Steven S. Reinemund: Leadership for a 21st-Century Multinational Corporation

Steven S. Reinemund is chairman of PepsiCo, one of the world’s largest food and beverage companies with annual revenues of $33 billion. Its principal businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices, and Quaker foods. Its portfolio includes 17 brands that generate $1 billion or more each in annual sales. PepsiCo has about 125,000 employees in 77 countries.

In August 2006, he announced his retirement after 22 years with PepsiCo. At the time, Reinemund was chairman and CEO. He stepped down from the CEO position in October 2006, and will retire as chairman and from the board in May 2007.

Prior to becoming chairman and CEO in May 2001, Reinemund served as PepsiCo’s president and chief operating officer (COO) starting in 1999. From 1996 to 1999, he was chairman and CEO of Frito-Lay’s worldwide operations, and from 1992 to 1996 he led the company’s North American snack division. He started his career with PepsiCo in 1984 at its Pizza Hut division (now part of YUM! Brands Inc.) serving as CEO from 1986 until 1992. Before joining PepsiCo, he held positions with the Roy Rogers division of Marriott Corporation and IBM, and also served as an officer in the U.S. Marine Corps. In addition to the PepsiCo board, he is a director of Johnson & Johnson.

Reinemund is a 1970 graduate of the U.S. Naval Academy, and received an MBA from the University of Virginia in 1978.

◊ ◊ ◊ ◊ ◊

Ethix: What is a CEO’s role in changing and shaping the company culture, and how would you define the culture at PepsiCo?

Steven S. Reinemund: Changing a company culture is difficult; shaping a culture is hard, but doable. I am fortunate to be at a company where the culture has historically been positive. We certainly had values, but we had never put them on paper until about three years ago. We have been growing rapidly, particularly internationally, and we wanted to make sure that we continued to support and strengthen the PepsiCo culture. We went about this process with about 30 people across multiple functions and different levels around the world, working with Laura Nash, a professor from Harvard.

I told her that I thought the essence of the company was around growth with integrity. At first she said growth is not a value. But she came back in a couple of months and said, “You know, you’re right, because I hear it everywhere I go. Although it’s never been in any other statements we have, it is true about PepsiCo.”

When you talk about growth, you talk about individual growth and the company’s growth. And these have to go hand-in-hand. We have a lot of emphasis on individuals growing as leaders, and I have been teaching a course for the last five years for top performers. We talk about the importance of being innovative in your own life and in the company, and constantly bringing new ideas into the company. That is what spurs growth.

Integrity has always been a company focus. It is not that we don’t make mistakes, but we have a strong history of leaders who believed in getting results the right way. My mentor, Wayne Calloway, used to say, “Winning is critical, but it is only important and meaningful if you get it the right way.” So that’s part of what our culture is. I hope during my tenure I have encouraged and strengthened it, but I don’t think I have changed it. That really was four generations of CEOs who have believed in the basic tenets of the culture.

High Performance Risks?

Some research suggests that companies with a high performance orientation have a higher risk for unethical behavior when they have stretch goals and get close to these goals. You are saying integrity is a value. How do you deal with the potential risk in an organization like PepsiCo that’s full of high-performing and high-achieving people? How do you maintain integrity when performance and growth create incentives for people to do unethical things?

That’s a great question. I don’t know that I would necessarily connect it quite the way you did, but I think that the question of how you instill ethical behavior in the high-performance company is critical. I am a believer that you don’t do that with rules. One of the big fallacies of the effort to clean up ethics in business is that you can develop a set of rules and therefore be ethical. I don’t believe that connection is true. Smart people can find ways around any set of rules.

The key is hiring leaders who have good moral compasses. Then you have to create checks and balances for accountability, so that no one — not the CEO, the board, or any individual in the company — has the ability to do things that would put the company in jeopardy. Even with that, you will have problems, but you will find them early and deal with them early. I would not dispute the fact that high-performance individuals have strong temptation to commit moral failures. The key is how an organization handles failures. How does it detect them? Did it reinforce the proper behavior? The most valuable part of our value statement is what we call the “values challenges” that we encourage every leader to have, every time they meet with their teams.

We had an example this summer you might have read about; it was a classic demonstration of our ethical values in action. We received an envelope from Coke that was addressed to one of our senior executives. The executive’s administrative assistant opened it and saw these were trade secrets that this individual, allegedly from Coke, was trying to sell to us. Immediately, she and another administrative assistant took it into the general counsel. Within an hour, the envelope was packed up and sent back to Coke. Our employees acted immediately, based on what they thought was right. I gave the administrative assistants the Chairman’s Awards as a demonstration of the pride we had in what they did. I have articles in languages I can’t read talking about this. Because of the “Cola Wars,” the press was enamored by this action. I don’t mean to degrade Coke, because frankly I think they handled it correctly by prosecuting this person. We recognize that errant behavior is going to happen, but we are constantly talking about the fact that if you win, but you don’t win the right way, it isn’t something with value.

The key is having leaders who have good moral compasses.

As you’ve seen, the ethical problems that have come to light, starting with Enron followed by a whole string of things over the last six years or so, did you ever have any doubts about your own environment? Have you done anything differently at PepsiCo because of this?

I don’t think anybody could read those articles and not have those thoughts. But I do remember one of our board members, in an executive session, saying, “I am not opposed to this scrutiny that we are all going through, but we need to remember that our biggest responsibility is to make sure we have the right people leading this company. We need to be sure they have the right motives, principles, and values, and then we hold them accountable.” That’s exactly what many of us concluded.

Like everybody else, we have done a lot of things differently because the rules have changed. Rules are necessary but not sufficient. You have to understand the underlying set of values. You can do completely legal things that the court of public opinion would not consider good. We are responsible for acting on those things too, and those little ones are much more difficult. We will have accounting violations like everybody does, but those are relatively simple, and you can get auditors to find those. But the more important thing is the moral fiber of what we do and the principles we have about things like pay, fairness, product integrity, and product quality.

We will be held accountable for the laws of the future not just the laws of the present. We as leaders have to anticipate that. The most recent case of backdating options should not surprise anybody. Many politicians think they can develop rules that will legislate ethical behavior, and it is just never going to happen.

The Role of Government in Business

What is your view of the role of government and law as it relates to business?

You don’t have a sustainable business without the rule of law. We went through a process with the government for approval of a merger that we were doing. It was quite contested and we eventually prevailed. However for me it was a time for me to really understand and appreciate how our government works. I remember flying back with the woman who is now our CEO from the last interviews with commissioners, and I said to her, “However this thing comes out, I feel a lot better about our government than I ever did before. There a lot of well-meaning people, committed people who know what they are doing.” I have a different point of view on some things, but this is not about people who don’t know what they are doing. These are smart, committed — in many cases not highly paid — people, who believe in what they do. “We must have a code of law, and whatever decision is made, we will live with it, that makes me proud to live in this country.”

Winning is critical, but it is only important and meaningful if you get it the right way.

Social Responsibility

Social responsibility is a buzzword for a lot of organizations now, but for some it goes deeper than others. How does PepsiCo view social responsibility, and what specific things have you done?

Increasingly, the public expects companies to behave in a way that demonstrates their commitment to more than just the short-term bottom line. And business today has more opportunity, responsibility, and legitimacy to affect social change than ever before. How do we in business handle that?

We define social policy in two ways: One, we will do what we are expected to do around the world. In the analogy of sports, you might call that defense. We will do it according to the letter and spirit of the law. But there is also offense —things we can do uniquely to affect social change.

As CEO, I spent a lot of my time on diversity. It’s a business opportunity and the right thing to do. Diversity, for a consumer-products company, is obvious to me. We can’t grow as a company if we don’t represent our consumers from the frontline to the boardroom. Previously, government took a big role that was probably appropriate at that time. But government is taking a negative role today, because it is passing legislation in some places that does not allow race to be a factor in university admissions. A University of Michigan case a few years ago was overturned because business rose up and said, “We can’t do our job if we don’t have an educated, diverse population that the university supplies to us.”

A second area of social responsibility is dealing with the big environmental issues. One is water. We use a lot of water in the manufacture of our products, and we sell a lot of liquid-based material. So we have some capabilities to make a difference, not just directly in our products, but in the amount of water we use. There are a billion to 1.2 billion people in the world who don’t have access to safe water. Many of them are never going to be buying our products, but we can make a difference by helping them get to access safe water.

We are supporting an entrepreneurial effort to develop a water distillation system that could theoretically be produced at $1,000; it would be able to take any source of liquid in a community and turn it into safe water. Why would we be involved in that? One, it’s the right thing to do. Two, we have technical capabilities we can help with. Three, the biggest advantage is that we have sales organizations all over the marketplace. Take India for example, we have a sales organization that can bridge “the last mile” to millions of people who don’t have access to safe water. Our sales people are excited about the opportunity to be able to give back in their community, and they can provide some technical resources to local entrepreneurs who would manage these machines and supply water to their local communities. Our people in countries like India and China are paid well, and they would love to be able to give back. With our assistance, this is an opportunity for them to do that.

Another environmental issue is recycling. We use a lot of packaging, and we should be able to figure out how to recycle better than we do today. Last year we had a promotion on Aquafina with Sam’s Club, encouraging people to bring back their Aquafina bottles to be recycled. Our goal was 35 million, and we recycled 37 million. We turned them into fleece jackets that were distributed to the needy in that area.

I could go on. We want to have profit with a purpose, and our people want to get involved. It enriches their lives to be providing for others.

Social responsibility is good for business, it’s the right thing to do, and more and more businesses will see that it’s a competitive advantage when you do it right. But if social responsibility is done strictly on defense, it will not work because no team can win on defense.

Socially Responsible Products

These are great examples of things that you do giving back to the community, but let’s turn inside and talk about your products. I read where you have a categorization of your products around “fun for you,” “better for you,” and “good for you.” Tell us what you are trying to do with your products and how that fits with social responsibility.

In the U.S., we have a program called Smart Spot. You will see it, for example, on Diet Pepsi. We went to the National Academy of Sciences, and some other experts in the country and developed a set of specific criteria from which we would evaluate all of our products.

We believe consumers don’t want to be told what to eat. They want to be informed on what they are eating. They want to be given the choice, and we want to have a portfolio that crosses a number of products. However, we want to grow in the area of what we call “better for you products,” ones that would be Smart Spot eligible. Over 40 percent of the U.S. products today are Smart Spot eligible, and they are growing at close to three times the growth rate of the rest of the products.

Do all eligible products have the label?

No. That’s because they have been controversial items that we think would degrade the Smart Spot or potentially put the Smart Spot in jeopardy. For instance, the light potato chips we sell that are made with olestra oil. They would clearly qualify. In fact, in my opinion they are the healthiest products that we make for people who are watching their diets. But olestra oil had been criticized. It has been proven to be a safe product, but nevertheless we chose not to put the Smart Spot on that product. Our goal is to help consumers understand what they should eat and how our products fit into their diets.

We are doing similar kinds of things around the world. The reason we don’t take the Smart Spot around the world is that different communities determine their health issues by what’s critically important to them at a particular time. In some places, it’s fat, in other places it’s sodium, and other places it’s too many calories. Genetically modified foods are a problem in some places, not in others. A lot of it is also political. So it’s determined on a local basis, but the principle of trying to educate consumers and trying to develop healthier products is our goal.

I believe that business today has more opportunity, responsibility, and legitimacy to affect social change than ever before.

Smart Spot has had some nice unintended consequences. When that designation came out, we had a lot of brand managers who asked what they could do to get this Smart Spot. They started working with R&D to make their products Smart Spot eligible. I would like to think we thought about that before we started, but we didn’t.

Our goal is to constantly reformulate our products to make them healthier. For instance, four years ago we were the first major company to remove trans fats from our products, and we did that before most people even know what trans fat was. We invested $50 million to do this, and we didn’t talk much about it. We were looking at reducing saturated fats, but our health advisory group, under leadership of Dr. Ken Cooper, told us that the real opportunity was trans fats, so he was way ahead of his time. I read recently that people thought that we did that as a result of the labeling law. That was not the case.

Products in Schools

There is public concern especially for school-age children about high-sugar drinks and high-fat foods. How is PepsiCo responding specifically to some of those concerns?

Let me answer that in a couple of ways because this is a very important point to me. We just completed negotiation with former President Bill Clinton, former Arkansas Governor Michael Huckabee, and The American Heart Association to come up with a recommendation for schools that would be positive and helpful to these local communities. As a result, we made decisions to alter the products we sell, and I think we came up with a very good compromise. I say compromise because when you talk about what’s right for kids, everybody has a point of view — even people who are uninformed!

The real issue is getting the public to realize that obesity is not a simple issue, and there is no silver bullet. This is a social issue that has tentacles into all aspects of our culture and it’s among the top issues, relating to the future success of not just the United States, but most developed countries and even undeveloped countries. There are two fundamental schools of thought on dealing with this issue. One is legislation and dictation; the other is choice and education. I am a big believer in choice and education. People don’t want to be told what to do, they want to be educated. Anybody who ever was a kid, or who has kids, knows that taking things away is not a way of achieving lasting change on things like nutrition. I believe education and reinforcement is the right way to do it.

We don’t make our money from vending machines in the schools, so that’s not the issue. When I was in school, I went to school in the morning and took my lunch in a bag, ate the school lunch, or didn’t eat. We didn’t go off campus at lunch. We didn’t have vending machines.

It happened at different times in different parts of the country, but in the ’70s, in deference to the challenges in the schools, the school systems allowed students to go off campus at lunch. It never should have happened. Immediately things started to happen that any good educator would have predicted, like drugs and alcohol and truancy.

Educators did not make these decisions, parents and politicians did, but the educators had to solve the problem. The educators put vending machines in the schools to try to bring the students back. When I spoke to the National Governors Association recently I said, “If the governors stood up and said we can close the schools and take them back to the ’60s and the ’50s in terms of nutrition, we would be the first people to support them, because that’s about education.”

But that isn’t going to happen. I think the next best solution is education and teaching high school students — who are old enough to vote, old enough to drive, old enough to go into the service — what a good diet is. Let them have the choices in school that are here today and hopefully they will become better decision makers when they graduate. Furthermore, only 1 percent of the caloric intake for an average student comes from what they get in the vending machines in schools. So taking vending machines out isn’t going to solve that issue.

Again, business has a big opportunity to make a difference. We know how to market, like it or not. We can figure out how to help people learn how to have the right diet, and we are spending a lot of time and money on it. We have programs for school food-service people about how to create the right environment and how to teach kids to eat right. The first time we offered it, the line was so long at our booths that we ran out of materials. There’s such a need for that kind of material.

The Role of Technology

How has technology changed the nature of your business over the last 10 to 15 years?

We are in the process of implementing a new system across our companies. It is a five-year journey using SAP to bring access to information all across our company. It requires a lot of committed, smart people and requires the whole organization to be involved in it. Clearly, the kind of information we can get today to run our business is dramatically different from what I remember as a young associate. Every morning, I can get the sales reports on many of our customers from the previous day, and we have that data available in most of our businesses every day.

Does this data help you run your company better?

It certainly does. In Frito-Lay, for instance, go from seed to shelf. We develop the seed that goes in the crops, and we actually go all the way to putting the products on the shelf. So having these systems, we will understand the supply chain better and be able to manage it better. We were one of the first companies to develop hand-held devices back in the ’80s that were used by our sales people to manage their inventory. Now we are way past that, but those are a few examples. We know where our trucks and trailers are all over the United States, so we can more effectively manage them.

Managing a Global Business

I heard Jack Welsh few years ago make the comment that there are three ways of thinking about global business: selling products around the world; making products around the world; and creating products around the world. PepsiCo has been selling its products around the world for a long time and I assume also making them around the world. But are you drawing on the ideas of the world in creating your products?

I had not heard that distinction before, but I certainly agree. In our case, we are forced to do that. We could not ship low-cost products very far because of the quality and the cost. So, all of our products were developed within the countries in which we sell them. We have very little export/import of finished goods. We do have some export/import of raw materials in some cases. Before we could sell potato chips in China, we had to spend several years developing the potato crop, because that’s not an agricultural product that was well developed in China. We are vertically integrated in almost every country now. For the most part we develop, make and move, and sell our products within the boundaries of the countries.

Does that mean that potato chips in China will taste different than here because they were developed with a different formula?

We try to have the basic product as close as possible to a worldwide standard. Where the difference would be is in the flavorings and the seasonings. For example, we have seasonings in China that we wouldn’t have in other places. However, increasingly what we are finding, particularly as the United States becomes more diverse, products that are successfully sold in India, for instance, become popular in the United States as well.

The key in a consumer products company is to have that balance of listening to the consumers and serving the consumers locally, but leveraging major technologies and learning to cross businesses whether it’s best-practice sharing or technology standards. We found that balance is really important and our most effective leaders around the world are leaders who are good listeners, good innovators, and flexible, to be able to take these things back and forth.

Dealing With Corruption

There are a lot of issues when working internationally, especially with developing nations, where bribery, child labor, or other forms of corruption are practiced. How does PepsiCo deal with these kinds of turbulent environments?

That’s something we talk about and think about a lot. In the end, we are not going to do business in a place where we think the standards would cause us to do things we are unwilling to do. But I have found that for the people who make, move, and sell our consumer products, the values are more universal than a lot of people want to believe.

Let me give you this as an example: A few years ago, when we developed the value statement I talked about earlier, I decided to take a tour through Asia and South America to have some sessions where we could talk about these values. The values resonated, and I found more enthusiasm for them in other parts of the world than at home. My philosophy is that you can come at your values any way you want, as long as you understand they are nonnegotiable and they are real. For me, I commit the values from my faith and my spiritual beliefs, but that doesn’t mean you couldn’t come at these from other places.

We will be held accountable for the laws of the future not just the laws of the present.

I have had the same experience, talking about business values on almost every continent. But it is how the values get worked out that can become tricky. For example, a payment to move goods through the customs might be thought more like a tip than a bribe in some places. American companies must abide by the Foreign Corrupt Practices Act, so you have to walk the line between values and practices.

A company can’t operate on values only. You have to have some substantive rules, but you can’t have rules alone either. American business people and politicians need to get a better understanding of how we interpret our values in this set of rules. We are going to live by these rules, but must respect other people who have different rules.

Influencing Government Policy

What is the role for PepsiCo in influencing government policy, both here and abroad?

Business has a responsibility to have a seat at the table, and that seat needs to be carefully crafted by having complete knowledge, as complete as you can, of the situation and representing your own point of view in a thoughtful way. To do that, we restructured our leadership team. We have a general counsel now whose role is only about 49 percent law and 51 percent social policy. With a place at the table, we can help come to the right answer on issues that have business and social impact. Larry Thomson, our general counsel, has background in both the private and public sector, and he is a great listener. He is at the table and his people are at the table all around the world. We like to engage our critics as much as we do our friends, because frankly we learn more. It can be a constituency in government or an NGO (non-government organization) or any number of other constituencies around the world. Increasingly NGOs are having more and more impact on the policies that are being made, particularly in developing countries. They deserve a voice, and we deserve voice in these discussions.

Next Generation of Leaders

Are you hopeful about the next generation of leaders?

We want to have profit with a purpose, and our people want to get involved.

I am very hopeful. I have two children in their 20s, and I love to talk with them and their friends and give them whatever advice I can — but also to listen to them. I would say there are some common traits in today’s best and brightest that I see on college campuses, and I don’t mean just in the United States. I met some Chinese students at Chinese universities recently, and I think it’s true around the world that the best and brightest have a more holistic view of their impact on society today than my generation had at the same time in our lives. And that’s good. More and more people who are considering positions in the private sector are doing due diligence to join companies they believe can help them fulfill their calling. They want to accomplish multiple aspects in their lives, and there is more interest in family and participative parents than in my generation.

Advice for Young Business People

What advice do you have for young people going into business today?

I get real tactical on this advice. I believe in the future; continuity is going to have more value in the individual’s careers than it has in the generation we are in. There are a lot of reasons for that. That’s a switch from what students are hearing today, which is have five jobs in five years; you will get a pay increase each time, and will be making “X” amount of money by the time you are 30. You can still do that, but I believe that the people who are going to lead companies in the future are going to be much more tenured people. When you have grown up in an organization and are sitting in the corner office, you know what will happen on the frontline when you as CEO make a decision. You are going to make better decisions than someone who is coming from another industry. I advise young people to think long and hard about the company they might join. You may not stay there, but don’t join it with the idea that you wouldn’t stay there.

I also encourage students to develop their own set of principles of what a great leader is. We all have our models. I started developing mine years and years ago. You need to know what you want to be and what you want to judge others to be.

Thirdly, I encourage young people, particularly MBA students, to use the years in school to figure out what success is. Get as clear about that as you can before you get out into the world. You are investing an enormous amount of money both directly by paying those huge tuition bills, and indirectly by not working. Use that time not only to get an education, but also to measure yourself by this success definition. Then surround yourself with a group of people who will hold you accountable for that. If you can do those things, your time in school will be more valuable. Once you get into a job, there is a frightfully little time to sit back and think about these things.

I am doing my dissertation research on MBA internships and what constitutes effectiveness in that environment. I interviewed 140 people in MBA programs at Kellogg and Carnegie Mellon, and asked them just before they started their internships, “What are your career plans?” Most frequent answer: “I don’t know.” They didn’t know what success was.

About four years ago, we developed a Leadership Development Program (LDP). I have personally been managing this program. We hire people who we believe have the capabilities to run a business for us and potentially become CEO. We bring them in to work between the first and second year of their MBA. If they are invited back, we guarantee them a three- to five-year career path to a general-manager role. So this is a highly sought-after program, and I spend a lot of time with these people. We only have 10 in the program now.

I advise young people to think long and hard about the company they might join.

My wife and I had dinner with a woman and her fiance recently and spent the whole evening with them. She runs a $90 million business for Frito-Lay, with responsibility for 400 people. They have decided what success is for them, and she states that issue clearly and concisely. I believe people should start in the first internship year, asking that question about success. This woman had done so, and it shows. I think 10 years from now we will be able to tell whether our LDP was a success or not.

Becoming Truly Multinational

Your new CEO, Indra K. Nooyi, is from India. Did you regard having a CEO from another part of the world as a milestone in the development of your multinational company?

I would start by saying that ultimately if 10 years from our original start, we had not had a multinational CEO, then our whole effort on diversity would have been a failure. But she was not chosen for that job because of her diversity. Indra’s success in our company over the last 13 years has been phenomenal. She has been part of major strategies for our business from the 1990s until today. She was a logical choice just from her experience base. However, that she is multinational will clearly be helpful. She will make different decisions than I would make because of her knowledge of the global world.

Secondly, if someone that qualified were not selected, one would have to say, “Are you serious about the diversity effort?” She gave a signal to the world that PepsiCo is a place where competency is valued first and foremost. They had an array of candidates that represent the population, and the most qualified person was selected. In this week’s Business Week, we were mentioned as the smoothest CEO transition for 2006.

Maintaining Personal Accountability

As I’ve looked at some of the scandals, it seems some CEOs have gone off track and become isolated. It’s almost like they had no one to hold them accountable. Who holds you accountable?

I have been fortunate in a couple of ways. My wife is probably the one who has the most influence on my short- and long-term actions, and I am grateful for that. I have a couple of close friends whom I have been able to use as counsels on a proactive basis, and ones who have, on a reactive basis, held me to task on things. I have a long-time friend and pastor who has been helpful to me. I have also been very fortunate to have enjoyed a very, very good board of directors who has been supportive, and also committed to making sure that the business is run in a way that would make us all proud.

Retirement and Next Steps

What went into your decision to retire and what do you hope to do professionally after you retire?

It was the hardest, as well as the easiest, major decision that I have ever made. Hard because, although I never set out to be the CEO, it was the best job I ever had. I loved it. The professional challenge of it has been spectacular and has far exceeded what I ever would have imagined the job to be.

I believe in 10 years, continuity is going to have more value in the individual’s careers than it has in the generation we are in.

However, I realized over the last couple of years that the sacrifices my family was making didn’t work in the balance of what I wanted in life. So I made the decision based on that, not knowing then or even now what I will do professionally.

I know what I will do personally a little bit better than I do professionally. I want to be home six out of seven nights a week. My youngest children are 13. When my older boys were that age, I was running Frito here in Dallas and I traveled, but I was home most of the time. I seldom missed their games. In this job, I was gone a lot. Anticipating the next five years ahead with these younger children, was not a trade off we wanted to make. After 32 years of marriage, my wife is more important than anyone. It’s too easy to lose time with the people you care most about, and time with her was getting squeezed. I am grateful that I have 13-year-olds because I probably wouldn’t have made the decision had it not been for them, though I should have made it anyway.

I am very comfortable now, three months later, that I made the right decision. I am excited about the future, but don’t know professionally what it will be.