Becoming a Better Corporate CitizenVijay Govindarajan, Ph.D
Capitalism is under pressure. People all over the world believe that CEOs manage companies for the short term because of a single-minded focus on shareholders. The emergence of activist investors, who focus on quickly extracting outsize returns, has created even more angst about how companies are run. To address these issues, academics, think tanks, corporate leaders, and NGOs have started talking about how to reform the capitalist system so that it works for everyone. In August 2019 the Business Roundtable issued a statement signed by 181 CEOs who committed to focusing on all stakeholders.
Commendable and courageous, indeed. But the truth is that change is tough for well-established companies. Most are not start-ups that began with a social purpose, as Whole Foods and TOMS Shoes did. Nor were they set up, as Grameen Bank was, to solve social problems. At companies that have performed well, sometimes for decades, it’s natural for employees to continue the behaviors that have led to strong results. Success, more than failure, prevents a company’s transformation.
PepsiCo is one of the few established global companies that have produced superior financial returns while meeting the needs of all stakeholders. It has always invested for the long term and delivered results in the short term. The layer that I, Indra Nooyi, added was a focus on sustainability—by which I mean satisfying multiple stakeholder interests to ensure the long-term viability of a company. (For ease of storytelling, we will use the pronoun “I” in this article when referring to Indra Nooyi.)
At the very outset, having grown up in an emerging market where I saw multinationals being a force both for good and for not so good, I wanted PepsiCo’s contribution to society to be rooted in its core business model. I did not want us to fund charitable programs to make ourselves feel or look good. Our social responsibility had to evolve away from corporate philanthropy and toward a deep sense of purpose that would also drive shareholder value. We needed to change the way we made money—not just give away some of the money we earned.
I came to call this new approach Performance with Purpose (PwP). It is based on four pillars: delivering superior financial returns (financial sustainability); transforming the product portfolio by reducing the sugar, salt, and fat in our products while dialing up more-healthful, more-nutritious foods and beverages (human sustainability); limiting our environmental impact by conserving water and reducing our carbon footprint and plastic waste (environmental sustainability); and lifting people by offering new types of support to women and families inside the company and in the communities we serve (talent sustainability).
In my 12 years as CEO, PwP was my primary focus, and PepsiCo made tremendous progress. Our portfolio of more-healthful options grew from about 38% of revenue in 2006 to roughly 50% in 2017. We reduced water use in our operations by 25% from 2006 to 2018 and provided safe drinking water to 22 million citizens in the communities we served. We almost tripled our investments in R&D to expand our nutritious offerings and minimize our environmental impact. Women held 39% of senior management roles by 2018. After PwP was implemented, net revenue grew by 80%, and PepsiCo stock outperformed both the Consumer Staples Select Sector Index and the S&P 500.
Those results mask the difficulty of implementing a purpose-driven strategy. PwP was viewed as transformational—but many questioned why we were doing it at all. And even when the will was there, the dominant logic of the business didn’t simply disappear. For instance, a bright young team from PepsiCo’s core business that had been put in charge of the “good for you” orange juice brand Tropicana tried to extend it into a sugary carbonated orange drink. The team hadn’t yet understood that PepsiCo needed to limit the introduction of treatlike products. Changing decades’ worth of marketing habits was tough too. When a newly hired senior executive pointed out that the child obesity crisis in the United States demanded a change in how PepsiCo marketed soft drinks to children, especially in schools, one company veteran went as far as to accuse the newcomer of being a saboteur and a traitor.
In this article we capture some lessons from PepsiCo’s transformation journey for CEOs seeking to implement a purpose-driven strategy at their own companies.
Anchor Your Transformation in a View of the Future
In shaping our approach, we decided to start from the outside. I asked a team of senior executives to identify future events that would affect our businesses. They pointed to several megatrends, many of them universal in impact, including changes in the world’s demographics, a preoccupation with health and wellness, scarcity of water and other natural resources, constraints created by global climate change, the rise of activism, and a talent market characterized by shortages of key people.
Coming out of that exercise, we recognized that we wouldn’t be able to deliver superior financial performance if we didn’t transform our portfolio to offer more-healthful products—which many consumers were demanding—in addition to treats. If we didn’t reduce water and plastic usage, our costs would go up, and we wouldn’t get a license to operate in many societies. If we didn’t create a company where people could bring their whole selves to work, we couldn’t hope to hire or retain the best and brightest people.
Companies wishing to pursue a purpose-driven strategy ought to embrace the same approach. Leaders should consider setting up a team that reports directly to the CEO and scouts out the megatrends that will affect the organization. Members of the team should be carefully selected so that they’re not wedded to the status quo and can think outside-in; otherwise the result will be incremental thinking from people who are worried that the current model will be disrupted. After analyzing interactions between the megatrends and drawing a composite of what the future might look like, the team must answer key questions such as: What innovations to the business model will be necessary? What investments does the company need to make? What talent does it need to develop or hire? This process will help CEOs future-proof their companies by developing “future back” strategies in contrast to the “current forward” model.
Ensure That the Board Is Your Ally
We realized early that PwP would require the support of PepsiCo’s board of directors. I created a detailed, multipage document to show the board how the megatrends analysis should shape our strategy and how PwP would future-proof the company. We were lucky that vocal board members such as Alberto Ibargüen, the head of the Knight Foundation; Sharon Percy Rockefeller, a leader and policy maker in the public broadcasting community; Daniel Vasella, the former CEO of Novartis; Victor Dzau, then the head of Duke University Medical Center; and Dina Dublon, the former EVP and CFO of JPMorgan Chase, embraced PwP and even challenged me when they felt that an action was inconsistent with it. For example, the board heavily scrutinized acquisitions in the “treat” space and rejected some of them because they would take us backward. Such was the board’s commitment.
As members retired, the board recruited their replacements with PwP in mind. The Ford Foundation’s Darren Walker brought an NGO and global society mindset to PwP, while David Page, director of the Whitehead Institute for Biomedical Research, enhanced our science-based capabilities. Each board member played a valuable role in PwP’s implementation.
The board realigned my compensation structure so that it was based on PwP-related metrics as well as on EPS targets. That step is critical: It’s how the board becomes the force that holds the CEO responsible for delivering on a purpose-led strategy. Not only will the CEO not be able to deviate without the directors’ involvement, but by setting targets, the board makes itself accountable to all stakeholders, not just shareholders.
Bold, early actions show that the new strategy is not just the flavor of the day.
The board’s support was particularly useful when an activist investor bought an equity stake in PepsiCo in 2012 and demanded that the company be broken up. The investor criticized PwP and wanted the company to focus on sugary beverages and salty snacks, cut costs, and return money to investors. I listened carefully to him and studied every one of his ideas. At the end of the day, though, our board—under the leadership of Ian Cook, the lead director and then-CEO of Colgate-Palmolive—wrote an open letter stating that the company was on the right track. We stayed the course. Three years later the investor sold the PepsiCo stock he had bought at $70 for $105—a 50% gain thanks to PwP.
Be Thoughtful About the Language You Use to Communicate Your Transformation
A global company must communicate its purpose-driven strategy in a way that everyone everywhere can understand. But it shouldn’t trivialize the message. Many at PepsiCo initially wanted PwP to be framed as “4 Ps: performance, product, planet, and people.” That was simple language, which we knew we needed, but it sounded to the executive team like a marketing campaign rather than a serious commitment to ensuring human, environmental, and talent sustainability along with strong financial performance. We wanted all stakeholders, especially our employees, to understand that sustainability was critical for the company’s future.
Floral Artist: Azuma Makoto; Photographer: Shiinoki Shunsuke / AMKK
The succinct phrase “Performance with Purpose” provided a broad canvas for growth in an elegant fashion. It signaled that if PepsiCo didn’t act purposefully to tackle rising health concerns such as diabetes and obesity and environmental issues such as water scarcity and plastic usage, its businesses would find it tough to grow. The problem would be most pronounced in China, India, and Mexico, where most of PepsiCo’s future growth was likely to occur but the social license to do business is difficult to retain.
It’s wise to test the framing of a purpose-driven strategy in one or two countries before rolling it across the global organization, because countries will respond to the message in subtly different ways. Mexico was one country we used for a test. At PepsiCo Mexico, after much discussion, then-chairman Pedro Padierna and his executive committee localized PwP with the tagline “Desempeño con Sendito,” which roughly translates to “performing to obtain something meaningful in a sustainable manner.”
By conducting numerous focus group sessions, we learned that this language best captured what PepsiCo wanted to communicate in Mexico. Not only did the idea go down well there, but PepsiCo Mexico never forgot that Mexico was the first nation outside the United States to hear about the new strategy. PwP remains a priority for the country’s top management today.
Model the Necessary New Behaviors with Early Actions
Taking bold actions early is critical for showing the organization that the purpose-driven strategy is not just the flavor of the day. Three things will send a clear message: creating high-profile leadership positions and filling many of them with outsiders; overturning decisions that would have made it through in the “old days”; and letting some people go.
One of the first things I did after articulating PwP was to create the role of chief scientific officer and appoint Mehmood Khan, an endocrinologist at Mayo Clinic and then the head of R&D for Takeda Pharmaceutical, to fill it. That sent a powerful signal throughout the organization and our industry that we were committed to building the radically different capabilities the company needed to execute its purpose-driven strategy.
Although we announced PwP in 2006, Khan didn’t sign on until a year later. By the time he had figured out the nature and structure of the R&D capabilities he wanted to create, it was 2008. His budgetary ask, a significant increase over the previous year, came just as the U.S. stock market crashed and the Great Recession began. Even so, I worked to give him every penny he needed that year and the next. It reinforced the message throughout the organization that PwP was here to stay.
Another new-to-PepsiCo position was that of chief design officer. Realizing that any successful transformation must be consumer focused—not just CEO driven—we knew that design thinking would be critical to our success, so we brought on Mauro Porcini from 3M. (See “How Indra Nooyi Turned Design Thinking into Strategy,” HBR, September 2015.)
Over time I recruited several other executives from outside the company for key senior leadership positions, including Laxman Narasimhan and Vivek Sankaran, partners at McKinsey; Brad Jakeman, from the video games developer Activision Blizzard; and Cathy Tai in China, who came to us from Apple. Jon Banner, who joined us after a storied career at ABC, brilliantly framed our messaging as EVP for communications. Each of them played a major role in the company. The positional power and capabilities of those senior executives challenged the status quo and catalyzed change quickly.
Interestingly, not creating or filling what might be seen as a key role also sends a powerful message. For example, I did not appoint a chief sustainability officer. If the company made such an appointment, I felt, PwP would become that person’s responsibility more than anyone else’s, and I wanted it to belong to everyone. So I used an expanded leadership team, consisting of all the executives in the top two levels, to drive the transformation. PepsiCo’s board-level sustainability committee wasn’t established until 2017, well after PwP had put down roots in the company.
Another action that communicated volumes was a late-in-the-game decision to call off a major new product launch. One of the teams in PepsiCo’s snack business, waking up to a growing demand for energy foods, had decided to launch a caffeine-based snack. The team formulated a product, identified a brand name, and designed the packaging and labels. Just days before the planned launch, the product came to the notice of a senior executive who was not comfortable that the company would introduce a highly caffeinated snack that children might consume. He stopped its development, despite the costs that had already been incurred and in the face of enormous internal pressure—a decision I personally endorsed.
Critics will always emerge, especially in the upper echelons of an organization. It’s important to involve them and engage in a transparent dialogue with them, pointing to the existential threat that the company may face tomorrow. It’s equally important to incorporate their legitimate concerns in implementing the strategy. However, if detractors aren’t converted within a reasonable period of time, they should not be allowed to continue to serve on the management team.
Develop the Capabilities That Advance the Purpose-Driven Strategy
To execute PwP, PepsiCo had to build fresh capabilities in several areas, particularly R&D and product development. Historically, PepsiCo’s R&D had consisted of people trained in the physical sciences, either food science or food engineering, but Khan hired for vastly different backgrounds—such as molecular biology, physiology, pharmacology, nutrition, and computer modeling—and from companies outside the food and beverage industry: businesses such as pharmaceuticals, personal care, beauty care, and oil refineries. He also appointed as many women as men to senior positions in R&D and set up research centers around the world, including Shanghai and Mexico City. That changed PepsiCo’s R&D capabilities in terms not just of talent but also of cultural background, gender, ethnicity, and location.
The results were quick in coming. PwP led to the reduction of salt, sugar, and fat levels in all our core products without any deterioration in taste—a very difficult undertaking. It also allowed us to create and acquire more-healthful beverages—Bubly sparkling water, LifeWtr purified water, Naked Juice fruit and vegetable smoothies, KeVita fermented probiotic and kombucha beverages, Wimm-Bill-Dann’s dairy products (in Russia), and, most recently, CytoSport Muscle Milk—and snacks including Stacy’s Pita Chips, Sabra hummus, Off the Eaten Path baked snacks, SunChips whole-grain versions, Bare Snacks baked fruit and vegetable snacks, and Health Warrior plant-based nutrition bars.
PepsiCo launched the first plant-based polymer packaging for its products some years ago. The polymer starts on a farm and becomes plastic packaging that’s biocombustible and biodegradable because it’s made from renewable materials such as switchgrass, pine bark, and corn husks. Over time PepsiCo hopes to use by-products from its own food business—orange peels, potato peels, oat hulls—to manufacture “green plastic.” That would be a scientific breakthrough that few people would associate with a food and beverage company.
PepsiCo has even developed new machines to produce more-healthful products. Some years ago Cheetos were taken out of America’s schools because they didn’t meet the USDA’s nutrition criteria. They had no positive nutrients, such as whole fibers, and there was no way at the time to introduce whole fibers into an extruded snack without clogging the extruders and shutting them down. No company wanted to work on the problem, so PepsiCo’s R&D center assembled a group to computer model the physics and chemistry of the extrusion of starches and cellulose fibers at high temperatures and high pressure. Two years later the engineers cracked the problem, designing an extruder that wouldn’t jam when whole grains were introduced. By 2016 we had relaunched Cheetos with whole grains, and the product made its way back into schools. That was good not only for business but also for organizational morale.
One handy tool that PepsiCo developed is called ReCon (for “resource conservation”), a multistep process for precisely measuring water usage and wastewater discharge in factories. It allows scientists to figure out how and where they can reuse or recycle wastewater. The company has developed similar tools for greenhouse gases, solid waste, and electricity. Reducing consumption and waste has helped improve the company’s bottom line. In fact, senior executives informally call ReCon PepsiCo’s 23rd billion-dollar brand for good reason.
Localize the Execution of the Strategy
Although a purpose-driven strategy must be common to all countries in which the company operates, each market should have the freedom to tailor the approach to its needs: freedom within a frame. Food and taste preferences are culture-specific, and environmental problems are local. For instance, water is less of an issue in Russia than in Mexico, a water-starved country. Because conserving water reduced costs and ensured a regular supply, PepsiCo Mexico could justify investments in the latest generation of water-treatment plants. By recycling 65% of the water they used, the three plants in Mexico City reduced their reliance on expensive municipal water.
That set the tone—and the pace—for PwP in Mexico. The next front was fried snacks. PepsiCo Mexico acquired a well-known local cookie company, Gamesa, which became the global center for PepsiCo’s baked products, and the company recruited a large number of R&D people to push the envelope in baking technologies and products. Another goal was to tackle salt levels in its snacks. To lower them, PepsiCo Mexico retooled the supply chain for flavors: Rather than sourcing complete flavor packs that contained salt, it started buying only the core flavors and mixing them with pulverized salt, reducing the amount of salt used.
Buoyed by these process successes, PepsiCo Mexico went on to modify its products by replacing ingredients, using more-natural ones, and adding nutritious elements. It developed extruded products from corn cereal; reformulated the popular Mafer line by roasting peanuts instead of frying them; and launched a new line under the Quaker brand—from cereal that included chia and other ancient grains to pancake mixes made with Quaker Oats. A typical breakfast in Mexico is a licuado, the equivalent of a smoothie. The company marketed the idea of transforming a regular breakfast into a super breakfast by adding Quaker Oats and provided branded containers to the small shops that sell licuados in every Mexican city. What was good for consumers’ health became a successful line of business.
PepsiCo Mexico effectively leveraged partnerships, too. Its snack foods business found it nearly impossible to switch from expensive, imported, and not-so-healthful palm oil to sunflower oil because the latter wasn’t reliably available or competitively priced. The company worked with the Mexican government and the Inter-American Development Bank to provide incentives and training for farmers to once again grow sunflowers in provinces that had stopped doing so. As a result, more than 50,000 hectares of land are under sunflower cultivation today, saving the country—and consumers’ hearts—from palm oil imports and providing PepsiCo Mexico with an inexpensive, dependable, and local source of raw materials.
Find Support Outside the Company
CEOs cannot execute a purpose-driven strategy without building coalitions of support and finding ways to respond to external critics. Whenever powerful NGOs such as Oxfam and Rainforest Alliance picketed PepsiCo headquarters, attacking the company’s agricultural practices or human rights record, I would make it a point to meet with the demonstrators, hear them out, and present a counterpoint. Walking even a yard in their shoes mattered. The NGOs would go away appreciating that they had been given a patient hearing and be more open to PepsiCo’s ideas and initiatives in the future.
Companies will need to figure out how to get a second chance. They will have to proactively deal with skeptical NGOs that argue that purpose-driven strategies are nothing more than window dressing. They should learn to engage with those critics, explain that they are trying something new, and candidly admit that they are coming late to the table. Listening closely, reframing NGOs as partners, and showing that the company takes criticism seriously can often diffuse a tense situation.
Floral Artist: Azuma Makoto; Photographer: Shiinoki Shunsuke / AMKK
In addition to personal interaction, data can help dispel NGOs’ negative views about business. Using facts and conclusions based on scientific results, Khan, Dan Bena (then the senior director of operations development), and Banner persuaded several skeptical NGOs to work with the company.
CEOs must also figure out how to join forces with other companies—even rivals—in their industry. In 2010 PepsiCo and several other leading companies in the food and beverage industry created the Healthy Weight Commitment Foundation. Its members promised to offer consumers low-calorie options and to remove 1.5 trillion calories from their products by 2015. As it turned out, by 2012 they had surpassed that target by more than 400%.
Embed Purpose in the Organizational DNA
A purpose-driven transformation may start out as the CEO’s passion, but it will not survive unless it is embedded in the organizational DNA. That requires several kinds of reinforcement, through communication, resource allocation, goal setting, and recognition and rewards.
Communicating the ideas and ideals of PwP constantly to every stakeholder was critical to making it stick. From 2007 to 2017, PwP was on almost every cover of the company’s annual reports. One of my objectives was to highlight its continuing importance, but those covers also subtly signaled that PwP had become the entire organization’s agenda, not just mine.
I used many external forums to describe PwP and amplify the message, and every senior executive spoke about it publicly to build support among external stakeholders. Khan, Bena, and other subject-matter experts were designated PepsiCo ambassadors; they traveled the world talking to various constituencies about specific aspects of PwP.
Resource allocation, too, must be tied to purpose. In fact, we insisted on a sustainability sign-off for every capital expenditure. Each proposal had to state what the sustainability impact of the investment would be, what trade-offs were being made, whether it would meet PepsiCo’s sustainability targets, how it would meet them, and if not, why not. The sustainability committee reviewed every proposal, and if the project wasn’t given the green light, it went right back to the drawing board. We set aside a percentage of the annual corporate budget in a sustainability investment fund, drawing from it to subsidize or defray the costs of innovation. That enabled the business units to experiment and test sustainability-related ideas without having to worry about the internal rate of return that normally applied. What was heartwarming was that our CFO, Hugh Johnston, drove this initiative—unusual for a finance chief.
We set PwP-related goals for everyone, from senior executives and country heads all the way down to midlevel managers. Those targets were used to evaluate performance and help determine annual bonuses. Even the R&D centers and the market-facing functions had PwP goals that were linked to performance evaluations and compensation.
Amid formal target setting and resource-allocation battles, it is easy to forget that purpose is fed by passion—and that the latter must be refueled from time to time. Companies must celebrate wins, showcase purpose-driven initiatives that are working, and energize the organization to believe that transformation is possible. PepsiCo gave global, regional, and national awards every year, even during the worst of times, lauding those who had delivered on their PwP goals—a highly visible action that helped keep people motivated. At the same time, we never forgot our traditional businesses. We celebrated both.
Finally, nothing bakes purpose into an organization more than leadership’s embodiment of it. Executing a purpose-driven transformation is a long and arduous process, and senior executives are likely to stay the course only if the purpose matters deeply to them. PepsiCo was fortunate: Several top leaders—including its former president Zein Abdalla and me—grew up in emerging markets that suffer from water shortages. As a child, I watched people waiting in line every day to collect water and store it for later use. So did Zein. We could relate to water shortages in a personal way. That lent authenticity to what PepsiCo wanted to do for the environment.
We also identified some long-tenured PepsiCo employees—Abdalla, Padierna, Sanjeev Chadha (then CEO of Asia, the Middle East, and North Africa), and Al Carey (then CEO of North America), among others—and gave them a central role in implementing PwP. It’s tough for old-timers to forget the past, but the few who are willing to change can bring credibility to the process. They can also help newcomers build bridges to the rest of the organization and become much-needed internal ambassadors for PwP.
It doesn’t end there, of course. Many senior executives who have left PepsiCo continue to advance purpose-driven initiatives on their own or at other companies. Further proof, if it was necessary, that PwP has been embedded in PepsiCo’s DNA came when the board, in selecting Ramon Laguarta as my successor, chose someone who deeply believes in the power of PwP and calls it “winning with purpose.” Not only is Laguarta building on the past, but he has committed the company to delivering on fresh initiatives related to food waste and plastic recycling to ensure that PepsiCo is adequately future-proofed.
It’s now 14 years since PwP was birthed. I look back at PepsiCo and am proud of the company it is today and will be in the future. It has succeeded both commercially and ethically. It has learned to balance the short term and the long term, carefully thinking through the level and the duration of returns. A real sense of purpose is integrated into the company’s core operations. So to anyone who doubts whether it’s possible to build such a company, I say, “We did it at PepsiCo, and you can do it too.” It’s the only way to make capitalism work for everyone.