Things Go Bitter With Coca-Cola

This has been a torrid summer for Atlanta-based Coca-Cola. In June hundreds of Belgians—including school children—complained of nausea and vomiting after drinking Coke products. Some consumers in France had similar symptoms. As a health scare spread across Europe, Belgium, France, the Netherlands, Spain and Luxembourg banned Coke products or placed curbs on their import, though the bans were later lifted. Meanwhile, in response to this crisis, Coca-Cola was forced to pull millions of bottles off store shelves, the company’s largest product recall in its 113-year history. How should companies respond to such crises? What can they do to prepare for them? Thomas Donaldson, professor of legal studies at Wharton and Director of the Wharton Ethics Program, spoke to Knowledge @ Wharton about the lessons to be learned from Coke’s handling of what the New York Times calls the “mad Coke disease” crisis.

Knowledge @ Wharton: Coca-Cola last month announced the biggest recall of its products in history. From the standpoint of business ethics, what has Coke done right so far, and what has it done wrong?

Donaldson: This episode constitutes a moment of truth for Coke. This is a challenge for any company whose principal product is challenged in this striking and fundamental way. What strikes anybody—and especially corporate managers—caught in such a moment is that there is very little time to make decisions and yet the stakes are extremely high. For this reason, a couple of things are important to have in place prior to the event. The first is a crisis-management process. That process has been made more complicated in Coke’s crisis because its bottlers are not owned directly by the parent company. The company needs some way to bring members of its top corporate management together with other decision makers and information providers so that a response to the public can be made quickly. We don’t know all the facts, but in this instance it took a full week to bring Douglas Ivester, Coke’s CEO, to Europe. In a crisis of this magnitude, the public looks for the No. 1 person to be doing something significant. So while we don’t know what Coke’s crisis management process was, it appears not to have moved speedily. The second thing that it is important to have in place is cultural. It is important that the company have evolved a culture that in a crisis like this will put foremost on the table the health of the customer.

Knowledge @ Wharton: Are there examples of companies that have faced major crises and acted differently for cultural reasons?

Donaldson: The Johnson & Johnson Tylenol poisoning episode of the early 1980s constitutes a classic case of a company that had developed a culture that put the health of the consumer first when its product was poisoned. This case is striking because the chairman, Jim Burke, was in an airplane when the news of the posioning broke. At that point, air-to-ground communication was not as superb as it is today. Burke later told me that the decision to recall all Tylenol products was made by the time the plane hit the ground. By the time he touched base with his management team, everybody was in agreement that this should be done. The reason for the agreement was that they rallied around the values that Johnson & Johnson had celebrated in its famous credo. Those values put the health of consumers first. Johnson & Johnson even pulled product from some assembly lines, though some consultants had suggested that to do so might imply that Johnson & Johnson had accepted responsibility. But Johnson & Johnson, putting aside issues of litigation, did the right thing. It pulled all the products. In doing that, Johnson & Johnson was able to do what many pundits said would never happen: It not only got the sales of its product back, but it got them back with the commitment of the consuming public that probably could not be changed in a generation. I mention Johnson & Johnson because the development of a culture that helps you do the right thing when you are in the spotlight, and all the cameras are rolling, and you have a small time window in which to make a decision, is not an easy or speedy process. It took Johnson & Johnson years to reach the point that it did.

Knowledge @ Wharton: How can companies develop such a culture? Where do they begin?

Donaldson: Many different ways can help companies do this. Johnson & Johnson had at the time—as it still does—credo challenge sessions. In these sessions the company brings managers together a couple of times a year to ask questions about the credo and if they want to change any of these values. Few if any changes are made, but in the process of testing the credo, incredible buy-in occurs. And the sessions often occur in the presence of the CEO or the people on the top management committee. This provides an opportunity also for issues that are percolating in the company on business and ethical lines to come to the fore. So that is one of the ways it can be accomplished.

Knowledge @ Wharton: What specific steps can a company take to develop such a culture?

Donaldson: Developing a culture that in a moment of truth is tested in the right way involves three major components: leadership, a lot of which is by example; culture, which I just described; and structures, including reward structures. In Johnson & Johnson, for example, people talk of someone’s credo credentials. If those credentials are not good enough, people are not promoted. So all the advice in the world means very little for a company in a moment of truth unless it has its values in the right place. What is amazing to me is that with the Johnson & Johnson example behind us, companies seem again and again to act in ways that do not square with that example.

Knowledge @ Wharton: Apart from Johnson & Johnson, are there other companies that have done the right thing when faced with their moments of truth?

Donaldson: The instance comes to mind of Salomon Brothers, when it was caught in a scandal involving the cornering of the U.S. Treasury market. The leadership that Warren Buffett provided when he came into Salomon Brothers is another example of responding well in a moment of crisis. And it illustrates another aspect of good leadership. In that instance, Buffett wrote a letter to all managers. He said, in effect, that we have just gone through an ethical crisis. If you see anything that is unethical, I want you to call me—and here is my home phone number in Omaha. He provided that phone number to all managers, and in fact some did call him. Of course, he has limited ability to field thousands of phone calls, but it was a symbolic gesture that showed the importance he placed on honesty.

Knowledge @ Wharton: As is well known, Buffett is also a major investor in Coca-Cola. What should he be telling Ivester these days?

Donaldson: Well, Coke appears to have made the classic mistakes in this area, and Buffett might want to point those out. The tendency of companies that for good reason or bad are in the public spotlight is to pull back immediately, assure everybody that nothing at all is wrong with anything, and allude to their terrific track record. It appears that that is more or less what Coke did. What companies typically forget is that while the tendency is to keep any additional information close to the vest, the right instinct is the value-driven one, which is to pay exclusive attention to the health of the customer. If there is additional information that in any way might bear on the health of the customer, there is a window of opportunity in which that information can come out, because the company is already in the hot light of public opinion and it has already had its image hit during this period. In Coke’s instance, the company had information about people who had become ill weeks prior to these incidents, which Coke had in its possession. Coke had a window of opportunity to disclose this information. The instinct is to pull this information in, and that is almost always wrong. The right move is to focus on the health of the customer. Even though you don’t think this information is relevant, you should get it out—because that allows people who might think it is relevant to go through whatever process they want to go through. So if Buffett has an opportunity to talk to Ivester, I’d like to think that he will say, “You did some things well. You personally went to Europe and clearly tried to reassure the public and the media. But you might have done a lot more than you did in the opening days of the crisis.”

Knowledge @ Wharton: How should companies deal with the government during such times?

Donaldson: In a crisis like this, you should try if you can to exceed the reach—even the unreasonable reach—of the government. If the government is asking you to recall at level three, if you can recall at level four, you are probably better off. In this case, unfortunately Coke had to be consistently outdone by the host governments. It is also a mistake to believe, because you have information that makes your company look good, to not appreciate the fact that the customer is hearing more than your side of the story. In this instance, perception is reality. You have to respond to the perceptions.

Knowledge @ Wharton: What long-term lessons does this episode offer Coke and other companies?

Donaldson: I’d return to the basic points with which I started. One, you need a system that will quickly respond to a crisis and will quickly put forward your principal spokesperson—usually the chairman—in front of the public in a matter of hours. Two, you need to prepare in advance a culture and an attitude of values toward these kinds of things that in a moment of truth reveals you to be the company that you know you are, deep down—one that really does care for the customer and puts the customer first. My third suggestion for the future is to remember that first instincts are often wrong on these matters. The instinct to pull in and to turn inward needs to be countered with the decision to put out more for the public than you may think they even need. The important thing about crises that affect the health of the customer is that it is hard to imagine something that you know is relevant to the issue that you don’t want to put out. You should err in the direction of more detailed disclosure. With the hot light of the entire world focused on you, somebody is going to find out what you did not disclose, and then you will look much worse.

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