Ethics and Compliance
Ethics, or rather a lack of ethics, is a recurring theme in the news - Ethics and Compliance introduction. Recently, finance has been home to an almost continuous series of ethical lapses. As recent history show, the business world does not forgive ethical lapses. Acting in an ethical manner is not only morally correct, but it is a necessary ingredient to long-term business and personal success. (Titman & Martin, 2011) In this paper, the authors will assess the role of ethics and compliance in Pepsi-Cola’s financial environment. The authors will describe the procedures Pepsi-Cola has in place to ensure ethical behavior.
The authors will explain how financial markets work in the United States. The processes Pepsi uses to comply with SEC regulations will be discussed. The financial performance of Pepsi for the last 2 years will be calculated using current, debt, return on equity, and days receivable ratios. Each year will be calculated. Lastly, the trend for each ratio and what it tells us about the organization’s financial health. The ethics and compliance role at Pepsi is of the upmost importance. The company strives to comply with rules and regulations put in place by officials.
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Ethics play a huge part of any organization and its success. The ethics and compliance standards that are in place at Pepsi are provided to ensure the company’s success. If anything unethical or non-compliant from the company would end up with the company in the headlines and on the news. These guidelines are also put in place to empower the employees of the company. The employees embrace the fact that a culture is put in place to promote honesty, trust, and responsibility. The company also strives on the fact that they are both socially responsible and socially conscious.
To ensure this will be carried out by each employee, Pepsi has principles to help keep employees grounded. Within these principles are encompassing total care of the consumer as well as the customer, offering the highest quality product, conducting business truthfully, having an equal balance of short-term and long-term goals, through inclusion and diversity display victory, being respectable and succeeding as a team. (Pepsico. com, 2012) Pepsi has a compliance committee that handles the program that ensures all rules and regulations are followed.
Four sub-committees complete the compliance committee. Anti-trust, safety and environment, human resources, and finance are the four committees. (Pepsico. com, 2012) To ensure accountability for the company actions, Pepsi is committed to strict corporate standards. The standards that Pepsi have adopted for its employees show that Pepsi is committed to operating within the legal guidelines. Pepsi has a company motto of “doing business the right way”. Pepsi believes acting ethically and responsibly is not only the right thing to do, but also the right thing to do for their business.
The company’s Code of Conduct was revised October 1, 2012 to address changing laws that impact their business. It was designed to provide the employees with specific guidelines on how to act ethically while performing work at Pepsi. (Pepsico. com, 2012) In efforts to ensure the Code of Conduct is being followed and employees are kept up to date with the ever changing policies, Pepsi announced in 2010 that they would be imitating a goal and commitment policy. The company soon after announced that the policy would better the lives of everyone associated with the company.
The areas focused on were performance, human sustainability, talent sustainability, and environmental sustainability. Following is a list of procedures put in place by Pepsi to assist and ensure ethical behavior in the workplace: 1. Foster diversity and inclusion by developing a workforce that reflects local communities. 2. Ensure a safe workplace by continuing to reduce lost-time injury rates, while striving to improve other occupational health and safety metrics through best practices. 3.
Continuing to lead the industry by incorporating at least 10 percent recycled polyethylene terephthalate in their primary soft drink containers in the U. S. , and broadly expanding the use of it across key international markets. 4. Reducing their fuel-use intensity by 25 percent per unit of production by 2015. 5. Increase the quality of their products. (Pepsico. com, 2012) Financial markets are any type of financial transactions that will help businesses grow and investors make money. Financial markets can be identified in different terms, such as Wall Street and capital markets.
When trying to understand better how the financial markets work in the U. S. three principles must be introduced to lay the foundation. The first principle consists of borrowers who need money to finance their purchases. Businesses may need money to grow their investments or individuals who may need money to purchase their first new home. The Second principle is savers (investors) who have money to invest. These are individuals who save money for college or save money for a down payment on a car. The third principle is financial institutions that bring individuals together who borrow and save money.
The most common would be commercial banks. For example Bank of America who receives payments and makes loans. (Titman, Keown, & Martin, 2011). Financial markets help to assist the movement of money from individuals who borrow money and who could also be the business. The reward is providing the savers with a return on their investment. Finance companies, investments banks, and insurance companies help to make up the financial marketplace. The term used to describe when there are people who have money to invest, and there are people who need money are financial intermediaries.
Financial markets can be defined as maturities of the securities traded in them. An example would be money markets whose maturity is short-term meaning for one year or less. However, another example would be capital markets whose maturity is long-term meaning for more than one year. (Titman, Keown, & Martin, 2011). Each year company’s develop a financial plan often used as a guide to future planning. Such plans have to be aligned with the Security and Exchange Commission Act of 1934 regulations providing estimates of the company’s financing requirements.
For Instance, Pepsi-Cola are required to file annual, quarterly, and current reports, proxy statements, and other information with the United States and the Security and Exchange Commission (SEC). In an attempt to keep the public updated on how well or terrible Pepsi-Cola is performing, the public has full access to read or copy such information. The annual report on form 10K contains statements reflecting Pepsi-Cola’s future performance that constitutes “forward-looking” and cautionary statements incorporating the Reform Act (PepsiCo, 2012).
Pepsi-Cola addresses future operating performance, and statements addressing events and developments that its company expect or anticipate will occur in the future. According, to the past two years Security and Exchange Commission report Pepsi-Cola conducted a variety of research and development activities for the continuous growth of the company. These activities involve the development of new products, improvement in the quality of current products, improvement of production processes, and the development and execution of new technologies.
In fact, Pepsi-Cola services including production, distribution, sale, advertising, marketing, labeling, and safety products are subject to various laws and regulation by federal, state, and local government agencies in the United States. Pepsi-Cola is required to comply with the food, drug, and cosmetic act, the occupational safety and health act, clean air act, the equal opportunity act, and the national labor relations act among others (PepsiCo, 2012). For example, in California state law requires a warning label on products that contains an element causing cancer or birth defects.
Such risk factors could limit activities, increase operating cost, reduce demand for product, or result in legal action. Releasing certain information and risks in Pepsi-Cola’s report is not inclusive but is designed to highlight what is believed to be important factors to consider when evaluating future performance. Evaluating Financial Performance (Dollar amounts represented in Millions) As evidenced in the chart above, Pepsi Cola, or PepsiCo, has experienced an increase in total and current liabilities in the past two years.
Total liabilities are valued at $52M in 2011-an increase of $5. 2M from PepsiCo’s 2010 figure. Total assets have also grown from $68. 2M in 2010 to $73M in 2011. The company’s Net Revenue increased by 15% between 2010 and 2011. Net income increased slightly-by 5%. The increases in Net Revenue and Net Income are caused by a number of factors including growth in PepsiCo’s worldwide snacks and beverage businesses, the acquisition of Wimm-Bill-Dann (WBD), profit from the sale of some of the company’s businesses and the benefit of an extra reporting week (PepsiCo 2011 Results, 2012).
At the end of 2011, Pepsi Cola’s current ratio measured 0. 96- down slightly from 2010’s ratio of 1. 11. A higher current ratio is preferred and indicates that current assets are sufficient to pay off current liabilities. Pepsi Cola reported current assets at the end of 2011 totaling $17. 4M while current liabilities totaled $18. 2M, illustrating that the company’s liabilities outweighed its assets by $713,000. In 2010, however, current assets exceeded current liabilities by $1. 7M (PepsiCo 2011 Results, 2012).
A small decrease in current ratio is unlikely to wreak havoc on the corporation but may, however, cause a decrease in stock prices due to stockholder insecurity. Pepsi Cola’s debt ratio also increased slightly from 0. 68 in 2010 to 0. 71 in 2011. This slight increase is expected based on Pepsi Cola’s reported assets and liabilities. Debt ratio is a measure of a company’s debt in relation to its assets and is calculated by dividing total liabilities by total assets. A Debt Ratio of less than one means that a company has more assets than debt. This measurement is an indicator of risk.
Banks are less likely to extend credit to a company with a debt ratio greater than one (Titman, Keown, & Martin, 2011). PepsiCo’s debt ratio remains low in spite of its slight increase. Pepsi Cola’s experienced a negligible increase of return on equity boosting their 30% return in 2010 to a 31% return in 2011. Return on Equity measures profitability as represented by how much profit is generated by money invested by shareholders. A higher return on equity gives the impression that a company is more capable of generating cash internally (Titman, Keown, & Martin, 2011).
This measure is useful in comparing other companies within the same industry and hints at shareholder preference. A recent report indicates that Coca Cola, a direct industry rival of Pepsi Cola, reported a return on equity of 26% in 2011 and 43. 5% in 2010 (Coca Cola Return on Equity, 2012). Compared to Pepsi Cola, Coca Cola’s return on equity fell significantly between 2010 and 2011, whereas Pepsi maintained a steady return. In this paper, the authors assessed the role of ethics and compliance at Pepsi-Cola.
The procedures put in place by Pepsi to ensure ethical behavior was described. How financial markets work in the United States was explained. The authors identified the processes that Pepsi uses to comply with SEC regulations. The authors evaluated Pepsi’s financial performance for the last two years using financial ratios. And lastly, the authors discussed the trend for each ratio and what it tells us about the organization’s financial health. References Coca Cola Return on Equity. (2012). Retrieved February 2013, from YCharts. Com: http://ycharts.
com/companies/KO/return_on_equity PepsiCo 2011 Results. (2012, February 9). Retrieved February 2013, from PepsiCo Inc: http://www. pepsico. com/PressRelease/PepsiCo-Reports-Fourth-Quarter-and-Full-Year-2011-Results02092012. html PepsiCo. (2012). Investors: SEC Filing. Retrieved from http://www. pepsico. com/Investors/SEC-filing. html Pepsico. com. (2012,Spring). Performance with Purpose. Retrieved from http://www. pepsico. com Titman, K. S. , & Martin, A. J. (2011). Financial Management: Principles and Applications (11th ed. ). Upper Saddle River, NJ: Pearson/Prentice Hall.