Pepsico the corporate citizen by Institute for Competitiveness

PepsiCo: the Corporate Citizen “The real voyage of discovery consists not in seeking new lands, but in seeing with new eyes.” - Marcel Proust, French novelist

ynics and critics of business have a field day in these ever-changing times, readily pointing fingers at businesses (see Exhibit 1). All along, the positive-minded corporates march forward, like baseball batters who face the fury of pitchers in real time. Pleasantly, the spectators come to watch the batters and the pitchers, not the vain critics. In the bedrock of this truism, corporates have been steadily growing beyond the profitability concerns of their firms, integrating in their processes interests of the environment, of the workforce, and of the mankind in general (see Concerns of people in Exhibits 2a, 2b, 2c). Welcome to the world of corporate citizens: aware of their rights, pushing realization of their potentialities, while being conscientious of their duties (Exhibit 3 delineates a framework for Corporate Social Responsibility [CSR] trends while Exhibits 412 explore opinion shaping and business effects of CSR related themes). This is a world where the scrupulous corporate is stretched into thinking innovative and progressive initiatives to carve newer sustainable competitive advantages in a world where the media scrutiny is heightened, the consumer is exercising choice in favor of environmentally-tuned products, and the regulatory pressures are mounting day by day. This is an evolving world with ever new challenges emerging at a rapid pace. Amongst the responsible corporate brands of our ever changing world, PepsiCo has always held a position of pride. Immense foresight and endeavor over decades on part of PepsiCo’s leadership and staff has brought this position in being. To grow further, this company has to constantly evolve to newer dimensions, for this pursuit is essentially characterized by dynamic responsiveness. This ambition to set higher benchmarks has created new dialogues within the company – between the corporate communicators and the brands, and between the various stakeholders like employees, suppliers, customers and communities. As these key groups have opened up their lines of communication, new ideas and products have sprung forth, foremost being the reckoning of the triple bottom-line: economic-social-environmental. Consequently, the PepsiCo senior executives have today a heightened comprehension of how to proactively address “corporate responsibility” related concerns of the corporation and the community at large. The focus is to ultimately address and create enhanced connect and trust through various relationships between the company and its multiple stakeholders. The sustainability of customer value is emerging as a priority, resulting in scrutiny of the internal processes that deliver the brand promise, and of the behavior of staff that naturally embodies brand values. Thereby the role of employees in building and maintaining customer relationships is being seen as one of paramount importance. The firm’s network of suppliers and partners is becoming an explicit part of the add-value proposition. Finally, the company is reaching out to all external stakeholders including investors, media, and local communities to understand their

Professor Amit Kapoor of Management Development Institute, Gurgaon prepared this case for the campus engagement program of PepsiCo International in India. You can contact Professor Amit Kapoor at amit@amitkapoor.com. No part of this publication may be reproduced without the permission of PepsiCo International. For copyright permissions and publications related queries kindly write to pepsicoindia.beveragestaffing@intl.pepsico.com.

needs, concerns and work to address them better and this is turning out to be an exciting and interesting forward movement. In these times of flux and chaos, a reasonable self-introspection and periodic review is a trigger towards excellence especially focusing on modalities of how to raise the bar in setting higher standards towards duties towards environment; what short term and long term strategic initiatives would exceed expectations of customers and public at large; what renewed priorities to focus on; doing more of what activities; doing away with which ones and innovating on what fronts. The World of Corporate Social Responsibility Jack Welch said in 1999 after extolling the virtues of legitimate profit-making, "these times will not allow companies to remain aloof and prosperous while the surrounding communities and society decline.” Proctor and Gamble in their advertising campaigns for selling diapers also bring attention to the salient role mothers play in our social fabric. Were a narrow focus guiding them, they could have focused only on the product features; instead the company endows the necessary dignity society must attribute to the sacrificial and caring role of mothers, allowing that exalted and self-esteem replete status this role demands. This endeavor in turn sets a deeper bond with the mothers who are customers too. Microsoft funds social well-being through major activities in education, health improvements, HIV/AIDS eradication programs etc. world wide. Long known for its adherence to business ethics, Tata’s, the largest private sector employer in India has community initiatives: a feeling of healing funded by Tata Trusts, the Foundation for the Revitalization of local health; involved in developing tribal communities around Jamshedpur in India; having started the path-breaking Social Audit Report. Apollo tyres in India provide general and sexual health services for truckers, besides promoting an NGO Umeed through funds and gifting tyres for its vehicles. Wipro has been promoting the “applying thoughts” crusade in schools. Cisco supports overall networking talent capacity building through its academies. Using CSR strategically, beyond the “feel good” factor is what is exemplified by Toyota. To address public concern about auto emissions, the company used its technical prowess to develop the hybrid-engine Prius. This car significantly reduces pollutants and has given Toyota an enviable lead over rivals in hybrid technology. In all these focused drives, the driver is suitably integrating business sense with concern for extra-organizational space. When conceived ingeniously, such drives that show care for environment and people, have the potential of increasing profitability to higher planes. For these drives provide better linkage with the current and potential customers, creating touchpoints hitherto not fully tapped. In these “happening times” for environmental management related issues in India, the benchmark brands are across most sectors: FMCG, IT, Chemicals, even Banking. Studying these, one can see how best to integrate social good with their business goals: targeting key business components, choosing focused causes with linked messaging planks, sustained efforts over time, with sound investment patterns. Triple Bottom-line Focus (economic-social-environmental) is a highlight of board meeting discussions, not a mere living room deliberation. Strategies born out of an organic wedlock of the three facets of economic objectives, social effects and environmental-ecological impacts are not only more potent than purely economic-ends-isolationist ones, they alone are the need of times. This is the next evolution stage, just like marketing has traditionally been seen to come through stages of the industrial age era production-focus, followed by product focus, selling focus, marketing focus, with the last leg having been societal marketing. 2

Brand-imprint movement at HUL seeks adding vitality to life, meeting everyday needs for nutrition, hygiene ad personal care with brands that help people feel good, look good and get more out of life. Nestle focuses on “Good Food, Good Life”, entwining Taste and Health, driving programs of technical assistance and education for farmers. It is also into energy conservation. Infosys has come to signify huge trust from stakeholders, boosting employee visibility and satisfaction through multiple programs, most noticeable being advertising campaigns on identifying the company with a specific employee randomly chosen. It is deep into grooming youngsters for future careers, besides driving general healthcare, rural upliftment, social rehabilitation and nurturing art & culture. ITC, stigmatized by dealing in tobacco products, is seeking to bring in the spirit of putting India first, ahead of the interests of the corporation. It has led in rainwater harvesting, afforestation, preserving national heritage, innovative e-chaupals and rural education through cause marketing. Strategic import can be seen in the fact that ITC has diversified into multi-products multi-domains, with no cross-over of its tobacco products perceptions rubbing wrongly its other domains and brands. The climactic bombshell ITC is facing is the ban on smoking in all public places effective October 2, 2008. ITC has tried to log its protests, mostly surrogate or muted ones, trying to defend the right to choice of its customers. Whereupon, public at large, at least the sect opposed to smoking, has begun to see a dichotomy in ITC’s CSR initiatives. Public expects that if a company embarks on CSR, it needs to ensure that its other actions are also aligned with the same (read CSR) agenda. Any confusing signals on this count would amount to blurred and obfuscated positioning of the company in people’s minds. Asian Paints is working at creating progressive change across the communities within the influence of its operations and beyond by initiating implementation of rain water harvesting in several housing societies and corporates, by introducing mobile medical units for the elderly, and bringing in health and infrastructure facilities in schools around its plants in Tamil Nadu and Gujarat. ICICI Bank’s social initiatives groups have identified three areas - child health, elementary education and micro-financial services. They have also set up an ICICI Foundation where the focus is to make markets work for the rural and the poor. Besides, corporates have emerged as pillars of strength in times of national calamities. DHL has offered its services as the official logistics partner in such disasters. Gati has adopted families from tsunami hit villages for employment on its rolls. Relief in truckloads has been conveyed by PepsiCo and many other corporates to flood-affected and earthquake hit regions. Governments too have begun looking forward to active collaboration of aid resources in such moments of crisis. All this not only proves that corporates, like the good Samaritan concept in France, are keen to share their wealth with regions in need; it also shows how corporates appropriately protect and nurture the markets. The engagement with customers is enriched onto firmer emotional bonding. Rising to occasion in such times of frail emotionalities and imperiled existence couples very well with the steady peace-time initiatives. Pizza Hut has begun the practice of having Rs. Ten per invoice to be billed to the customer for charity towards fighting Hunger; this is an optional billing which allows the willing customer to feel good while she and her group have food themselves. All this CSR activity builds trust, which is under attack when the brands, in their life cycles, sometime or other come under attack. A controversy can either be a marketer's worst nightmare or her greatest blessing. Blessing because the controversy and subsequent consumer curiosity may turn out to be an opportunity for an increase in sales. Nightmare 3

because it threatens to damage the credibility of the brand. These include Cadbury's having to fend off accusations of worms in its chocolates, McDonald's of beef tallow in its fries, KFC of monosodium glutamate (MSG) in its products, and even Johnson & Johnson for the alleged presence of harmful chemicals in its baby products. KFC entered India in 1995, but a controversy surrounding the levels of MSG in its preparations and subsequent protests from farmers' groups and animal rights activists spelt trouble for the company. Ultimately, the company had to shut all but one outlet in the country. Only recently it made a quiet re-entry into the Indian market. Even in international markets, controversies have been known to wipe out brands. Coca-Cola, for instance, had to withdraw its newly launched bottled water brand, Dasani, in the UK in 2004 after it was found to contain higher than permissible levels of the chemical bromate and the issue snowballed in the UK press. However, in a situation in which consumer-connect with a brand already exists, what is the best way out for marketers when faced with a controversy threatening to go out of control? "The best way to respond is to come upfront, meet the problem head on, be transparent, recognize the problem and importantly, be seen to be taking utmost care and corrective action," says Sam Balsara, Chairman and Managing Director, Madison Communications. It has been observed that established brands do better with controversies, and far more quickly, if they are perceived to be taking corrective measures. This could be noticed in the case of the Cadbury's controversy three years ago, in which some of the company's chocolates were reportedly found to be infested with worms. Following this, Cadbury went into overdrive to inform consumers how improper storage may result in such things happening. Further, the company improved the packaging of its chocolates and also focused on altering the way they were stored across the retail outlets. It also launched â&#x20AC;&#x153;Project Vishwasâ&#x20AC;? to educate retailers about improving storage conditions. Even the company's advertising at the time sought to assure consumers that with the new packaging, its products are totally safe. This all strengthened its CSR agenda by commitment to environment and enhancing community value. In fact, corrective measures are known to quickly help in rebuilding a brand's credibility as the high incidence globally of product recall and subsequent replacements shows. In such cases, the challenge for companies is to create the perception that they are taking care of the consumer's interest first, rather than their own. This can be seen in the famous case study of the Johnson & Johnson Tylenol controversy which hit headlines in the US in 1982. After it came to light that several people in Chicago died after taking cyanidelaced capsules of the pain reliever, Tylenol, the organization took the decision to recall all Tylenol bottles and introduced a new tamper proof pack at a huge cost rather than disown responsibility for the tampering with some of its medicine samples. They had also proactively set up a communication link with consumers through the media educating them about the entire issue. The company was lauded for its transparent and swift reaction, and was able to regain market share in a short span of time. In the global automotive industry also, for instance, product recalls are an increasingly regular feature. However, they do not appear to affect the core credibility of the auto brand in question. Millions of vehicles have been recalled by automakers such as Nissan, Toyota and Ford. If anything, a recall can even work in a positive manner by showing that the brand cares about the customer. Further, recalls can even save a brand from potentially more harmful controversies. "The best way to handle controversies is to not allow them to develop in the first place. And if, because of external factors, a controversy does occur, the issue should be faced directly. Further, as a brand stands for 4

trust, it makes sense for the company to focus on the credibility and not the celebrity aspect. The celebrity should not be the base and credibility the icing, but the other way round," says Jagdeep Kapoor, Chairman and Managing Director, Samsika Marketing Consultants. In other words, a brand can't hope to rid itself of a controversy by ignoring it or hoping that its celebrity brand ambassador can pull it out of trouble. Kapoor adds that an escalating controversy could hint at larger issues of brand trust and perhaps even a lack of confidence building between the company and the consumer. "Controversies come up when there is a difference between the actual and the perceptual image of the brand. The attempt of the brand manager should be to reduce the difference between the two to the minimum by engaging the consumer. When there is a gap, then issues related to either credibility or even incredibility come up. Further, treat the relationship between a brand and the consumer as that between two people. Thereby if a controversy does break out, the company should directly interact with the consumer," he says. The interaction should be done through on-ground activities rather than through the media or advertising. Of course, certain brands tend to be more susceptible to controversy than others, say marketers. "The bigger MNC brands are more likely to court controversy, as anyone can point a finger at them," says Balsara. Further health-related controversies, which affect FMCG and Pharma brands the most, are more likely to balloon into major issues. While there is no ideal way to respond to such situations, most marketers are in agreement that when the controversy is on a nationwide scale, ignoring the issue and waiting for the controversy to blow over is not the best strategy. But it’s a call the company in question will have to take. At times the damage is too daunting, as in the case of Bhopal gas leak tragedy, where thousands died due to Union Carbide’s plant gas leak. The subsequent legal wrangling etc and delayed disbursement of compensation has caused tremendous irreparable damage to the corporate brand, though the product brands are virtually unscathed. In Allan Greenspan’s words, “the greatest asset of any corporate is its brand equity, which is built over years and years of trustful dealings... it is irrational and impractical to think a corporate would jeopardize its trust for mere temporary benefits.” Societal responsibility by corporate strengthens its trust bond with customers and public. Recognizing this dynamic, it is imperative corporates genuinely and intelligently craft their CSR agenda, any non-challance in this pursuit would not only make such a corporate a laggard, it might cripple its functionality as a profitable entity. CSR also enables winning the war of extraordinary talent - talent which has finer sensibilities and an evolved sense of responsibility towards world issues. A meaningful CSR agenda strikes a chord in the hearts of talented people who can be the future workforce with a corporate. There is a need however to surge beyond the defensive and the mere compliant, onto sure-footed management and strategizing of CSR, further collaborating collective action. Identifying with CSR initiatives of the employer provides selfactualization satisfaction to employees, active participation in such activities adds spice to ennui of office-bound work, and gives a fillip to the employees’ identity in their community at large. Additionally, vendors and suppliers too feel themselves contributing to a larger sense of society. Vendors’ trust with a corporate, based on engagement in serious CSR programs, lends higher credence to transparency perception of the corporate.

Fundamentals of PepsiCo PepsiCo (NYSE: PEP) is one of the world's largest food and beverage companies, with 2007 annual revenues of more than $39 billion. The firm has strong market positions in its soft-drink, sport-drink, and snack-food businesses. The company employs approximately 185,000 people worldwide, and its products are sold in approximately 200 countries. Its principal businesses include: Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. The PepsiCo portfolio includes 18 brands that generate $1 billion or more each in annual retail sales. The company’s international business generated around 40% of sales and 26% of operating profits in 2007. PepsiCo: the Global Corporate Citizen PepsiCo's commitment to sustainable growth, is focused on generating healthy financial returns while giving back to communities the company serves. This includes meeting consumer needs for a spectrum of convenient foods and beverages, with environmentfriendly initiatives on water, energy and packaging, and supporting its employees through a diverse and inclusive culture that recruits and retains world-class talent. It exists to accelerate top-line growth while transforming the portfolio to meet consumers' ongoing snacking, thirst, refreshment and hydration needs. This spirit has always characterized PepsiCo’s presence. Ms. Indra Nooyi’s appointment as Chairman and Global CEO in 2007, has further charged up this spirit, CSR at PepsiCo has acquired a whole new meaning, and a fresh vibrant face has been given to the CSR agenda. Significantly, the 'Performance with Purpose' coinage and pursuit is shaped by her, thus energizing PepsiCo into re-positioning itself as a corporate model to conduct business worldwide. Naturally, this vision is being translated across ranks within PepsiCo and to the world in general (Exhibit 13). PepsiCo has a three pillar approach (see Exhibits 14-16), which has been integrated in line with global benchmarks: • Human Sustainability: Nourishing consumers with a range of fun and healthy products, and making the healthier choice the easy choice. This has included drives to offer a wide ranging portfolio of products to cater to various consumer choices, initiating nutrition timelines, bringing forth the concept of health and wellness partnerships, transparent well-informing and ethical product labeling, concern for food safety, developing dynamic and responsive consumer and customer relations constantly seeking the valuable feedback, working towards consumer privacy and enacting a sound and ethical advertising code. • Environmental Sustainability: Replenishing the environment, and working toward a netneutral impact on the environment in which PepsiCo operates. Fructification has been seen of an overall commitment, environmental sustainability timelines, evolved industryspecific metrics to keep tab of progress, efficient management and monitoring mechanisms, with installation of capital expenditure filters, framing a progressive environmental policy, fostering education and awareness on this theme, striving on all fronts of water, energy, packaging and waste, focusing on amelioration of agriculture environment, and declaring and winning environmental honors. • Talent Sustainability: Cherishing employees, and making PepsiCo the most desirable place for people of all backgrounds to build a career. This has emanated out of an overall commitment to talent, engendering diversity and inclusion across gender, challenged groups and minorities, conceiving numerous benefits, working for health and 6

safety, devoting resources towards training, vigilantly working for human rights, developing synergistic relationships with suppliers and rolling out multiple formats of talent honors. In recognition of the company's economic, environmental and social performance, PepsiCo has been nominated to the Dow Jones Sustainability World Index (DJSI World) for the second time and the Dow Jones Sustainability North America Index (DJSI North America) for the third time. DJSI World identifies companies that exemplify leadership in sustainability among the leading 10 percent of the world's top 2,500 companies and DJSI North America identifies those companies that exemplify leadership in sustainability among the largest 600 North American companies. The World Index reported that PepsiCo held the industry's leading score for corporate governance, code of conduct (see Exhibit 17) and compliance, and brand management. PepsiCo was awarded A+ for its corporate governance practices by Forbes. PepsiCo’s business strategy and affairs are overseen by its Board of Directors. The Board of Directors has three standing Committees: Nominating and Corporate Governance, Audit and Compensation. The Board of Directors has 12 independent outside directors and three inside directors. Members of the Board are kept informed of the Company’s business through discussions with the Chairman and Chief Executive Officer and with other key members of management, by reviewing materials provided to them, by visiting the Company’s facilities and customers, and by participating in Board and Committee meetings. The board truly effects an earnest following of win and retain Trust paradigm. PepsiCo strives to continuously improve its environmental programs and find solutions to its environmental challenges. In 2007, for example, the company saved nearly 2 billion gallons of water through conservation programs and made a landmark purchase of Renewable Energy Certificates. Such water conservation efforts enrich the environment significantly, adding to quality of living and comfort of the locality. "Acting as a force of good in the world is at the very core of our values," said Indra Nooyi. "PepsiCo is committed to achieving business and financial success while leaving a positive imprint on society -- delivering what we call Performance with Purpose. This recognition is the direct result of the personal commitment of thousands of people across PepsiCo working to operate in a responsible manner and address critical challenges facing our world." Values: PepsiCo’s commitment is to deliver sustained growth, through empowered people, acting with responsibility and building trust. Sustained Growth is fundamental to motivating and measuring its success. Its quest for sustained growth stimulates innovation, places a value on results, and helps it understand whether actions today will contribute to its future. It is about growth of people and company performance. It prioritizes making a difference and getting things done. Empowered People means the people have the freedom to act and think in ways that will get the job done, while being consistent with the processes that ensure proper governance and being mindful of the rest of the company’s needs. Responsibility and Trust form the foundation for healthy growth. It’s about earning the confidence that other people place in PepsiCo as individuals and as a company. This responsibility means taking personal and corporate ownership for all it does, to be good stewards of the resources entrusted to it. It builds trust between its own and others by ‘walking the talk’ and being committed to succeeding together. 7

Background of PepsiCo India PepsiCo looked at entering into the Indian market in the early 1980s. The entry was against a backdrop wherein foreign participation was limited to 40% of the venture equity. PepsiCo did face stiff resistance in India at that time from the opponents of foreign firms entering the local markets. The opposition was led by Captains of the industry who fanned patriotic sentiments against foreign investment. PepsiCo‘s task was however made easier because of the balance of payment crisis India was facing at that time. This time over the proposal was denied on the grounds that PepsiCo would be detrimental to Indian Soft Drink manufacturers. In 1986 PepsiCo submitted a second proposal. This time over, the permission was granted and PepsiCo started its journey towards capturing one of the nascent beverage markets in the world. PepsiCo had an exceptional start in the Indian market with a leading market share in its pocket by 1994. It was post 1994 when the effects of liberalization and deregulation started having an impact on the spending ability of the Indian consumer that the market started catching the fizz. PepsiCo in 1994 moved into strategically capturing the Indian market and increasing volumes in the growing Indian market. PepsiCo volumes grew at a double digit CAGR for the period 1994 through 2006. The volume growth that was seen was a result of distribution expansion, setting up of plants and adding talent. The ramping up of infrastructure was one of the primary drivers of growth over the years. Beyond the growth and challenges are some very interesting facts about PepsiCo in India. In 18 years of their operations they have become one of the largest FMCG in India, employing over 4000 people directly and over 1,50,000 indirectly. The brand Pepsi exudes confidence with being ranked as the most trusted beverage brand in the 2008 survey conducted by Reader’s Digest. In addition Brand Equity's annual survey of the Most Trusted Top 100 Brands has ranked Pepsi amongst the top 20 Most Trusted Brands across categories in the country this year. Brand Pepsi is ranked 13th across panIndia brands and is the only beverage brand in the Top 20 bracket (Exhibit 22&23). PepsiCo’s success in India could be attributed to the four pronged strategy i.e., building a winning image, building blocks for market leadership, building high quality management capabilities and controlling its destiny. This is to be accentuated by the fact that PepsiCo has always invested strongly for the future with investments in R&D, infrastructure and capabilities. Through all these, PepsiCo has been strengthening its commitment towards current and future Corporate Social Responsibility. Challenges for Industry and for PepsiCo India It would be an understatement to say that the world is going through a period of unprecedented uncertainty. Patently, this uncertainty isn’t limited to the economy alone, it is hitting the very fundamentals of political, civil, and social landscape. In this context of evolving landscapes, the cola industry and PepsiCo in particular, are beset with loadfuls of long-term and ever new challenges. Combating these successfully requires strategic thoughts and actions: I.

Image of MNCs: India was under British colonial rule from early 17th century to August 15, 1947. The trading company East India Company, under Robert Clive, entered under the garb of commerce but eventually fulfilled political acquisition. Naturally, most population in India has been fed a general distrust towards an MNC. There was a spree of building self-reliance post 1947, founding Public Sector Units, with 8

nationalization waves of banking, and even asking MNCs to exit. In today’s world however economic realities are the key primer of global activities. Appreciation of this and other compulsions forced India to liberalize and globalize 1991 onwards. Nevertheless, many NGOs and many anti-capitalist stance dominated political parties have frustrated growth of MNCs in India. True, many a times big corporates are unethical and obsessed with greed, but a few such fly-by-night-operators have made populace defensive against all MNCs. Willy-nilly, PepsiCo being an MNC has to necessarily combat this cynicism. Here, it has to confront not a comparative identity with other organizations, it is an absolute fight of proving MNCs are value adding and nation building. II.

Pesticide Rattle: It was a rattling experience for Cola industry in India, when it was accused of serving pesticide infected beverage to the masses. This was in 2003, and then again in 2006. The pesticide controversy created a negative image of Cola products in the mind of the consumer. Huge hue and cry on part of NGOs and media resounded even in the Indian Parliament. Not surprisingly, cola sales declined by 30 per cent the first time the cola controversy broke, and sales came down by about 15 per cent the second time around. But the major worry is not the immediate but potentially long-term damage that the controversy may have caused. The challenge mitigated to the level wherein Cola giants launched a consumer education campaign about the safety of the products. The Indian Soft Drink Manufacturers Association condemned the false claims and said that 'soft drinks are completely safe'. There was eventual vindication by most scientific of tests as to the safety of and quality standards of the products. Thus the public was eventually won by communicating the true facts of the situation and via suitable consistent communication. However, the corporate leadership began to wonder as to how it could insulate the company from such brand damaging events. Risk management began with taking stock of certain dimensions. Efforts were rolled out to align the public at large and even the legislators onto faith in the quality processes behind the products. It was realized that the company’s social and environmental impacts, as well as the short and long term impact of its product fed directly into stakeholder perceptions. It was seen essentially as a matter of trust and important to carve out a long term strategy that positively impacts all the dimensions.

III. Health and Wellness: PepsiCo, significantly, had to contend with the controversy being identified almost entirely with its cola brand Pepsi. This makes PepsiCo’s challenge of creating positive goodwill tougher as PepsiCo products are seen as one of the causes of obesity if not consumed in moderation. A mass-appeal yoga guru has equated cola with “only fit for washing the toilet”. Email forwards talk of high pH of cola drinks, so much so that, a hard human tooth too would dissolve in it. The heart of the problem lies in the fact that consumers and key opinion leaders have little or no knowledge about the portfolio transformation agenda that is being led in PepsiCo. In 2004, healthy products including packaged water contributed to 12% of volumes. Today in 2008, it stands at 25% of total volumes. Given that India today has a rising incidence of diabetes, stress and heart related diseases, medical fraternity, nutritionists and educationists are all concerned about inculcating sound dietary and healthy lifestyle. In this context, PepsiCo is incorrectly perceived as luring young consumers with high decibel of attractive advertising.

IV. Environment: This is a multi-textured challenge, needing an addressing of Packaging Waste and Water Table depletion. Water table is getting depleted around cola plants is the accusation of many NGOs. Further, it is accused that this water is being impregnated with harmful pesticides and chemicals. The allegations talk of large water debits from the ground water table and due to lack of knowledge no water credit is granted to PepsiCo. However the real status is far from these insinuations. PepsiCo has replenished water in benchmarking quanta. V. Welfare of Communities and Rural Population: Inclusive growth alone can be sustainable growth. Corporates have to take cognizance of this facet in an active sense. They cannot and must not allow widening of the divide between the haves and have-nots and should strive towards bridging the gap between the two. India has a large proportion of population residing in villages; this has to be woven into the mainstream and cannot be left away from the upward mobility the urban sector is experiencing. Similarly, various communities, of minorities, of physically challenged and others have to be integrated in markets and workforce. This throws the challenge of managing access, heterogeneity, logistics and diversity. This also requires the need to surmount the bias public and some ulterior motive driven bodies propagate that corporate is generally not bothered about these communities, that considerations of profit-making deter corporate from reaching out to “uneconomical” pockets. Eventually, the composite effect of all these challenges is exacting an ever-rising crescendo of demands off the corporate. The laggard amongst the corporate fraternity are hardly being reactive enough, the forward looking need to be proactive and set higher benchmarks in CSR activity. Besides demanding time and capital resources, innovating apposite CSR solutions have to conform to business needs of the corporate. PepsiCo has taken up the performance with purpose motif as its guiding mantra; wherein necessarily there has to be performance (economic, market share, innovation, customer satisfaction etc) to enable a sustained pursuit of purposeful initiatives.

PepsiCo India: the Corporate Citizen PepsiCo’s vision for the future is to make tomorrow better than today and PepsiCo India believes that its businesses are intrinsically connected to the communities and the world that surrounds it. To balance its superior financial performance with the ability to improve the world that it operates in, PepsiCo focuses on 3 critical planks on a global scale : I. Human Sustainability II. Environmental Sustainability III. Talent Sustainability I.

Human Sustainability: This begins with valuing the customer. Today's consumers increasingly view their spending decisions as a way to make a difference in the world. They want to see their values reflected in the products they buy and their communities strengthened by the businesses they support. PepsiCo sees itself in a good position to take on this challenge by working on various initiatives such as:

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PepsiCo is continuing with the Health and wellness movement through its product portfolio transformation by increasing more options in Tropicana juice, making 10

beverages more nutritious and also striving to reduce the impact of fat and sugar in its products. ♦

The emphasis on healthy beverage is becoming visible. It has begun to give momentum to anti-obesity drives globally and PepsiCo has been supporting athletic activities of blind at Delhi, sponsoring National cricket games for blind, and improving community infrastructure like roads and tanks.

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PepsiCo is also engaged in developing products to offer affordable nutrition to the most needy sections of society in line with their Millennium Development Goals.

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The PepsiCo foundation is deeply engaged in new partnership models which lead to healthier communities and new research insights. Last year it announced a new PepsiCo grant of $ 5.2 million to the Oxford Health Alliance for implementation and evaluation of community based health interventions in India, China, Mexico & England impacting more than 2 million people.

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PepsiCo has specifically enunciated policies and measures that promote active lifestyles and health consciousness amongst children through its ‘Get Active Program’. This is attained through multiple programs of sponsoring sports activities, adventure sports, and even scholastic accomplishments. Reengineering its product portfolio is again promoting healthier consumption patterns in the children community. Thus PepsiCo enshrines its faith in giving children a healthy growing-up experience.

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PepsiCo continues to work to ensure consistent and equitable trade practices across its customers (retail chains and bottling partners), to deliver value-added product innovation and differentiation, to achieve the most effective trade spend across customers and channels through productivity programs.

II.

Environmental Sustainability: Smart management of environmental issues is about being preventive, not merely hedging downside risks and working on this is not to be seen as an obligatory compliance issue, it goes beyond that with potential of becoming a competitive advantage. PepsiCo shares expertise and technologies that provide important benefits to communities and countries. In India, this effort spans the following major planks in this segment:

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Replenishing water: PepsiCo is in the process of attaining the zero-water balance norm and an external auditor has been mandated to audit its positive water balance process. Water sustainability is a subject close to PepsiCo global chairman and CEO Indra Nooyi. It is a way of telling the consumers that not only is there care about environment and communities, but also there is commitment to water sustainability to make the tomorrow better than today. In India, PepsiCo is using its knowledge to improve water supply in Kerala area. As part of the work with the World Business Council on Sustainable Development (WBCSD), it contributed technical knowledge to the creation of the Global Water Tool, a water assessment tool that is being offered without charge. The company has been working on water replenishment over the past five years by conserving and recycling water usage within its manufacturing processes, constructing rain and roof water harvesting structures, rolling out community water 11

projects, and hosting watershed management programs in partnership with TERI. PepsiCo has reduced water usage in its manufacturing plants by over 60%, and that has saved 2 billion liters of water in the process.

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PepsiCo India has relabeled all its products with a quality seal to put the pesticide row behind it. It has replaced all existing packs of Aquafina, its packaged water brand, with new labels announcing that by next year, PepsiCo India will be a positive water balance company. In other words, the company claims it will save and replenish more water in its plants and communities than the total water it uses in the country. India is the first country in the PepsiCo universe where a corporate sustainability initiative is being communicated to consumers through a product pack. The Aquafina pack labeling is a public declaration of PepsiCo’s commitment to positive water balance. The pack labels will also carry details of the company’s ‘replenish and restore our water’ message With the objective of involving the consumer, the pack also urges the consumer to partner with the company to ‘use water wisely so it could be enjoyed by future generations’.

In India, the Development and Rehabilitation Outreach Program comprises two pilot water – sanitation programs (in the north and south) funded by PepsiCo and implemented by The Energy and Resources Institute (TERI). Common to each of these holistic programs is the fundamental approach of engaging local communities in developing affordable sustainable solutions to improve water availability while simultaneously invigorating local economies. A wide array of education, interventions and activities, tailored to individual communities are advancing hygiene and sanitation in addition to bringing awareness of the need to and methodologies of managing water resources as a non-renewable resource.

State of the art effluent treatment plants also ensure efflux is non-polluting and eco-friendly. Thermodynamic vigilance allows having a pure and clean air around its plants.

Transforming waste to wealth: PepsiCo India continues to convert Waste to Wealth to make cities cleaner. This award winning initiative has established Zero Solid Waste centers that benefit more than 200,000 community members throughout the country. This has also been recognized by UNICEF as a model international centre. o

PepsiCo is pursuing recycling of PET bottles through informal system of rag pickers enabling collection of PET bottles and recycling these into another form thereby creating value for the rag picker community and decreasing solid waste.

The glass bottles at PepsiCo are 100% recycled, however the need to develop newer recyclable packaging solutions is imminent. It is still a grey area as to how to measure progress on this front. Criteria have to be transparency (public disclosure of policies), stability (commitment through time and not on opportunistic/ capricious basis), responsiveness (varied endeavors with changing social-economic conditions), and involvement (of people within and outside), besides others.

Partnership with farmers: PepsiCo India’s agri-partnerships with farmers help more than 15,000 farmers across the country earn more. PepsiCo facilitate seed and weather insurance for their farmers thereby reducing the risk due to unpredictable 12

weather affecting the farmer’s earnings. In emerging markets, such as India and China, its agricultural development programs have significantly improved crop yields for local farmers. For example, in China, it shares knowledge about potato farming with the Chinese Ministry of Agriculture, and it has established an advanced potato research laboratory. PepsiCo India also supports contract farming over large areas giving guaranteed buy-back basis defined quality specifications.

III. Talent Sustainability: Staff at PepsiCo has been interviewed, far and wide, by objective assessment parties. The entry level employees are characterized by thrill: thrill of hands-on opportunities to make a difference to the company, thrill of receiving steady learning, thrill of having laid a satisfying long-term career foundation. The middle management perceives job rotation and multiple job enrichment avenues as the most differentiating aspect of a career at PepsiCo. The top management has always felt supported with complete reliance on its strategizing abilities by global leadership. ♦

PepsiCo Foundation Volunteer Program: The foundation has a long history of encouraging employee involvement in the community through nonprofit groups. The Foundation’s commitment to encourage the personal contributions and volunteer leadership of PepsiCo associates includes the Foundation’s Matching Gifts program, support for United Way Campaigns, and Community Service Days. The PepsiCo Foundation matches employee gifts to nonprofit organizations through a Matching Gifts program and United Way. In 2006, Matching Gifts totaled $4,436,795 and United Way $2,880,769. Grants are made to nonprofit groups where employees volunteer. Many PepsiCo associates are active in local communities as volunteers. In addition to the wide spectrum of individual volunteer work, teams of associates often represent PepsiCo at events such as runs and walkathons to raise funds to fight cancer or HIV/AIDS and community clean-up days.

♦

PepsiCo Foundation EXCEL Awards program promotes excellence, community, education and leadership. The children of full-time employees are offered renewable scholarships with stipend ranging from 500 USD – 10,000 USD. Overall, appreciation of value of people is the underlying driver.

♦

Leadership for tomorrow initiative is providing mentoring and inculcating vision in next generation talent. PepsiCo strives to create the environment of College of Leadership that provides growth through differentiated experiences and a robust leadership development model to nurture next generation leaders (see Exhibit 18). Run as an Academy Company, it offers electives that are analogues of critical experiences that provide breadth of experience which builds capability and that gives people stretch roles. All this stimulates entrepreneurship within organization that advances it’s business goals.

♦

Retention is induced by a continual focus on leveraging diversity and inclusion. The breadth and depth of succession planning has been expanded. There is a reinforcement of the focus on managing people through an increased emphasis on people development as part of the performance management process. Processes like Internal Job Posting and Career Development Action Plan Process encourage employees to have more co-ownership in their development.

♦

While fostering an environment of excellence and performance, PepsiCo also strives to provide an environment to ensure work life balance of their employees - be it the flexi-time policy, sabbatical et al.

♦

Inclusion and Diversity are one of the Guiding Principle of employees, esp. gender diversity, has been meaningfully and seriously pursued. Best practices are being pursued, with inclusion in 40 best compliance companies. An effort to spread the change in HR policies industry-wide, the Diversity Initiative is not only facilitating the female workforce of India to join back and adjust better, but also create a platform for them to search for flexi-time, part-time, home-office and freelance opportunities with a simple click of the mouse!. The main aim is to provide flexibility so that female employees at various life stages could leverage these policies like working from a different city, sabbatical from corporate life, extended maternity leave etc.

♦

Scholarships for the gifted have been instituted. For example PepsiCo has instituted Harvey C. Russell Award. This is a global recognition by the Chairman of PepsiCo and honors those who have distinguished themselves as truly extraordinary in their efforts to help PepsiCo further its goal to build a diverse and inclusive culture. The award is named after Harvey C. Russell, who broke America's color barrier when he became a Vice President of PepsiCo in 1962 and went on to set the standard for corporate social responsibility. Eight individuals and 14 teams from across all PepsiCo divisions, along with two external partners, were honored as 2007 Harvey C. Russell Inclusion Award winners.

♦

Helpline: PepsiCo has instituted Speak Up Initiative (Exhibit 19) which is a telephone hotline. It aims to promote high ethical standards and open communication across a global organization, and ensures that employees have clear lines of communication to report potential issues. It is accessible from around the world at no charge to employees. To further ensure an environment that fosters open communications, employees may remain anonymous. The availability of the Speak Up line is communicated across PepsiCo. Types of incidents that may be reported through the Speak Up line include, but are not limited to: • Employee mistreatment • Discrimination, including sexual harassment • Product tampering • Substance abuse • Falsifying Company records • Accounting irregularities • Questionable business practices • Fraud or theft • Criminal conduct • Impermissible gifts • Safety hazards

♦

PepCare: PepsiCo has introduced PepCare’ – A Work Life Coaching Program which helps employees and their families in leading a joyful, healthy and productive life. It has partnered with Human Dynamic Asia Pacific for this key initiative. Human Dynamic Asia is a world leader in counseling and coaching and comprises a team of trained professionals from the counseling, psychology, human resources, legal and financial fields who interact with employees and respective families and offer consultation. 14

Surpassing the Competition PepsiCo vigilantly outcompetes the competition. It competes against global, regional and private label manufacturers on the basis of price, quality, product variety and effective distribution. It steadily takes proactive and reactive action to be more competitive. It is believed that the strength of its brands, innovation and marketing, coupled with the quality of products and flexibility of distribution network, allows it to compete effectively. Market risks emerge from adverse changes in Commodity prices, affecting the cost of its raw materials and energy; Foreign exchange rates; Interest rates; Stock prices and discount rates affecting the measurement of its pension and retiree medical liabilities. In the normal course of business, these risks are managed through a variety of strategies, including productivity initiatives, global purchasing programs and hedging strategies. Strategic Dynamics Ahead Over the past few years PepsiCo has increasingly won more trust, trust which is critical to market performance and shareholder value. PepsiCo’s commitment to sustainability is now long-standing and much evolved than the formative romanticizing of many other corporates beginning to get serious on this front. CSR forms the foundation of its operating strategy, bringing together what is good for business and good for the world. This makes the goal simple but the journey long. The demographics are shifting with many more youngsters forming the ranks. The media activism is reaching new highs (or shall it be called its lows). Communication technologies make it impossible to contain bad news. Public and regulatory agencies are becoming more demanding with tectonic shifting in societal expectations. A brand-centric corporate strategy has to carefully manage the brand loyalties, any switching can be devastating, and a purposeful CSR framework not only allows holding onto current customers, but fosters winning new ones. The scars of the pesticide rattle are not completely forgotten. Cynics continue to see PepsiCo products and wellness as oxymoron concepts. A journalist recently outrightly quizzed Indra Nooyi as to how PepsiCo reconciled insincerity and hypocrisy while talking of tackling obesity, flaunting fattening products like Lay’s and sugar-concentrated carbonated beverages. The rejoinder was, “Why do you think I am being insincere or hypocritical?... There is place for Pepsi, because it tastes great. Chips are an integral part of diet – American and Indian... I am extremely proud of our track record. Name me one other company that took out Trans fats from all its products without increasing the price of products – four or five years before anyone else... We’re doing everything possible to shift our portfolio to “better for you” or ”good for you” products...And we’re doing this all over the world.” The priorities under the Performance with Purpose strategy have been consistent. The focus is on driving sustainability against three priorities: human sustainability, environment sustainability and talent sustainability. These priorities reflect the many challenges PepsiCo faces: rising obesity and the need for more balance between energy intake and physical activity; food safety; water quality and scarcity; energy efficiency, emissions and climate change; increasing amounts of waste and the need for more recycling; hiring and retaining the best people and helping them achieve work-life balance; to name a few. No one person, and no one company, can solve them all. But each one 15

can make a difference, and every associate at PepsiCo firmly wants to make that crucial genuine difference. Relatedly, Indra has been quoted to say, “When I was a child in India, my mother would ask my sister and me a simple but compelling question: “What would you do to change the world?” Today, I know my answer would be that I want to lead a company that is a force for good in the world. A company that delivers good financial performance while embracing “purpose” in everything it does.” It is this sense of purpose the entire corporate group is being imbued with and it remains focused on Performance with Purpose – delivering strong business results as usual, but equally importantly giving back to its communities and its environment, more than it takes from them… to make tomorrow better than today. In this dynamic scenario PepsiCo has set specific goals to be achieved by 2010 in areas as mentioned earlier and hopes to achieve these while building stronger trust and connect with consumers, customers and larger communities in which it operates. Eventually it can be said, though PepsiCo has made considerable progress, yet it is realistic that it is a long journey and there is much more to be done. The sentiment within is that though immense strides are being taken, the business environment is much more demanding, which can be seen as an opportunity. Within the constraints of business realities, the key issue is how to accelerate the CSR activities. Now what further newer, even experimental methods can be introduced in PepsiCo’s satisfying and worthwhile endeavor of sculpting a dynamic & robust Corporate Responsibility Agenda. Answering these question paths shall take PepsiCo to be a much more trusted brand, an organization most loved and known for its products.

Exhibit 1. Issue of company’s credibility “A company is the least credible source of information.” Financial Times Reporter

Exhibit 2a. Environmental Concerns are rising

Exhibit 2b. Environmental Concerns are rising

Exhibit 2c. Environmental Concerns are rising

Exhibit 3. Relevance of CSR in todayâ&#x20AC;&#x2122;s world

Exhibit 4. Health perception on food elements

Exhibit 5. Key health concerns

Exhibit 6. The whiplash consequence of distrust.

Exhibit 7. Keeping tabs on CSR activities.

Exhibit 8. Is there “real” value addition?

Exhibit 9. Winning employees through CSR

Exhibit 10. Returns of CSR

Exhibit 11. Asset building via CSR

Exhibit 12. Drivers behind CSR

Exhibit 13. Tomorrow more important than today.

Exhibit 14. Guiding Principles

Exhibit 15. Significant achievement of PepsiCo

Exhibit 16. PepsiCo’s social responsibility award

PepsiCo China Wins Golden Bee award – Leading Enterprises 2007 had PepsiCo China winning the Golden Bee Award – Leading Enterprises, for active fulfillment of social responsibility over the years. This honor roll recognizes outstanding enterprises in social responsibility, it is believed competitive bee enterprises will lead sustainable development of global economy, and exert a profound impact on mankind. Cathy Tai, VP Corporate Affairs of PepsiCo Investment (China) Limited said, “...the harmony and symbiosis between bees and nature and human beings is symbolized, which is in line with the ecological chain in which enterprises are in symbiotic harmony with the surrounding world, human beings and the environment.”

Since its entry into China 27 years ago, PepsiCo China has actively carried out corporate social responsibility in a number of areas such as participation in public interest causes of its operational region, consumer rights protection, environmental protection, community services, the protection of the rights and interests of employees and more. The well-known “Water Cellar for Mothers” project initiated and implemented support to women and children in the dry and poverty-stricken central and western regions, improving the living conditions of the people. RMB15.6 million have been funded, ameliorating lives of 36000 people over 22 villages and 18 counties. RMB200 million invested in growing potatoes in the desert has not only increased income for local farmers and promoted economic development of the local rural economy, but also contributed to checking desertification and improving the environment. RMB360,00 have gone into setting PepsiCo libraries in Inner Mongolia and Hebei. his award was shared by 12 enterprises out of 205 candidate corporates.

Exhibit 17. Pepsi College of Leadership

Exhibit 18. Regulatory issues To address risks relating to legal and regulatory issues PepsiCo has launched an enhanced Code of Conduct training program in multiple languages (Exhibit 21 details this). There is an improved functionality of the employee hotline. Periodically, environmental and health & safety audits are being undertaken to help focus mitigation efforts in these areas going forward. PepsiCo has had a Code of Conduct since 1976. It is regularly updated and it applies to all employees and to all divisions and subsidiaries. It is communicated to all the employees annually. PepsiCo’s Code of Conduct is made available on-line and in 30 languages. It includes sections on: • PepsiCo’s Mission • Respect for Employees/Diversity • Customers, Suppliers and Competitors • Global Relations • Business Gifts and Payments • Health and Safety • Environment • Political and Community Activities and Contributions • Conflicts of Interest • Insider Trading and Proprietary Information • Accounts and Record Keeping • Protection and Use of Company Assets • Reporting Code of Conduct and Other Ethics Issues • Responsibility for Compliance In addition, there are specific policies regarding key topics such as the International AntiBribery Compliance Policy, Anti-Harassment/Discrimination Policy, Customer Trade Agreement Policy, Disclosure Policy, Equal Employment Opportunity Policy, Environmental Policy, Human Rights Workplace Policy, Information Security Policies and Travel and Entertainment Policy. These policies apply to all of the associates worldwide. Specific employees, including management and any individual with access to sensitive information or in a position to acquire goods and services, are required to complete mandatory web-based training on the Code of Conduct and to certify their compliance with the Code. Each year, there is distribution and communication of the Code to employees. In addition, there is regular communication to reinforce the Code of Conduct and Values through a variety of means, including in-person training, Town Hall meetings, articles in daily in-house e-newsletters, information on intranet, management presentations and awards for ethical behavior. In 2005, PepsiCo established a compliance and ethics leadership structure, appointing a Vice President, Deputy General Counsel, Business Practice and Compliance, who is focused on business practices, ethics and compliance. In the event of a breach of the Code of Conduct, appropriate disciplinary action is taken, ranging from counseling to termination, depending on the type and seriousness of the matter. PepsiCo’s outside auditor receives reports regarding potentially significant violations that relate to fraud, accounting, auditing and internal control matters. The Audit Committee also receives regular reports regarding compliance with the Code of Conduct. In order to maintain

the confidentiality and anonymity of PepsiCoâ&#x20AC;&#x2122;s hotline, PepsiCo does not publicly report on breaches of its Code of Conduct or other policies. Any reports of potential corruption are investigated immediately under the direction of the Law Department. If employees are found to have engaged in questionable behavior they will be disciplined accordingly. When appropriate law enforcement authorities are notified, PepsiCo cooperates with law enforcement activity to the fullest extent possible. Anti-corruption policies and procedures are included in the Code of Conduct. In addition, PepsiCoâ&#x20AC;&#x2122;s International Anti-Bribery Policy was communicated to all Corporate and PepsiCo International employees in 2006 and web-based training was provided to approximately 15,000 employees on this Policy in 2007.

Exhibit 19. Exciting staff and customers to verbalize

Exhibit 20

Key Opinion Leader’s voice common themes on issues burning the nation “The main cause or concern, I think, is the divide between rural India and urban India. Disparity is there in any aspect of development; health treatment or education or may be drinking water. Lots of villages do not have their own toilets; they do not have tap water to their houses; there is no road, no sanitation…and we are a developed nation…this is not development.” (Media)

Social

Economic

Lack of empowerment of the masses

Money in the Hands of Few

Infrastructure

Degeneration of the Environment

Political

Rampant Corruption & failure of the government

• Lack of education across the masses • Lack of implementation of women & child welfare schemes • Poor tribal rehabilitation programmes • Health of the nation – on the decline (differing perspective) • Disparity between the ‘haves’ & the ‘have-nots’ • Exponential growth of industries & corporates • Breakdown of the agrarian economy – ‘farmer suicides’ • Absence of local employment opportunities in rural • Poor quality of life for the majority, particularly in rural India • Shelter • Water supply • Sanitation, health & hygiene • Solid waste management • Electricity • Roads • Information system

• Lack of governance in the democracy at the lowest level. • Lack of Transparency & accountability

Few Questions: • • •

Can we allow nation to Burn? Who will take the responsibility? How will the Fire be doused?

Exhibit 21

There is universal agreement that multi-stakeholder partnerships will truly move and shake the agenda. “Every human being has a social responsibility; why do we want to divide it in segments; we should not….it must be the collaborative effort of institutes, corporate world, the government agencies, NGOs. All would need to come in ..it is everybody’s world, but the corporate world could take it up in a bigger manner; that is of course if they want to take up a social responsibility …” (Education)

Corporates

Individuals

NGOs

• Tremendous scope & potential – not shown leadership • Huge funds – not paid their dues • Dabble with a few small issues that impact their image • Masses not empowered to take on the mantle • Classes have displayed apathy in action to such issues • Few visionaries who have risen to the occasion – Tatas, Dr Kurien, NRM. • Limited scope – operate in small pockets • Geographical spread • Scale of operations • Have shown leadership & initiative • Not without corruption – huge funding • Non functional & seeks to work largely on political issues • get the vote bank (others)

Government

Lack of synergy across the four; creation of linkages critical for momentum & scale impact.

Contribution of Corporate India critical !

• Have taken up issues in their respective constituencies (min)

Exhibit 22

Exhibit 23