Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
1
– 1 –
TEACHING NOTE
CASE 31
Conflict Palm Oil and PepsiCo’s
Ethical Dilemma
Overview
Palm oil, obtained from the fruit of the oil palm tree, is the most widely used vegetable oil in the world and
goes into the processing of a wide array of food products including cookies, chocolates, peanut butter,
crackers, breakfast bars, potato chips, instant noodles, baby formula, margarine, and dry and canned
soups As the global demand for palm oil has continued to grow, tropical forests across Southeast Asia, Africa,
and Latin America are at risk of being converted into large-scale palm oil plantations. According to observers,
with palm oil demand set to double by 2030, the sourcing of sustainable palm oil could become a critical
environmental and human rights issue.
By 2014, PepsiCo was recognized as one of the world’s leading food and beverage companies. The company
marketed, distributed, and sold a wide variety of beverages, foods, and snacks to customers in more than 200
countries. PepsiCo owned a global portfolio of diverse brands, and of those, 22, including Pepsi, Lays, Quaker,
Tropicana, Aquafina, and Gatorade, generated more than $1 billion apiece in terms of global annual retail sales,
while the entire product portfolio generated more than $66 billion in revenues. Five years earlier, PepsiCo had
implemented a sustainable development program called ‘Performance with Purpose’, under the leadership of CEO
Indra Nooyi. The ‘Performance with Purpose’ mission was based on Nooyi’s belief that the financial performance
of the organization must go hand-in-hand with its responsibilities toward society and the environment. However,
Conflict Palm Oil continued to pose an ethical dilemma for PepsiCo. It was the world’s largest purchaser of
palm oil, procuring approximately 470,045 metric tons annually. Some analysts felt that the company should
strengthen its palm oil policies and practices and commit to sourcing exclusively from suppliers with traceable,
transparent, verified, and accountable supply chains across all operations. Others said the company should step
up and break the link between its products and the factors responsible for the destruction of rainforests in order
to dismiss customer concerns, that is, it should stop using palm oil entirely.
In response, PepsiCo made a commitment to purchase exclusively 100% certified sustainable palm oil for its
products by 2015, saying that it had integrated responsible palm oil procurement guidelines with its sourcing
strategies. Some environmental groups expressed concerns over this new commitment. They felt that while
PepsiCo had acknowledged the problem related to Conflict Palm Oil, that commitment fell short, inasmuch as
the sustainability measures adopted in the new action plan were weaker than the ones that had been adopted
by its peers in the consumer packaged food industry. PepsiCo had not taken any explicit efforts to trace palm
*
Case 31 Teaching Note Conflict Palm Oil and PepsiCo’s Ethical Dilemma
2
oil back to the source, to ensure that it was deforestation-free. Also, the company’s new policy lacked a time-
bound implementation plan, failed to commit to tracing the palm oil to the plantations where the fruit grew,
lacked independent third party verification of supplier compliance, did not lend clear support to small and local
producers, and failed to implement strong human rights protections for local communities and workers.
Suggestions for Using the Case
PepsiCo and its portfolio of snack food brands are well known to students, so this case should provoke substantial
debate over the effcacy of the company’s environmental and social responsibility. The case pairs particularly well
with the coverage of ethics and corporate social responsibility, covered in Chapter 9: Ethics, Corporate Social
Responsibility, Environmental Sustainability, and Strategy. It fits particularly well with a guided discussion
to achieve a major learning objective in Chapter 9: “Apply the concepts of corporate social responsibility and
environmental sustainability and learn how companies balance these duties with economic responsibilities to
shareholders.” Instructors can direct students to critically evaluate PepsiCo’s actions, by using ethical reasoning
and analyzing the costs and benefits of the company’s actions on its stakeholders. Persuasive arguments can be
made on both sides that PepsiCo has made a commitment to be socially and environmentally responsible and, on
the other hand, it has fallen short of its commitment in that regard.
Particular learning objectives that can be met with this case include:
nThe term corporate social responsibility concerns a company’s duty to:
• Operate in an honorable manner
• Provide good, safe, healthy working conditions for employees
• Encourage workforce diversity
• Act as a good steward of the environment
• Support philanthropic endeavors in local communities where it operates and in society at large
nThe triple bottom line refers to company performance in three realms: economic, social, and environmental
nSustainability is a term that is used in various ways, but most often it concerns a firm’s relationship to the
environment and its use of natural resources:
• Sustainable business practices are those capable of meeting the needs of the present without compromising
the world’s ability to meet future needs
nA company’s environmental sustainability strategy consists of:
• Its deliberate actions to protect the environment
• Provisions for the longevity of natural resources
• Maintenance of ecological support systems for future generations
• Guardianship against threats that might ultimately endanger the planet
nWell-crafted CSR and environmental sustainability strategies are in the best long-term interest of shareholders,
for the reasons just mentioned and because they can avoid or preempt costly legal or regulatory actions
nCSR strategies and environmental sustainability strategies that both provide valuable social benefits and
fulfill customer needs in a superior fashion can lead to a competitive advantage
Case 31 Teaching Note Conflict Palm Oil and PepsiCo’s Ethical Dilemma
3
nIn addition to providing a competitive advantage, there are solid reasons why CSR and environmental
sustainability strategies may be good business — they can be conducive to:
• Increased buyer patronage
• Reduced risk of reputation-damaging incidents
• New opportunities for revenue enhancement
• Cost reduction and minimization of penalties for non-compliance.
Video for Use with the Conflict Palm Oil and PepsiCo’s Ethical Dilemma case. There are two videos
available for use with the Palm Oil case.
n There is a 3:17-minute 2016 Rainforest Action Network video entitled “The Human Cost of Conflict
Palm Oil.” It can be accessed at https://www.youtube.com/watch?v=LlGj7Wx1azE.
nA 1:58-minute video produced by The Economist in 2015 can be viewed at https://www.youtube.com/
watch?v=LlGj7Wx1azE.
The assignment questions and teaching outline presented below reflect our thinking and suggestions about
how to conduct the class discussion and what aspects to emphasize.
To give students guidance in what to think about and what analytical tools to utilize in preparing the Conflict Palm
Oil case for class discussion, we strongly recommend providing class members with a set of study questions and
insisting that they prepare good notes/answers to these questions in preparing for class discussion of the case.
To facilitate your use of study questions and to make them available to students, we have posted a file of
the assignment questions contained in this teaching note for the Conflict Palm Oil case in the instructor
resources section of the Connect Library.
You may also find it beneficial to have your class read the Guide to Case Analysis that follows Case 31 and is
also posted in the instructor resources section of the Connect Library. Students will find the content of this Guide
particularly helpful if this is their first experience with cases and they are unsure about the mechanics of how to
prepare a case for class discussion, oral presentation, or written analysis.
This case is suitable for both written and oral presentations. Our recommended assignment question is as follows:
What grade would you give to PepsiCo for its efforts to become a socially responsible, environmentally
sustainable corporation? Prepare a report that includes: (1) an evaluation of PepsiCo’s achievements
to date, (2) an assessment of PepsiCo’s commitment to corporate social responsibility, and (3) a set
of action recommendations that address each of the elements of the triple bottom line of corporate
environmental sustainability. Your report should not exceed 5-6 pages, plus an assortment of charts,
tables, and exhibits that support your analysis and recommendations.
Case 31 Teaching Note Conflict Palm Oil and PepsiCo’s Ethical Dilemma
4
Assignment Questions
1. Does it seem that PepsiCo has made a commitment to operating in a socially responsible manner? Based
on the five components of a socially responsible strategy depicted in Figure 9.2 in Chapter 9, is PepsiCo’s
strategy socially responsible? How does it address the needs of all of its stakeholders? Explain.
2. How does PepsiCo link rewards and incentives to strategically-important employee behaviors and the
company’s targeted sustainability outcomes?
3. Evaluate the key environmental strategy implementation efforts at PepsiCo since the roll-out of its
‘Performance with Purpose’ sustainability initiative in 2009. Has management allocated suffcient resources
to the sustainability effort? Exercised strong leadership? Instituted polices and procedures that facilitate
good execution of sustainability? Demonstrated prudent financial management, based on your analysis of its
recent financial performance? Explain.
4. What grade would you give to PepsiCo for its efforts to become a socially responsible, environmentally
sustainable corporation?
5. What recommendations would you make to PepsiCo management to increase its triple bottom-line
performance? Provide a justification for these recommendations.
Teaching Outline and Analysis
1. Does it seem that PepsiCo has made a commitment to operating in a socially responsible
manner? Based on the five components of a socially responsible strategy depicted in Figure
9.2 in Chapter 9, is PepsiCo’s strategy socially responsible? How does it address the needs
of all of its stakeholders? Explain?
As depicted in Figure 9.2, environmental sustainability and corporate social responsibility (CSR) programs
commonly include the following five elements:
1. Actions to ensure the company operates honorably and ethically
5. Actions to support philanthropy, participate in community service, and better the quality of life
worldwide
Students should be directed to PepsiCo’s pronouncements regarding its commitment to sustainable palm
oil sourcing, as shown in case exhibit 5 “PepsiCo Palm Oil Commitment (May 2014)” and case Exhibit 7,
“PepsiCo Palm Oil Commitment (September 2015). Of the five elements above, PepsiCo appeared to have
focused primarily on elements #1 “Ethical operation,” #2 “Protect and sustain the environment.”
Case 31 Teaching Note Conflict Palm Oil and PepsiCo’s Ethical Dilemma
5
to address all of its stakeholders’ needs.
2. How does PepsiCo link rewards and incentives to strategically-important employee
behaviors and the company’s targeted sustainability outcomes?
As stated in Chapter 9, PepsiCo has good reason to operate within ethical bounds, if only to (1) avoid the
risk of embarrassment, scandal, disciplinary action, fines, and possible jail time for unethical conduct on its
part and (2) escape being held accountable for lax enforcement of ethical standards and unethical behavior
3. Evaluate the key environmental strategy implementation eorts at PepsiCo since the roll-
out of its ‘Performance with Purpose’ sustainability initiative in 2009. Has management
allocated sucient resources to the sustainability eort? Exercised strong leadership?
Instituted polices and procedures that facilitate good execution of sustainability?
Demonstrated prudent financial management, based on your analysis of its recent financial
performance? Explain.
Students who have read Chapter 9 carefully will note that socially responsible business behavior can help
avoid or preempt legal and regulatory actions that could prove costly and otherwise burdensome. In some
instances, it is possible to craft corporate social responsibility strategies that contribute to competitive
advantage and, at the same time, deliver greater value to society.
Students are likely to debate hotly whether or not PepsiCo is a socially responsible corporation, or just
pays lip service to CSR — that is, complies with but does not go beyond regulatory requirements and
legal mandates. As discussed in the previous question, there have been few indications that PepsiCo
has consistently provided incentives and rewards or good working conditions for its employees and just
compensation for its supply chain partners.
The corporation appears to be operating honorably and ethically, although no formal code of ethics is
Case 31 Teaching Note Conflict Palm Oil and PepsiCo’s Ethical Dilemma
6
Product re-formulations across the PepsiCo portfolio would well involve substantial outlays on R&D and
possible increases of the corporation’s cost of goods sold depending upon supply chain choices. Since the
2009 initiative was announced, PepsiCo’s financial performance has been fairly stable, as shown in Table 1.
TABLE 1. Financial Performance and Ratio Analysis for PepsiCo, 2011 - 2014
Key performance indicators 2014 2013 2012 2011
Growth in revenues, % 0.4% 1.4% -1.5%
Growth in net income, % -3.4% 9.1% -4.0%
Gross margin, % 53.7% 53.0% 52.2% 52.5%
Operating margin, % 14.4% 14.6% 13.9% 14.5%
Return on sales, % (ROS) 9.8% 10.1% 9.4% 9.7%
Based on data in case Exhibit 1.
nThere is as yet no apparent indication that PepsiCo’s sustainability initiatives are having any favorable
or unfavorable impact on its financial and operating performance.
4. What grade would you give to PepsiCo for its eorts to become a socially responsible,
environmentally sustainable corporation?
PepsiCo has evidently had mixed success to date as a socially responsible corporation. While some students
might award it an “Incomplete” grade as there is no information on at least two of the five activities of
socially responsible corporations listed in Chapter 9, we would award PepsiCo a “B+” grade based on its
sustainability plan, achievements to date, rising rankings by outside organizations such as UCS, and long-
term aspirations under CEO Indra Nooyi, who has made balancing sustainability and profitability a personal
Case 31 Teaching Note Conflict Palm Oil and PepsiCo’s Ethical Dilemma
7
5. What specific business strategy recommendations to PepsiCo management to increase its
triple bottom-line performance? Provide a justification for these recommendations.
The triple bottom line refers to company performance in three realms: economic, social, and environmental,
as discussed at length in Chapter 9. Among the triple bottom line strategies that PepsiCo should consider in
the future, it should make it a priority to undertake at least some of the following actions:
Actions for protecting and sustaining the environment
nMinimize as far as possible the use of palm oil in snack food production as part of its overall strategy to
design for sustainability
Actions to enhance employee well-being and make the company a great place to work
Actions to ensure the company operates honorably and ethically
nDevelop a Code of Ethical Conduct for all PepsiCo stakeholders
Actions to ensure the company operates profitably (in terms of the overall value that PepsiCo creates and
the over-all costs that it imposes on society)
nProduce innovative new products in a more sustainable way or by reformulation of existing products
using raw materials and ingredients that do not lead to deforestation and environmental degradation
Case 31 Teaching Note Conflict Palm Oil and PepsiCo’s Ethical Dilemma
8
Wrapping Up The Class
This is a good place in the discussion to remind students that CSR and environmental sustainability strategies
can provide both valuable social benefits and fulfill customer needs in a superior fashion — and lead to
competitive advantage for a company.
Corporate social agendas that address only social issues may help boost a company’s reputation for corporate
citizenship — but are unlikely to improve its competitive strength in the marketplace. The goal of a triple bottom
line measurement is for a company to succeed simultaneously in all three dimensions. The Dow Jones World
Sustainability Index has been created to evaluate companies in these three performance areas, using indicators
such as corporate governance, climate change mitigation, and labor practices.
nContinued inward investments in manufacturing and training programs
nVigilance over currency exchange rates and fleet-mileage costs
Epilogue
In September 2016, PepsiCo published the first update on its Palm Oil Action Plan. Ben Cooper spoke with
Andrew Aulisi, senior director, global environmental policy at PepsiCo, about the progress to date and how the
company’s initial actions and achievements are likely to be received by environmental campaigners. PepsiCo
chose not to launch its Palm Oil Action Plan with a great flourish or fanfare last October. Instead, it simply shared
its plan with a number of key NGOs before posting it on its website. Proud rhetoric and mission statements
are not uncommon in how companies approach sustainability but there is a palpable sense that PepsiCo wants
to place the emphasis on action and not intention. Nevertheless, there has to be a framework for action and
PepsiCo’s palm oil plan provides a detailed blueprint for the sustainable palm oil supply chain it hopes to have
by 2020. Andrew Aulisi, senior director, global environmental policy at PepsiCo, says the company is in “full
execution mode” on its palm oil commitments, adding, “the ball is rolling and there’s a lot of momentum behind
our programme.” Leaving no doubt that PepsiCo wants to highlight action, he says: “It’s called an Action Plan
Case 31 Teaching Note Conflict Palm Oil and PepsiCo’s Ethical Dilemma
9
PepsiCo Income Statements, 2015 v 2014
Report Date 12/26/2015 12/27/2014
Currency USD USD
Consolidated Ye s Ye s
Venezuela impairment charges 1.359 —
Amortization of intangible assets 0.075 0.092
Operating profit 8.353 9.581
Interest expense 0.97 0.909
Interest income & other income 0.059 0.085
Current provision (benefit) for income taxes - state 0.065 0.21
Total current provision (benefit) for income taxes 1.981 2.425
Deferred provision (benefit) for income taxes — U.S. federal -0.014 -0.033
Deferred provision (benefit) for income taxes — foreign -0.032 -0.06
Deferred provision (benefit) for income taxes — state 0.006 -0.133
Preferred shares — dividends 0.001 0.001
Preferred shares — redemption premium 0.005 0.009
Net income available for PepsiCo, Inc. common shareholders 5.446 6.503
Weighted average shares outstanding — basic 1.469 1.509
Weighted average shares outstanding — diluted 1.485 1.527
Number of common stockholders 131285 137971
Source: Mergent Online.
