When teaching corporations (or securities for that matter), I try to integrate ongoing developments in the market into my lectures. Last semester, the public offering of Twitter (which had a board of directors that lacked any diversity) provided plenty of examples to illustrate key points.
With respect to fiduciary duties, I still teach that profit maximization is the obligation of boards. I stress that the statute and case law refers to the "best interests of shareholders" and says nothing explicit about profit maximization. I further stress that profit maximization does not mean short term profit maximization but is a matter to be determined by the board and invariably results in a balance of long and short term goals. I also note that the law of fiduciary obligations, particularly when applying the duty of care, is extremely deferential to the board's determination of what constitutes profit maximization. In that way, fiduciary duties align with, rather than go against, business practices.
With that in mind, I thought it interesting to point out an ongoing example of the diverse approaches to profit maximization within the same industry. Coca Cola does one thing: Drinks. The Company's 10-K describes the business as beverage concentrates (i.e. syrups) and "finished sparkling and still beverages." Pepsi in contrast not only sells bevereges but also owns Frito-Lay and is active in the "snack business." At one time Pepsi owned several chains of fast food restaurants (pizza hut, taco bell, and kfc) but has gotten out of that business.
So is a business selling beverages better run (that is maximizing profits) by emphasizing only one area (beverages) or by expanding into others? Anecdotally my impression is that the singular focus of Coca Cola on beverages means that it may access markets, particularly overseas, that become available, more quickly than Pepsi. When I was in Kazakhstan in 1997 (Fulbright), there was a Coke bottling plant and the product was readily available. I do not remember seeing Pepsi (although perhaps it was sold in outlets I didn't frequent). Moreover, Coca Cola is the dominant player in the beverage market. Coke has 42% of the carbonated soft drink market while Pepsi has 28.1%.
At the same time, however, operating in a single industry means that your fortunes can go up and down with that industry, potentially making profits more vulnerable to developments that are beyond the control of the company. Presumably there is no one right answer and even after selecting a particular approach, boards, consistent with their fiduciary obligations, keep alternatives in mind. Thus, McDonalds at one time owned a number of other restaurant chains (recall that it owned Chipotle) but ultimately decided to sell them and go back to its core business.
In the soda/beverage industry, boards are likely weighing that very issue at both Coca Cola and Pepsi. News reports indicate that Coke is not doing well. According to the WSJ:
- Earnings per share are seen at $2, up slightly from $1.97 a year earlier with a slight drop in revenue, according to FactSet. Coca-Cola's stock performance has trailed the S&P 500 by 16 percentage points over the past year as stagnating developed markets and slowing growth in developing ones take their toll.
Coke is apparently looking for other profit making opportunities and has purchased an interest in Green Mountain Coffee Roasters. Perhaps snacks will be the next area of interest.
So that must mean that the Pepsi approach is the right one. Not exactly. At least one significant shareholder is pushing Pepsi to profit maximize by splitting beverages from snacks. Snacks, apparently, is the faster growing business. So far Pepsi has rejected this idea.
So which is it? Separate or combined? It is for the board of directors to determine and a matter of the board's fiduciary obligation to profit maximize.