COCA-COLA Now that Coca-Cola Co. has written the denouement to its latest
public spectacle—now that it has landed a new chief executive after
a search so remarkable that another Fortune 500 CEO, A.G. Lafley of
P&G, calls it "one of the strangest processes we've ever
seen"—let's stop a moment, step back, and take stock of what's been
happening at this company. Until just six years ago it was
considered a crown jewel of corporate America, proud steward of the
world's biggest, best-known brand. Since then, with breathtaking
speed, it has become a case study in business dysfunction. Let's
call this Coca-Cola: the real story. It is a story with three layers. First there is the one that Coke
would like you to focus on: financial performance. After a
tumultuous period, the company is in solid—it would say
stellar—shape, having just posted a 35% jump in first-quarter
earnings. Then, in sharp contrast, there is the management layer: a
roiling six years of public blunders and musical chairs in the
executive suite, unsettling at any company but especially so at
Coke, where impeccable leadership was always considered critical to
maintaining the integrity of its brand and its reputation on Wall
Street. Partly as a result, Coke's stock has been trading in the $50
range, well off its high of $88 in 1998. And then there is the third layer, the one that's most
interesting and least transparent: governance. Coke has been
overseen by a mostly old-boys club of directors that one
corporate-governance expert calls the "Coca-Cola keiretsu"
because it so resembles the web of interlocking relationships
typical of corporate boards in Japan. There's nothing illegal about
it, but lately Coke's board has been ineffective to the point of
farce. In just six years this group has installed one CEO, ousted
him and installed another so inexperienced that he needed constant
shoring up, and finally, after a very public search that found no
outside takers, named a third—a retired Coke executive who had been
passed over for the top job earlier. At its heart, this third layer is a story of byzantine
maneuverings and warring tribes, of spin and counterspin, of old
grudges and character assassinations. The tale is long on thwarted
ambitions and short on real strategy. It is positively
Shakespearean, most akin to Henry VI, in which vying nobles
engage in the Wars of the Roses and cripple the kingdom. Of course, Coke isn't crippled yet. In fact, it's a testament to
the brand's strength that it has remained vigorous in a time of
management fiasco. Consider the litany of blunders. Last summer a
fumbled response to a whistleblower lawsuit brought on
investigations by the SEC and the U.S. Attorney's office in Atlanta.
Coke botched the British introduction of Dasani bottled water so
badly that in March it had to scotch plans for other European
markets. Coke's decision not to investigate possible union-related
murders at its bottlers in Colombia has become a public relations
nightmare. On Easter Sunday, Coke announced that its general counsel, Deval
Patrick, was leaving, and aspersions on his work were leaked to the
press. Three days later Coke backtracked, saying it had asked
Patrick to stay till year-end. Since Patrick is a prominent African
American who had headed up the Justice Department's civil rights
division, this didn't help Coke's troubled race relations. The
company was sued by employees charging racial discrimination in
April 1999 and settled for $192.5 million in November 2000. The
Patrick announcement also drew more attention to what has become a
rapidly revolving door: Only one of Coke's 13 senior officers has
lasted five years—and he's on his way out. It's been obvious for some time that the company's management
team is in disarray, yet when its CEO, Douglas Daft, announced in
February that he planned to retire, the board was unprepared. It had
no succession plan. Clearly, a company can't go on like this
indefinitely. To understand what has happened at Coke, you have to look back to
1996. That's when people on the 25th floor of Coca-Cola headquarters
noticed that Coke's beloved leader, CEO Roberto C. Goizueta, was
slowing down, overcome sometimes by coughing spells, succumbing, it
would later turn out, to lung cancer. Goizueta had overseen a
sustained, 16-year increase in the company's value that had become
the stuff of corporate legend and made a lot of investors rich. But
when he began to flag, a power vacuum opened up at Coke—and into it
stepped Donald R. Keough, the central, powerful, and paradoxical
character in this drama. Many people see Keough as the company's guardian, savior, and
keeper of the flame—the man who has, since Goizueta's death, worked
behind the scenes to keep Coke on course. Keough served for 12 years
as Goizueta's very strong and effective No. 2—a hard-charging,
irrepressible president and COO until he retired from the company
and the board in 1993. In truth, though, Keough, now 77, never
really retired from Coke. He has continued to serve as consultant,
advisor, and behind-the-scenes power broker. He officially rejoined
as a director after Coke abolished its 74-year-old age limit in
February. "You want all of Keough you can get," says James B. Williams, 71,
retired CEO of SunTrust Banks in Atlanta and a Coke board member
since 1979. "When you can't have him as a board member, you take him
as a consultant. If he's eligible to be a board member, you put him
back on the board." But to others, Keough is a big part of Coke's problem—a man who
never got the top job and, according to many who have worked closely
with him, never got over it. (Keough declined to comment for this
story.) There is no question that Don Keough eats, sleeps, and breathes
Coca-Cola. But his constant involvement in Coke's affairs has too
often amounted to meddling that appears vindictive and even
vengeful, reflecting his own thwarted dreams, outsized ego, and
overt, old-fashioned cronyism. And at worst, he has acted in ways
that bear the whiff of self-dealing—a shadow CEO, working from the
wings at Allen & Co., a small New York City investment firm with
a big reputation that might have had nothing to do with Coke if its
longtime boss, Herbert A. Allen, hadn't sold Columbia Pictures to
the beverage maker 22 years ago, gaining a seat on Coke's board.
Keough's supporting cast is a board of directors who, no matter
how rich, smart, and powerful, have somehow failed to see that you
can maim the golden goose with weak top management. Their actions
have frustrated analysts, raised eyebrows among major shareholders,
and confounded other corporate leaders like P&G's Lafley, who
asked about the recent CEO search: "Is the board running the
process?" Surprising as it seems given Coke's blue-chip board
(including Warren Buffett, Barry Diller, and Home Depot's Bob
Nardelli), this looks like the gang that couldn't shoot straight.
Some directors bristle at the charge that their governance has
been below par. When the proxy advisory firm Institutional
Shareholder Services challenged Buffett's seat on Coke's audit
committee on the ground that Coke does business with his company,
Berkshire Hathaway, Allen responded with a vitriolic op-ed piece in
the Wall Street Journal. He compared the challenge to the
Salem witch trials, where "reasonably stupid people accused
reasonably smart and gifted people of being witches and casting
spells. Then they burned them." Up until the geniuses at ISS said
it, nobody knew that Warren was really a witch. Thank God those
folks are here to save those of us who actually have a share in the
Coca-Cola Company." Other defenders of the board point to results. Coke's latest
first-quarter numbers were rosy—that 35% increase in net income was
accompanied by a 13% increase in revenue, to $5.1 billion. The
company has done a lot to strengthen its bottlers, cut costs, boost
profit margins, and increase cash flow. Says director Jimmy
Williams: "If you would write five pages on Coke's performance,
earnings, cash flow, and market penetration, we'd look like the same
old animal we used to. These other things are just taking the
limelight. We feel pretty good about the way the company is moving.
We just have bumps in the road that are so doggone visible, it's
hard to get people to focus on the business." Coca-Cola may be a globe-straddling FORTUNE 500 company, but it
remains in many ways an insular, idiosyncratic place with its own
distinct folkways, the kind that can breed suspicion and court
intrigue and whispers. There's even an oracle of sorts at the Thomas
Barber Shop, at the corner of Northside Parkway and West Paces Ferry
Road in the part of Atlanta's Buckhead neighborhood where Coke
executives traditionally settle. Walter "Tommy" Thomas has cut the
hair of top Coke executives for years, at $15 a pop. Keough, whom
Tommy calls "Big Dog," gets his hair cut there. (Big Dog, he says,
"is tough as nails, sharp as a tack, and he can talk the spots off a
leopard's back.") Former CEO Doug Ivester gets his hair cut there
too. When Steve Heyer, Coke's president, arrived three years ago, he
was told to get his haircut there too, if he knew what was good for
him. (He does.) You learn a lot about Coke at the barbershop. Tommy
knew that Skeeter Johnston wouldn't be made CEO of Coca-Cola
Enterprises, the big bottler, even though his daddy, Summerfield,
had been pushing for it. Tommy warned Coke president Jack Stahl that
his days were numbered, and they were. (Stahl is now CEO of Revlon.)
Nearly every main character in this story has signed the coca-cola
sign on Tommy's back wall. He understands all the feuds and knows
where all the skeletons are buried. "I don't go to Tommy because
he's such a great barber," says one Coke executive. "I go because
I'm afraid not to." Tommy is a passionate shareholder and Coke watcher and has been
since the days when he cut the hair of Coke's legendary patriarch,
Robert Woodruff. And what's happening today all goes back to
Woodruff —"the boss," as he was called—the longtime CEO who built
Coke into the world's best brand by deft strategic management and
grand gesture. It was Woodruff who made Coke available for a nickel
to every U.S. soldier in World War II, thereby quite literally
conquering international markets as the armed forces helped deploy
Coke bottling plants around the world. And it was Woodruff who, 25
years ago, emerged from the shadows and his retirement at age 90 to
pull Coke out of its first succession crisis. Then, as lately, the company had a weak leader (CEO J. Paul
Austin had Alzheimer's, it was later revealed), trouble with
bottlers, and worries that people had grown tired of Coca-Cola. In a
six-way succession contest set up by the board at Woodruff's behest,
the gregarious Don Keough looked like the lead horse. But he didn't
win. The CEO job went to Goizueta, an executive vice president with
no operating experience who had risen through Coke's technical side
and forged a strong bond with Woodruff, often visiting him on the
way home after work. Keough became Goizueta's celebrated No. 2. From the team's first
New York road show, Goizueta was gracious. "The day of the one-man
band is gone," he told analysts. "It would be absolutely a crime for
me to try to lead the bottlers the way Don Keough can. I would look
like a phony... My job is to pick the people, then give them the
responsibility and authority to get the job done." Over the next dozen years, theirs became one of the most
effective partnerships in corporate history. They complemented each
other—the Cuban-born chemical engineer whose family wealth had been
confiscated by Fidel Castro, and the Iowa salesman who had once been
a talk-show host in Omaha, where he shared an apartment with Johnny
Carson. Goizueta was cerebral, quiet, charming, a business
philosopher, while Keough was infectiously gregarious, the king of
schmooze. Goizueta was happy to preside from a clean desk atop
company headquarters on North Avenue in Atlanta. Keough liked to
travel, wine and dine customers, joust with bottlers, regale
audiences. Keough adored the limelight, and Goizueta, a modest man,
was happy to share it. He paid Keough as much as most CEOs made, and
showered him with praise. It all looked smooth and collegial, but behind the scenes it was
a delicate balancing act of big egos. It was well known that Keough
and Douglas Ivester, Goizueta's heir apparent, couldn't stand each
other. Keough wanted more of the credit for the company's big acts,
like the creation of Coca-Cola Enterprises, its biggest bottler. And
God forbid that Goizueta learn a little piece of news before Keough
did. Employees followed the "lollipop protocol," making sure,
recalls one, that "if you give a lollipop to Roberto, you damned
well better be sure you give one to Don" almost instantaneously.
"The trouble with Keough," one former top executive was fond of
saying, "is that he wants to be the bride at every wedding and the
corpse at every funeral." When Goizueta died, in October 1997, it didn't take long for
feuding to begin. To use the Wars of the Roses analogy, think of the
Ivester people as the house of York and the Keough people as the
house of Lancaster. Newly crowned as CEO, Ivester began to exile
some Lancaster dukes and rebuke others. He demoted senior vice
president Carl Ware, the company's highest-ranking African American.
E. Neville Isdell, Ivester's one true competitor for the top job,
went into exile to head a bottler in Britain. The timing of Ivester's ascension couldn't have been worse. The
Asian currency crisis that began that summer ravaged Coke's
business. The revenue stream from a completed bottler consolidation
dried up. Practically from day one, Ivester had trouble meeting
Coke's famously dependable earnings targets. The biggest problem, though, was his tin ear. Ivester was high in
IQ but terribly short on EQ. A self-made, stubborn, very shy son of
North Georgia millworkers, he had gotten where he was through brains
and hard work. He resented Keough's grandstanding, say people who
knew him well, and never fully appreciated the importance of
Goizueta's almost daily chats with directors. (Ivester declined to
comment.) Before long, head-down and full tilt in a turbulent
market, Ivester had alienated European regulators, executives at big
customers like Wal-Mart and Disney, and some big bottlers, including
Coca-Cola Enterprises (on whose board sat Warren Buffett's son
Howard). As he raced to put out fires, he became increasingly
isolated from his own board of directors. One person was
keeping in touch with them, though, even in his retirement—Don
Keough. Now you have to know this about Keough. When he greets you, he
shakes your hand and puts his left hand on your elbow and leans in,
radiating both genuine warmth and terrible power, and he can make
you feel like a million bucks or scare you to death. He is charming.
He has twinkly eyes and relentless energy. He doesn't look or act
his age. After retiring from Coke in 1993, he began a new career as
chairman of Herbert Allen's Allen & Co., which is headquartered
in Coke's New York City building at 711 Fifth Avenue, the old
Columbia Pictures building. His office is just down the corridor
from Allen's. At the time it looked as though the Allen job was just another
lollipop for Keough—a nice way station to retirement for a man who
had already stayed on two years beyond Coke's mandatory retirement
age. But Keough's role at Allen & Co. would be far more than
ceremonial. Keough had a blue-chip Rolodex that included, among
others, his close friend and one-time neighbor in Omaha, Warren
Buffett, who had joined the Coke board in 1989, as befitted his
status as the CEO of Berkshire Hathaway, Coke's largest shareholder,
with more than 8% of the stock. Keough continued to attend Coke
board meetings as a consultant to Goizueta—right up until Goizueta
died and Ivester declined to renew Keough's consulting contract.
By shutting out Keough, Ivester made a fatal miscalculation. When
Keough sent the rookie CEO memos and suggestions, Ivester's replies
were short, curt, and designed to keep the former executive at a
distance. Making matters worse, Ivester hadn't done much over the
years to ingratiate himself with Keough's ally, Herbert Allen,
either. In fact, he had done just the opposite. Herbert Allen is wiry, restless, fiercely private, and
fascinating. He wasn't the founder of Allen & Co.; he took over
the business from his uncle and his father. But Allen greatly raised
the firm's profile—far exceeding its modest size—by burnishing his
image as a player (his annual Sun Valley, Idaho, media conference is
a summit of industry heavies) and by taking an active role in firms
he had a stake in. Allen & Co. owned about 7% of Columbia
Pictures when that company was roiled in 1977 by a check-forging
scandal. Allen, a director, led the board's ouster of Columbia's CEO
and replaced him with Fay Vincent, an SEC lawyer who had been a
Williams College contemporary of Allen's (and who is a director of
Time Warner, parent of FORTUNE's publisher). It all worked out nicely for Columbia when, in the early 1980s,
Coke's rookie CEO came calling. Columbia was just what Roberto
Goizueta needed to provide profit growth and a little Hollywood
smoke and mirrors to buy time to figure out Coke. He paid a premium
price for Columbia, gave Allen a seat on his board, and opened up a
lucrative new source of business for Allen & Co. as Coke's de
facto investment advisor. From 1982 until 1989, the firm would earn
annual fees on Coke business anywhere between under $1 million and
$30 million (the payoff from Coke's 1989 sale of Columbia to Sony).
But Allen's Coke income declined substantially in the early '90s
as Ivester gained influence, and then dried up altogether in 1993,
the year Keough retired. Ivester even let it be known that he was
considering selling the 711 Fifth Avenue building. He didn't get the chance. In early December 1999, after attending
a board meeting for a Ronald McDonald House charity event, Ivester
was met at a Chicago airport by Warren Buffett and Herbert Allen,
who delivered a bombshell. They told him they had lost confidence in
his leadership. Ivester agreed to retire, assuming that the two Coke directors
represented the whole board, according to sources familiar with the
events. But at a special board meeting the following Sunday night,
Ivester's departure came as such a shock that board members asked if
he was sick or if something horrible had happened at the company
that they weren't aware of, and were angry that he would walk out
with the company in turmoil. By the following morning Ivester was
out, but bad feeling in the boardroom lingered for years. In came Doug Daft, a Keough man, who, as it happened, had houses
in Britain and Switzerland and one in Williamstown, Mass., not far
from Herbert Allen's, where the two men socialized. Few outside Coke had ever heard of Daft. An Australian, then 56,
he had joined the company as a planning officer in Sydney in 1969
and had spent most of his 30 years in Asia, including a terrific run
as president of Coke Japan, one of the company's biggest markets
outside the U.S.ÊHe was low-key, unassuming, not much of a
communicator, very press-shy. A lover of wine, travel, and the arts,
Daft was one of the few Coke executives who made time for outside
interests. He had been preparing for retirement. He would come to be
called Coke's "accidental ceo." Part of his success in Asia, according to several direct reports,
was his consensus-driven style, his knack for diplomacy. He couldn't
stomach conflict, though. "He ran from a fight," said one. "He was a
nice man, but a terrible pick for a ceo." (A company spokeswoman
said Daft wouldn't be made available for interviews because "you
have to understand, we're trying to do as little damage as possible.
We're trying not to blow the place up.") Daft, who had spent the bulk of his 30-year Coke career jetting
around Asia, didn't have a clue about presiding over Coke from
Atlanta. Not long after his promotion, a feng shui consultant was
summoned to make some decorating changes, according to an employee
who worked on the 25th floor at the time. The monk rearranged
telephones so the cords wouldn't snake in the wrong direction.
Life-sized ceramic roosters were placed in the offices of Daft and
two other executives. The four flagpoles outside the building that
had traditionally flown the American flag, the Georgia flag, the
Coca-Cola flag, and a flag honoring the day's visitor (usually a
customer or a bottler) were taken down. If Woodruff and Goizueta had
been skillful communicators, this new CEO seemed oblivious to the
effect of his gestures. Employees were aghast: The Australian CEO
doesn't like to fly flags. It's a cultural revolution. (Down at the
barbershop, Tommy would come to say: "The stock went from 69 to 36
under Daft. If that's good luck, I don't want none.") Tommy is a big fan of Big Dog's, and he says it's no wonder that
Keough had to get so involved. In fact it was mandatory. More than
good luck and harmony, Daft needed a lot of advice and coaching, so
he turned, of course, to Keough. The two had nearly daily phone
conversations, Daft told FORTUNE in March 2001. "It's nice to have
someone who can tell you you're a fool." Keough was once again
welcome at Coke board meetings (always excusing himself for
executive sessions). Allen & Co. once again began to advise
Coke. In 2001, Allen & Co. gave Coke advice to the tune of $3.5
million; in 2002 Allen's various interests got $2.75 million and
last year an Allen affiliate, one in which his son and Keough's are
both principals, received some $10 million. Daft demonstrated what one insider called a "magic bullet
mentality," looking for quick fixes. Within weeks he began the
bloody job of downsizing the company, cutting 5,200 jobs to bring
costs in line and address what was widely perceived as bloat. The
company now concedes that the cuts were ham-handed, aimed more at
reducing head count than at pointing Coke in any strategic
direction. Ivester's mantra had been "Think global, act local." The
closest thing Daft had to a vision was "Think local, act local,"
reflecting his long experience in the field, which naturally led him
to think that a lot of Coke's problems were caused by bureaucracy at
headquarters. "He had a real disdain for Atlanta," says an executive
who worked with him. But Coke had always worked as a complex matrix. While 70% of its
revenues came from more than 200 countries outside the U.S., the
keepers of the flame were at headquarters, setting and zealously
guarding the standards for advertising, quality control, public
relations, legal matters, and more. "The genius behind this global
company, beyond the systems and the trademark, was the web of
controls: lawyers at corporate being matrixed to lawyers in the
field—same with finance, technical, marketing, quality control,"
says a former top executive. "A lot of that was ripped out."
Goizueta the strategist had created and nurtured this system of
tight controls from headquarters in the glory years; Keough the
salesman had been busy with other things. Just as Ivester had pushed out many of Keough's favorite
executives, now Daft got rid of Ivester's. Turnover was ferocious.
In the past 42 years, the company has had two new heads of
marketing, two new heads of European operations, and new executives
running its North America, Latin America, and Asia divisions, as
well as its human resources and legal departments. Daft sought Keough's imprimatur on big personnel decisions,
according to people who know both men. One of the few times he stood
up to Keough was when he named Jack Stahl (an Ivester man) his
president and chief operating officer. Keough objected. In an
obvious vote of no confidence, Stahl was not named to the board.
Before long Stahl was left out of important meetings, including a
key strategy meeting in Wyoming that included all his direct
reports. He left for Revlon. Keough orchestrated the return of Brian Dyson, a seasoned Coke
executive, from retirement. He also cast the key vote on whether
hotshot Steve Heyer, president and COO at Turner Broadcasting, could
be recruited as a possible successor to Daft. After Cathleen Black,
president of Hearst Magazines and a Coke director, recommended
Heyer, he was immediately sent to see Keough, who took a liking to
him. When Heyer arrived in 2001, he appeared at first to be another
magic bullet. It didn't take long, though, for the brash executive
to run afoul of the culture and Keough. Heyer was hard-driving and
harsh. Worse, he had a sense of entitlement. Coke executives, who
know they depend on bottlers to turn their syrup into a finished
product, had a saying: "If your bottler drives a Cadillac, you drive
a Buick. If your bottler drives a Buick, you drive a Ford. If your
bottler drives a Ford, you walk." Heyer drove up in a Mercedes, and
bought a house on Tuxedo Road, the street where Robert Woodruff had
lived. Even Goizueta never did that. He got a lot of attention too, dangerous at a place where
traditionally the executives-in-waiting have been carefully coached
not to steal the spotlight. In the past year, Heyer has developed a
fan club among bottlers and analysts who credit him with stabilizing
the place, getting control of the budget, conducting layoffs
sensibly, and delivering a clear business strategy. A keynote speech
he gave at a conference in Beverly Hills a year ago February was so
well received that Coke was swamped with requests for copies. After
that Heyer was put on what colleagues sarcastically called
"probation" and warned to lie low: no more public speeches or
interviews. The buzz on Heyer was that he didn't really have Coke in
his veins; he could neither motivate the troops as Keough had done
nor be an ambassador for the brand as Goizueta had been. At the
barbershop, word was that Heyer was not going to get the top job. He
didn't. (Heyer declined to comment.) Whisper campaigns like that demoralized people. Sometimes press
releases were written even before senior executives were notified
that they were about to "retire." Those who left had to keep their
lips sealed if they wanted to get their severance and retirement
benefits. Often senior executives were either damned with faint
praise or tarred by leaks that looked as though they came from on
high. "It was almost thuggish," says a former employee. And at a
company where morale depended on the belief that Coke was not just
brown fizzy water but the magic of the Woodruff legacy—patriotism,
globalism, civility—this was a hard blow. "They've let the genie out
of the bottle, and it's very hard to know how to get it back in,"
says one insider. During the Daft years, Keough was rarely seen at headquarters,
but his presence was always felt. As advisor, power broker,
rainmaker, he continued to be a logical behind-the-scenes touchpoint
for Coke customers, bottlers, and suppliers. "I talked to him a fair
amount," recalls one former executive. "It was conversational stuff.
I did not feel it was meddling or overstepping bounds." But he was
powerful, and everybody knew it. "Nobody wanted to cross him," the
executive says. Early on, Daft tried to push Coke into the fast-growing
noncarbonated-drink business. Keough attempted to help him buy
Quaker Oats, which owned Gatorade, in November 2000. But the attempt
turned out to be an embarrassing flop that undermined Daft's
credibility as a CEO who could stand up to his board. A Quaker proxy
filed later gave an account of the strange tale. In the three-way bidding for Quaker, Coke, represented by Allen
& Co., offered the sweetest deal—a stock transaction valued at
more than $115 a share plus downside protection if Coke's stock were
to fall. As part of the offer, Coke insisted that Quaker break off
talks with Pepsi and Danone. On Nov. 18, Quaker's board agreed to
that requirement, but only if it could get assurances that Coke's
board would support the deal. So Quaker CEO Bob Morrison did the logical thing: He consulted
with Don Keough, who would seem to be in the know, since he was an
advisor to Daft, a principal of Coke's investment firm and a
business partner of one of its most powerful board members. In a
conference call, Daft and Keough assured Morrison that the board had
been informed of the proposed transaction and that management was
committed to finalizing it and getting board approval in time for
the Thanksgiving holiday. Quaker ended its other talks. Imagine the surprise when, three days later, the Coke board
killed the deal. So sure were Daft and Morrison that it would go
through that they'd had publicity shots taken together. Champagne
was on ice. Quaker's board was awaiting word, having approved the
deal five hours earlier. Coke's public-relations machine had called
newspapers to alert them. But when the Coke board gathered, according to a person with
knowledge of the meeting, directors Buffett and Peter Ueberroth
raised objections to the deal. Buffett did the math and deemed that
giving up 10% of Coke stock for Quaker's assets was a bad bet. Daft
didn't have a good grasp on the due diligence and didn't fight for
the deal. Ueberroth asked, "How much are the bankers getting?"
Somebody computed that roughly $28 million would go to Allen &
Co. Daft, the board's chairman, couldn't win over his directors.
A lot of people blamed the deal's failure on Daft's unwillingness
to fight for it. But the Ivester crowd had another take: payback.
Ueberroth, according to two people close to the situation, had felt
blindsided by Ivester's ouster. (He declined to comment.) He didn't
want to be railroaded again. After Heyer was named president, Daft was rarely around. Board
members say he spent a lot of time traveling and mending fences with
bottlers. But he also spent a lot of time in Coke's New York
offices, a few floors away from Allen & Co. in the Fifth Avenue
building. One of his direct reports in Atlanta worked for him for
more than a year and met with him only once. Daft could be indecisive and mercurial. This March he abruptly
reversed a four-month-old decision to let general counsel Patrick
investigate Coke's problems in Colombia. Patrick had announced at an
awards dinner last fall in Washington that he would look into the
labor violence at Coke's Colombia bottlers, and with a green light
from Daft had begun the process. Patrick told Daft he wanted to
resign, but Daft didn't want to announce the resignation until the
April board meeting. Word leaked out, though, and Patrick was made
livid, say people close to him, by news stories implying the board
was unhappy with his work. (Patrick declined to comment.) The handling of the announcement backfired and attracted Jesse
Jackson to an annual meeting that became a symbol of Coke's
problems. Stockholders at Wilmington's Hotel du Pont got leaflets
thrust at them by demonstrators chanting, "Coca-Cola, killer Cola,
toxic Cola, racist Cola." In the ballroom, as the company's
directors were introduced, not a single one stood up to face the
crowd. Daft muddled through the meeting, gradually losing control.
He urged a child questioner to "Drink Coke, Sam," and then paused.
"That is, if your parents let you." A shareholder activist got
unruly, and eight dark-suited security guards wrestled him to the
floor. "Stand down, security, stand down!" Daft called from the
podium. The only other executive to speak was Keough, who had rejoined
the board in February and had been put in charge of the committee
searching for a new CEO. He assured the crowd that the board would
land Coke the best possible candidate. Indeed, the committee was conducting a strangely public search.
The possibility of taking the Coke job was floated to Bob Nardelli,
who said he wasn't interested, and to Steve Burke, executive vice
president of Comcast, who also declined. Directors put a very hard
press on Jim Kilts, CEO of Gillette, on whose board Buffett used to
sit, but he bowed out of the running because he and his wife didn't
want to move to Atlanta. At the reception after Jack Welch's wedding
to Suzy Wetlaufer, on April 24, Coke director and search committee
member Jim Robinson, former CEO of American Express, spoke with
Welch about the job. Welch, the retired CEO of GE, was so interested
that talks continued through the following week. But Welch withdrew
his name, too—he was having too much fun. The person outsiders thought would be the logical lead candidate
for the job—Steve Heyer—never appeared to be much in consideration.
Heyer hadn't fit into the culture, having run through too many
secretaries and having unceremoniously canned Jeff Dunn as head of
North American operations, even though his father was a former Coke
executive and close friend of Keough's. The man drafted for the job—out of his retirement in Barbados and
the South of France—was Neville Isdell, a tall, charismatic,
globetrotting operating executive, a darling of Keough's, sidelined
a decade ago in the race to the top. Isdell greeted the troops last week, with Daft at his side, and
showed just the reassuring blend of humility and pride that Coke
demands of its CEO. At last, employees were relieved to hear, they
had a CEO who could give a morale-building speech. Isdell has the
leadership and operating experience to stabilize the company, and a
sensibility that might, once and for all, put an end to the blood
feuds. But the real test of Isdell will be whether he can stand up to
the past, and to Don Keough. He will have to address long-term
strategic questions and restore the company's bench strength. He
will have to figure out how to realign the system to deal with a big
problem: consumers, particularly young ones, who shun mass-market
products because they don't want to be like everybody else. He will
have to figure out how to keep the focus on Coke but still push the
hip, new, lower-margin products that are all the rage. Isdell's biggest challenge of all, though, was evident in a phone
interview with FORTUNE the day after he was named CEO. Keough was
right there on the speaker phone, jumping in every chance he could.
Isdell ran through his plans for tackling the job. "I believe there
is significant future growth to be had for brand Coke," he said.
"Obviously some of that will come out of new markets—the Chinas, the
Indias—but there is still growth in the U.S. and Europe." Midway
through the interview Keough interjected his own message: "For the
first time in 119 years, we have as the head of the Coca-Cola Co. a
person who has worked on both sides of the system...He brings a
fresh new perspective into the system with the experience of being a
bottler and a concentrate person, having worked on five continents.
. ." At the barbershop, Tommy's laying odds that Isdell will succeed
"if the board leaves him alone." Even though things seem at last to
be settling down at Coke, that doesn't mean that Keough will be any
less involved. "When the Big Dog dies," he says. "He'll have a
telephone in his grave and be talking with the people at Coke." With additional reporting by Patricia Sellers, Julie
Schlosser, Ellen Florian, John Helyar, and Patricia Neering.
The
Real Story
How did Coca-Cola's
management go from first-rate to farcical in six short years? Tommy
the barber knows.
FORTUNE
Monday,
May 17, 2004
By Betsy Morris