner in which it gave away some of the money it earned.
PwP had four key components. The first was financial sustainability, which was designed to deliver superior financial returns. The second was in the area of human sustainability and here PepsiCo wanted to change its “product portfolio by reducing the sugar, salt, and fat” while increasing a portfolio of healthier and more-nutritious foods and beverages. The third component was environmental sustainability so that the company worked to limit its negative environmental impact by “conserving water and reducing our carbon footprint and plastic waste.” Finally, the fourth component was talent sustainability and this was designed to lift up “people by offering new types of support to women and families inside the company and in the communities we serve.”
Any corporate transformational change will be difficult. Nooyi understood that PwP was transformational. Indeed, many both inside and outside PepsiCo questioned why the company was doing it at all. To make the change would require a massive corporate effort. It certainly was not an easy journey for Nooyi and PepsiCo but it not only took up the challenge but did so successfully. Nooyi reported that the company’s collection of more-healthful options grew from about 38% of revenue in 2006 to roughly 50% in 2017. PepsiCo reduced water use in its global operations by 25% from 2006 to 2018 and provided safe drinking water to 22 million citizens in the communities they served. The company nearly tripled its investments in R&D to expand nutritious offerings and reduce its environmental impact. After PwP was implemented, the company’s net revenue grew by 80%, and PepsiCo stock outperformed both the Consumer Staples Select Sector Index and the S&P 500.
Tomorrow I will lay out the strategy pursued by Nooyi and PepsiCo to achieve these results.
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© Thomas R. Fox, 2020