It is distressing how tolerant major corporations are of dishonest behavior by their executives. We should send a lot of them to jail, but we don't. I just read an article about fraud by Coca Cola that illustrates this, and also illustrates a number of other points in industrial organization. The article is "Into the Fryer: How Coke Officials Beefed Up Results Of Marketing Test; Consultant Gave Kids' Clubs Cash to Buy Value Meals In Burger King Promotion; Wiring $9,000 for Whoppers" Chad Terhune. Wall Street Journal. (Eastern edition). New York, N.Y.: Aug 20, 2003. pg. A.1. Mid-level executives at Coca Cola defrauded Burger King, its second biggest fountain drink customer, in a minor but indicative way by buying about 700 meals to bias a test market and induce Burger King to pend $10 million on a joint promotion. When the Coke board found out, it mildly punished the executive and kept the secret from Burger King till this year. When the story did come out, Coke paid $21 million to Burger King as compensation to restore good relations. Here is the story.

Coke advised Burger King on everything from improving drive-through business to breakfast items. The theory: More business for Burger King means more potential Coke buyers. In the mid- 1990s, Coke pitched Frozen Coke to Burger King as a way to boost its dessert and snack sales.

Frozen Coke dates back to the early 1970s, when it was introduced in convenience stores and other retail outlets to compete against brands such as Slurpee. About a dozen Burger King restaurants introduced Frozen Coke in 1997. Two years later, Burger King mandated that all of its franchisees install a Frozen Coke dispenser.

The restaurant chain's new french fry had just flopped, and its independent-minded franchisees had rejected Burger King's idea of a free Whopper promotion as too costly for them.

It was the first big test for John Fisher, who had just taken the helm of Coke's Burger King account team. The vice president was known as a talented salesman and dynamic speaker, and was considered a rising star at Coke. One of his marketing managers, Robert Bader, oversaw the Frozen Coke test. Mr. Fisher, 40 years old, and Mr. Bader, 45, decline to comment for this article.

Mr. Bader wired $9,000 from his personal Visa card to Mr. Berryman on Monday, March 13, spending another $400 for the transaction fee. Mr. Berryman arrived in Richmond that same day. He had lunch with Esther Hyatt, who at the time was development director for the Boys & Girls Clubs of Metro Richmond.

...

The story might have ended there had it not been for a routine audit. On Aug. 9, 2000, Mr. Bader filed an expense report for $4,432.01 for the "Richmond mystery shop" with dozens of Burger King receipts attached. Mr. Fisher approved it. That amount represented the receipts returned by Mr. Berryman, the consultant.

About five months later, Matthew Whitley, the internal audit manager in Coke's fountain division, randomly pulled Mr. Bader's expense report during the routine audit. Mr. Whitley says he thought the amount of meals purchased for a "mystery shop" was excessive.

On March 2, 2001, Mr. Whitley and another auditor quizzed Mr. Bader about the expense report. In follow-up memos, Mr. Bader defended Coke's "unconventional" methods in using Mr. Berryman as being "entrepreneurial." He told the auditors he disagreed with Mr. Fisher's decision to re-start the value-meal purchases, but he considered it a judgment call by his boss. "I would never have agreed to move forward if I believed I was being asked to commit an ethics code or legal transgression," Mr. Bader wrote.

Mr. Moore, the head of Coke's fountain unit, wanted an explanation from Mr. Fisher. In a memo to Mr. Moore, Mr. Fisher argued that the value-meal purchases were necessary to compensate for an unfair comparison between Richmond and Tampa. He said the Florida city was warmer in March, which would increase drink sales there. "We had to deseasonalize the data in order to have an accurate measure," he wrote. "I am not completely aware of the details of how the shops were executed but take full responsibility for the decision to execute the program."

Mr. Whitley says he and the other auditor recommended that the company fire Mr. Fisher. Senior executives at Coke opted for a lighter punishment. The company cut Mr. Fisher's 2000 bonus in half and eliminated his stock-option award for 2001. "These actions exposed the Coca-Cola Co. to a risk of damage to its reputation as well as to the relationship with a major customer," Mr. Moore wrote in a May 17, 2001, disciplinary report.

Two months later, Coke's audit committee was informed of the Frozen Coke affair when it received an internal quarterly report on employee code-of-conduct violations. The audit committee then consisted of chairman Peter Ueberroth, now candidate for governor of California; billionaire investor Warren Buffett; Cathleen Black, president of Hearst Magazines, a unit of Hearst Corp.; and Ronald Allen, retired chairman of Delta Air Lines. They all declined to comment beyond what the company has already said on the matter.

At the time, Coke didn't tell Burger King what it had learned concerning the Richmond test. Coke declines to comment on why not.

About two years later, on Feb. 4, 2003, Mr. Whitley sent Mr. Heyer, who had just recently become Coke's president, an e-mail about the Richmond test and unrelated allegations of accounting fraud and earnings manipulation. Mr. Heyer didn't respond to the e-mail, Mr. Whitley says. Mr. Heyer declines to comment. On March 26, Deval Patrick, the company's general counsel, responded to a follow-up e- mail from Mr. Whitley and pledged to conduct an internal investigation into his allegations. Mr. Whitley lost his job that same day.

In May, Mr. Whitley, 37, filed wrongful-termination suits against Coke in state and federal court in Atlanta. Mr. Whitley contends he was retaliated against for being a whistleblower. In court documents, Coke said Mr. Whitley's termination was part of 1,000 layoffs in the company's North American operations. Coke has asked the courts to dismiss Mr. Whitley's lawsuits.

Mr. Fisher was promoted to a top marketing job in the fountain division earlier this year. In April, internal auditors at Coke questioned him about swapping Disney theme- park tickets purchased by the company for Notre Dame football tickets, according to people familiar with the matter. He left the company soon after, but Coke declines to say why. Mr. Bader works as a marketing manager for the fountain division, but is no longer on the Burger King account.

1. Companies care about good relations with each other and are willing to pay a lot to maintain them.

2. There are a lots of crooks in business.

3. Coca Cola claims to value ethical behavior, but does not.

4. Here we have an example of how a franchise--Burger King-- sometimes imposes new duties on all its franchisees, and sometimes decides not to against their objections.

5. Here we have an example of cooperative behavior when two companies sell complementary goods.

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