Coca Cola: Is It "the Real Thing"? Most of us think about the Coca-Cola Company in a positive light because it continues to bring us what is arguably the tastiest soft drink around. One would expect that a company that describes itself on its website as "a company that exists to benefit and refresh everyone it touches" and has been so successful for years would have a corporate culture and code of ethics that matches this image. However, a closer look at the Coca-Cola Company, its corporate culture and allegations of corruption paint a less than rosy picture of the soft drink leader. A Coca-Cola employee named Matthew Whitley made a splash when he was fired on March 26, 2003 and then sued the Coca-Cola company a couple of months later for the large sum of forty five million on the grounds that he had been fired in retaliation for raising concerns about accounting fraud and other misconduct. He was fired just five days after sending his allegations to the company's top lawyer.

When Coke balked, Whitley turned for relief to a new legislation: the Sarbanes-Oxley Act of 2002. He filed for whistle-blower protection under the act's section 806 provisions and initiated federal investigations into the Coca-Cola Company. In the past couple of years, the corporate world has been rocked by scandals occurring in well-known companies such as Enron and World Com. These blatant examples of fraudulent financial reporting and related corporate corruption created the necessity for more stringent and comprehensive laws and punishments to avoid such corporate scandals in the future. On July 30, 2002 President Bush signed into law the Sarbanes-Oxley Act of 2002. The law was enacted to bolster public confidence in our nation's capital markets.

It imposes new reporting requirements and significant penalties for non-compliance on public companies and their executives, directors, attorneys, auditors and securities analysts. In my opinion, one of the significant provisions of the Act, that covers companies registered under section 12 of the Securities and Exchange Act of 1934, provides federal protection for "whistle blowers". The Act requires that companies covered in the Sarbanes-Oxley Act should encourage employees to come forward and provide management with information regarding potential corporate fraud. It also specifically prohibits employers from retaliating against employees who provide such information. This Act was passed as a result of Enron's attempted retaliation against Sherry Watkins who blew the whistle on the company. It's purpose seems to be to enable ethical employees help keep management abreast of unsavory activities that will in the long run not only harm employees, stockholders and other stakeholders, but as past experience has shown will often lead to the demise of the company.

I will focus on this aspect of the Sarbanes-Oxley Act and how it relates to the case brought against the Coca-Cola Company by one of its employees, and also refer to section 301, relating to new rules about audit committees. Attitudes toward whistle-blowing have evolved over the past 50 years in corporate America, from the early days when loyalty to the company was the ruling norm to the present time when public outrage about corporate misconduct has created a more comfortable climate for whistle-blowing. Prior to the 1960's, corporations had total control over employee policies and could fire an employee at will, even for no reason. Employees were expected to be loyal to their organizations at all costs. Therefore, in that era, more often than not problems were concealed rather than solved.

In response to these issues, Congress passed the Civil Service Reform Act in 1978 to protect the rights of government employees who reported wrongdoing. In 1989, the federal government extended whistle blowing protection to non-governmental employees through the False Claims Act, which allows private individuals to sue government contractors on behalf of the U.S. government. However, there were still few laws protecting whistle blowers in the private sector. In the 1980's, some states began to provide whistle blower protection to employees as a result of the erosion of the employment-at-will doctrine (i.e. a company can terminate employment for any reason). Now with the Sarbanes-Oxley Act, internal and external whistle blower protection has been extended to all employees in publicly traded companies for the first time. Specifically, the employee does not have to prove that the employer violated the law.

He just has to have a "reasonable belief" that this has occurred. He can report the illegal activity to a federal agency, a member or committee of Congress, or a supervisor in the company. The act prohibits the company, officers, employees, contractors and other agents of the company from retaliating against the employee. Retaliation includes firing, demotion, threats or other harassment. The employee must file a complaint with the department of labor within 90 days of the alleged retaliatory behavior. The employee may be granted remedies such as reinstatement of employment, back pay with interest, damages, and attorney's fees.

Clearly there is quite a bit of subjectivity to the act, which may make seeking such damages not as easy as it may seem. In his lawsuit, Whitley claims that while he was employed as the Director of Finance - Supply Management in the Fountain Division of the Coca-Cola Company, he identified to senior management a variety of illegal and fraudulent schemes and discriminatory misconduct in the Fountain Division. Some of these allegations include, the promotion and sale to children of frozen un carbonated beverages that Coke knew contained metal residue that may potentially be harmful, a 65 million dollar fraud perpetrated on the Burger King Corporation and ratified by members of Coke's board of directors, intentional overstatement of revenues and gross profits by 750 million, illegal price discrimination against customers, and continued intentional discrimination against African - American and Hispanic employees. Whitley claimed that he reported these offenses to upper management in an attempt to protect the company's stakeholders including the customers, shareholders, and employees of the Coca-Cola Company.

Coke vehemently denied the allegations brought by Whitley and the charges of a retaliatory dismissal. Coke called Whitley's suit 'frivolous, unreasonable and without foundation. ' The world's largest soft drink company said Matthew Whitley had been dismissed in March solely as a result of a decision to cut 1,000 jobs in its North American division. However, Coke did concede that some employees improperly influenced a marketing test, which the suit says led Burger King to invest $65 million in Frozen Coke. On April 14, 1999, Coke prepaid a $400 million 10-year marketing allowance to Burger King, the Fountain Division's second largest customer. Coke knew full well that its decision to give Burger King so much money in advance of performance carried the risk that actual purchases would not live up to the prepayment.

That is exactly what happened. Coca-Cola needed a way to increase sales of Coca-Cola products to Burger King. Coke figured that they needed to find a way to get more customers coming to Burger King because more traffic means more product sales for Burger King which means more inventory purchases which include Coca-Cola products. This would help justify the 400 million dollar prepayment. Coke came up with a plan to hype frozen carbonated beverages ("FCB") as a kid's snack item at Burger King. To promote the product, and more importantly, convince Burger King's OPS-Tech committee that FCB would in fact increase traffic, Coke persuaded Burger King to run a three week test in the Richmond, Virginia market.

Burger King agreed to this. Coke knew that Burger King's senior management team saw this marketing survey's success as crucial to justify a large increase in investments in FCB. Coke suggested that with the purchase of a value meal, the customer would get a coupon for a free FCB. Presumably, if kids liked the FCB's, they would buy more value meals and more purchases of value meals would mean that store traffic will have increased. The benchmark for success would be the volume of value meals sold in Richmond during the trial period. If the test was successful, Burger King would extend the promotion nationally which would mean more syrup sales for Coke.

When Coke saw that the marketing survey was going poorly, the Vice President of the team in charge of the Burger King account, had a marketing manager hire a "marketing consultant" to falsify the survey and rig the results so that it looked like FCB's caused traffic. The marketing manger paid ten thousand dollars to a Virginia man so he could take hundreds of kids to buy Burger King value meals for the sole purpose of falsely inflating the survey results. Burger King and its franchises took the bait and bought into it and ended up losing around 65 million dollars because of it. Around March 2001, this marketing fraud came to light at Coca-Cola in the Fountain Division. Matthew Whitley led a preliminary investigation that recommended the Vice President's termination.

He also alleged that Warren Buffet who is one of the four members of Coca-Cola's audit committee, convinced the committee to reject the request to terminate the vice president because such an incident would be potentially embarrassing for Coke. Rather, Whitley claims, Buffet persuaded the audit committee to go forward with FCB sales and victimize Burger King and its franchises rather than tell them the truth about the fraudulent marketing report. In his lawsuit, Whitley said it is because Buffet is the biggest shareholder of Coca-Cola, owning some 200 million shares, and he wanted to recover some lost money through this fraud. Furthermore, Buffet's Berkshire Hathaway Inc. owns the Dairy Queen chain, a direct competitor of Burger King, and the FCB fraud would cause serious financial injury to Burger King and Dairy Queen would directly and substantially benefit. Obviously, Coke and Buffet denied any of these charges.

However, even if the conversation with Warren Buffet never actually occurred, I think it is absolutely ridiculous to have someone with such strong ties to the company, and that is so obviously biased, continue to serve on the audit committee. The function of the audit committee is to serve as a more independent arm of the board of directors by consisting of non-officer board members, and to act as a liaison between the auditors and management. The New York Stock exchange has required that the audit committee consist of outside directors only, since 1978. In fact, the Sarbanes-Oxley Act increased these requirements. Section 301 talks about the function of audit committees and says", Each member of the audit committee of the issuer shall be a member of the board of directors of the issuer and shall otherwise be 'independent'.

To be considered 'independent', a member of an audit committee shall not: 1) accept any consulting, advisory, or other compensatory fees from the issuer, or be an affiliated person of the issuer of any subsidiary". Now, I may not be an expert on corporate governance or audit committees, but I find it hard to believe that someone owning 8 billion dollars of stock and being the largest stockholder in a company, can be called independent regardless of how you define it. Obviously, Warren Buffet was on the audit committee prior to Sarbanes-Oxley. However, it seems to me that no reasonable person could consider the presence of such a related party on the audit committee to be justifiable.

Coca-cola trades on the New York Stock Exchange, and although it may have followed the letter of the law, in that Warren Buffet was technically an outside director, it certainly hasn't followed the spirit of the law, since he was far from independent. I believe Coke's lie somewhere in between Whitley's allegations and their admissions of guilt. I think a lesson can be learned here that companies, especially large ones should listen to their employees when they come forward with pertinent information. I would recommend that to avoid whistle blowing to an external party, which usually proves hazardous for both the individual and the organization, companies should encourage internal whistle blowing, that is, to an authority within the organization. This is so that action can be taken immediately to resolve the problem, and it minimizes the organization's exposure to the damage and embarrassment that can occur when employees take these issues to the public.

Furthermore, instituting a program which encourages employees to come forward with their ethical and legal violations, sends a message to the employees that the organization is serious about adherence to their corporate codes of conduct. It seems to me that Whitley did not get a sufficient amount of relief under the Whistleblower provision of Sarbanes-Oxley, probably because he settled the lawsuit rather than allowed it to go to trial. He did not get his job back, and may have a hard time finding another one, since other companies might be wary of hiring him, rather than opt for acquiring a very ethical employee. It will also likely take several lawsuits to iron out some of the ambiguities and in the act. For example the act allows the employee to make allegations that are based on a "reasonable belief", however, there is no definition given of what a reasonable belief is.

Other problems include the fact, that there is a very short window for filing the claim. Alternatively, this may open up the possibility that disgruntled employees will file claims alleging wrongdoing for malicious reasons, and the employer will have to prove otherwise. It seems like some laws evolve by moving two steps forward and one step back. However, enacting the law in the first place seems like a huge step forward in trying to discourage / reduce corporate fraud and corruption, that hurts many of the company's stakeholders and often causes the demise of the company as well...


1) Alexander Hamilton Institute. Whistle blowing: A New Perspective on an Old Issue. New Jersey, 2002.
2) Miceli, Marcia P., and Near, Janet P. Blowing The Whistle: The Organizational and Legal Implications for Companies and Employees. New York: Lexington Books, 1992.
3) Conference of State Bank Supervisors. Executive Summary of the Sarbanes-Oxley Act of 2002 P.
L. 107-204.2002.
February 18, 2004.
web sar banes-ox ley summary. htm. 4) The Coca-Cola Company. Coca- Cola. 2003.
February 17, 2004.
web 5) CFO Magazine. Whistle-Blower Woes. CFO publishing Corporation 2004.
web. 6) Cox News Web. In the Superior Court. 2003.
February 23 2004.