Corporate Governance Paper for Starbucks

Table of Contents

Executive Summary

Company Background

Situation Analysis

Executive and Board Review

Corporate Governance Analysis

Conclusion

Reference Page

Appendix

Intro/ Executive Summary

There are a lot of companies that make up the society as we know it today, however we are going to talk Starbucks and what they have done to make a difference and what they have done in the way of different corporate governance policies to set them ahead of their competitors.

Starbucks has been tarnished by a number of different public relation issues, however they have done well in turning them around in their ways of improving their public image into a thriving and successful business that they have today. We first see that Starbucks was hit by a number of fair trade issues, which lead them to start their campaigns in showing and proving that they get most of their coffee from free trade dealers now.

Starbucks put a number of things in place to counter act their prior issues that may have haunted them in the begging years of operation. They have loaned money to farmers that needed it, and would have otherwise been in a bad situation. Starbucks uses mostly recycled material to produce their cups and other material in the storefront. Starbucks has bought other companies in attempts to broaden their spectrum from just coffee. These are just a few things that Starbucks has done to try and come out on top as one of the most admired producers of coffee and coffee related beverages. I will go into detail and discuss on the different things that Starbucks has done to make them a leader in the coffee industry in sustainability, in both policy and operation.

Company History

Three friends named Jerry Baldwin, Zev Siegl, and Gordon Bowker formed Starbucks in Seattle in 1971, these three friends had a common interest in providing fresh gourmet coffee (Garza, 2007). The love for coffee led the three friends to start this company, which at first was just a place that people could buy fresh ground coffee and coffee accessories. The business went on like this for a while, then came the 80’s and the business changed.

Howard Schultz discovered Starbucks in 1981, when he was selling parts to them from his company Hammarplast. “From his first cup of Sumatra, Howard was drawn into Starbucks and joined a year later” (Heritage, 2012). “In 1982 Baldwin hired Schultz as the new head of marketing and shortly thereafter sent him to Milan to attend an international housewares show in Italy” (Garza, 2007). It was at this point that Shultz fount the Italian culture and the way in which they drank coffee, in shops, that interested him. It was in Verona in 1983, where Shultz sampled his first latte (Timeline, 2009).

The main thing that Shultz witnessed was the way in which these people were interacting and enjoying each others company. It was at this moment that Shultz realized on what direction Starbucks should go in. This was a new way in which no American coffee shop had went, that is until then. So Shultz took this idea back to the United States and described it to the board. His idea was meant will a lot of resistance and ultimately got shot down, however Baldwin let Shultz try this idea in the corner of one of the shops (Garza, 2007).

It wasn’t until Starbucks had opened six more shops downtown, and Shultz ideas still being rejected, that Shultz decided to part from this shop and open his own shop called Il Giornale in 1985 (Garza, 2007). This shop had oly been open about two months until its sales were 300 percent more than Starbuck, at about 700 people a day (Garza, 2007). In 1986 Shultz hired “Dave Olsen, who in 1974 had opened a coffee bar, Café Allegro, near the busiest entrance to the University of Washington campus. Olsen was a long-standing Starbucks customer, having discovered the quality of Starbucks' coffee beans, gotten to know the owners, and worked with them to develop a custom espresso roast for use in his café. Olsen's successful Café Allegro had become known for café au lait, a concoction equivalent to the Italian caffè latte” (Timeline, 2009). Shultz put Dave in charge of running his coffee shop in order to help its success.

It was in August of 1987 that Shultz gathered some local investors, which were interested in his idea of the coffee shops, and bought out Starbucks for 3.7 million. Shultz had promised his investors that they would be able to open about 125 new location in the within the next five years, which helped his proposition for them to invest in his idea (Garza, 2007). At this time that the logo was turned from a bare breasted mermaid into a more acceptable logo, as well as turning the six existed location into coffee bars as well. (See appendix) It wasn’t long after this that Starbucks had expanded from its original 17 stores to Vancouver, Portland, and Chicago. In 1988 Shultz had decided to expand the health insurance coverage to include part time employees, due in part to his father recently died from cancer (Timeline, 2009). We start to see the profits start to roll in, in 1990 (Timeline, 2009).

We see that in 1991 that Starbuck expands more into California, into Airports, and mail order catalog. At this time Starbucks started to offer stock options to its employees. We see that in 1992 Starbucks went public with their IPO, following in 1994 Starbucks and Pepsi had a joint adventure to mass-produce coffee related products (Timeline, 2009). In1995 Starbucks starts to reinvent their image and stores. Starting in 1996 Starbucks starts to expand into other country, starting with Japan. Starbucks was growing at a rate that was unheard of in the coffee business, which had led them to being ten times the size of when they started. This included having operations in United States, Japan, and Singapore (Garza, 2007). Starbucks wanted to start expanding into other markets besides just the storefront, this included the release of the home espresso machine in 1997, focusing on supermarket sales in 1998, Offering tea through Tazo Tea Company in 1999, and even producing premium coffee ice cream with Dreyer's (Garza, 2007). “In 2000, Howard Schultz transitioned from chairman and chief executive officer to chairman and chief global strategist while Orin Smith was promoted to president and chief executive officer. With its strong focus on quality of coffee, Starbucks launched Special Reserve program in a quest to find the highest quality coffee in the world. It also opened stores in Dubai, Hong Kong, Shanghai, Qatar, Bahrain; Saudi Arabia and Australia. (Schultz becomes Chief Global Strategist)” (Timeline, 2009). This was a step in the right direction that helped to set them apart from the rest of the coffee shops.

Situation Analysis

Starbucks has had a lot of things that have helped to shape them into the company that they are today. Starbucks cares about their customers satisfaction and the community around them, which is demonstrated by their mission statement and their corporate governance policy’s, which are as follows: Our mission: to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time. The corporate social responsibility is “At Starbucks, our commitment to good governance, ethical conduct and social responsibility is core to our way of doing business, and strongly aligned with our drive to create and increase shareholder value. We are also committed to maintaining our relationships with stakeholders and gaining their input and feedback on issues of mutual importance” (Customer relations, 2007).

Starbucks Corporation has stated that they are committed to maintaining their uncompromising principles while we grow. In this respect they have 12 directors that meet independence requirements of NASDAQ® and the U.S. Securities and Exchange Commission (Customer relations, 2007).

The events that lead Starbucks to go down this path are a number of small and large occurrences mostly in the media. First we see that Starbucks had a number of issues with Starbucks and their use of non-fair-trade coffee beans (Customer relations, 2007). Starbucks has been pressured, since their IPO, to use fair trade coffee. Their customers and the media found out about fair-trade coffee and the difference between that and the coffee that Starbucks was using, and this issued uproar, thus tarnishing the image of Starbucks. Starbucks seen this and put things in motion to fix their image, including a new mission statement, recycling programs, and most importantly their use of fair-trade coffee.

These things proved to be working and helped to repair Starbucks tarnished image to one that Starbucks wanted. Starbucks also started to use cups that where made from mostly recycled material. This helped in the restoration that they cared about the environment and not just about making a fast buck, or so to say. So a lot of their shareholders found this to be a good step in the right direction. Starbucks also implemented marketing plans to inform all their shareholders on the moves they were taking and the moves that they intend to take. Most of this marketing was done on the storefront side and dispersed by word of mouth. This proved to be the best way to spread there the information about their improvements and their changes. This was a less abrasive way of getting the message out about their changes.

This was just one of the reasons that Starbucks headed in the direction that they did. “Established in 2004, the EIC is a cross-functional team of 18 Starbucks executives responsible for proactively identifying, prioritizing and mapping key external trends and issues that may impact Starbucks and/or specific business units on a local, regional or global level. As issues are identified, the EIC may engage external stakeholders to gain input. It may also involve appropriate business units to explore an issue further, define feasible options and present follow-up recommendations at a later date. For stability and continuity, among other reasons, Starbucks has historically had a classified board. However, Starbucks has questioned whether a classified board reduces accountability of directors because of the limits it places on shareholders’ ability to evaluate and elect the board annually. The board requested that the Nominating and Corporate Governance Committee once again consider the merits of a declassified board in fiscal 2005. Based on the Nominating and Corporate Governance Committee’s recommendation, the board approved an amendment to our Articles of Incorporation, which provides for the annual election of all directors, and then recommended to our shareholders that they approve this change. Starbucks shareholders approved the change at the company’s 2006 Annual Shareholders’ Meeting” (Customer relations, 2007). This quote shows us that Starbucks also made a change because of the corporate political situation as well. The board seen a need to change the way things were run, thus causing them to implement the change that was needed, this was then put to a vote and then approved by the shareholders. This proves that the board has the interest of the Stakeholders and Shareholders in mind, and does what they see as necessary to change and steer the big corporation of Starbucks in the right direction.

Executive and board review

The current board of directors includes:

- Howard Schultz

- Starbucks founder, chairman, president and chief executive officer

- William (Bill) Bradley

- Allen & Company LLC
- Managing director

- Mellody Hobson

- Ariel Capital Management, LLC
- Ariel Mutual Funds
- President

- Kevin Johnson

- Juniper Networks, Inc.
- Chief executive officer

- Olden Lee

- PepsiCo, Inc.
- Retired executive

- Joshua Cooper Ramo

- Kissinger Associates
- Managing director

- Sheryl Sandberg

- Facebook, Inc.
- Chief operating officer

- James Shennan, Jr.

- Trinity Ventures
- General partner emeritus

- Clara Shih

- Hearsay Labs, Inc.
- Chief executive officer

- Javier Teruel

- Colgate - Palmolive Company
- Retired vice chairman

- Myron Ullman, III

- J.C. Penney Company, Inc.
- Chairman and chief executive officer

- Craig Weatherup

- Pepsi-Cola Company
- Retired chief executive officer

The executive board of Starbucks has not changed that much over the years, however we see that Starbucks has brought on a lot of new people that have had experience in business sustainable practices. This has helped Starbucks to shape the company into a corporation that has its impact and business practices in mind. We see that most of the people that are on this board have prior experience of being in similar positions of other successful corporations. This helped to place Starbucks in the opportunistic role and since we see a lot of seasoned people, this helped all of them to bring their experiences to the issues that tarnished the image of Starbucks. The board brought the mistakes that the other older companies had made to the table, so that Starbucks could learn from them and not follow in its footsteps. One of the best moves that Starbucks made was in hiring some past executives from their partner Pepsi, which helped them break into the beverage market.

Corporate Governance Analysis

In Starbucks corporate responsibility report of 2007, they stated, “In fiscal 2006, we fulfilled our commitment to create a CSR Executive Committee, an effort we believe will strengthen the company’s overall governance of CSR. The Committee is charged with setting CSR-related strategy and policies; monitoring progress against CSR objectives; reviewing and approving major CSR social investment activity; overseeing global, regional and local CSR organizational structure and accountabilities; and ensuring CSR integration throughout the company. The CSR Executive Committee is comprised of Starbucks president and CEO, who heads the Committee, and several of his direct reports, all of whom are senior level officers of the company. In 2006, as part of our ethical sourcing commitment, the Committee made the decision to approve the EIC’s recommendation and implement Starbucks Socially Responsible Cocoa Sourcing pilot, which allows for a premium to be paid for processed cocoa when it is produced and sourced in a socially responsible manner”.

We see that in this standard that Starbucks seen the need to have a central committee that would oversee monitor and mange the policies and procedures that were put into place. Starbucks has put into place a number of different procedures, policies, guidelines, standards in the attempts to steer their business to stay within the guidelines of their missions statement, the law and the guiding principals, it was not until 2006 that Starbucks formed a governing committee, to insure that the things put in place were actually being followed. “Starbucks formed a Policy Governance Council in fiscal 2006 to oversee and approve our governance tools at the global enterprise level, and to ensure they are well defined, consistent with each other, current, stored for easy retrieval, and effectively communicated to partners. The Council is comprised of company leaders who represent multiple business units and functions, and is supported by Starbucks newly created Policy Office and staff” (Customer relations, 2007). This committee allows Starbucks to pay close attention to the policies and procedures that they have put into place. The committee is responsible for monitoring and focusing on customer, stakeholder’s satisfaction. In order to get more customer involvement and gain more transparency, Starbucks engaged in many stakeholder meeting, including a nutrition meeting in October 2005, water related issues in November of 2005, a meeting to discuss the fiscal year of 2005 in June 2006, and the last meeting was a meeting to gain feedback from all stakeholders in September of 2006 (Customer relations, 2007). This shows us that Starbucks cares what their shareholders think of the company and how they should proceed. Unlike other business they do not wait until the numbers come in, they are proactive in finding out what the stakeholders feel so that they may make changes and or keep on the path if need be.

Starbucks implements a number of things to move towards more sustainable practices. “When we began our journey to create a more sustainable model, there were several key assumptions we considered and which we still believe to be relevant today. We assume that:

- A holistic strategy for sustainability must include criteria for quality, social, environmental and economic aspects.
- Premium prices paid for coffee are linked to premium quality.
- Economic transparency is required and necessary to evaluate whether farmers receive equitable payment for their crops.
- Our strong relationships and direct engagement with coffee farmers and suppliers will keep us in touch with their progress and issues.
- Coffee-growing communities will benefit from the economic stability of local farmers as well as from targeted community investments.
- Access to credit and other resources will enable farmers to make quality improvements and strengthen their businesses.
- Certification labels, such as Fair Trade Certified™ and organic, help to advance specific aspects of sustainable coffee farming.
- By embracing sustainability, Starbucks can lead change within the coffee industry.

As our journey progressed over several years, we created and launched a number of programs and initiatives. Collectively, they represent the key components of Starbucks sustainable model for coffee production, and have been the focus of our ongoing efforts. They are:

- Coffee and Farmer Equity (C.A.F.E.) Practices, a set of coffee-buying guidelines, was formally introduced in fiscal 2004.
- Starbucks Farmer Support Center, an on-the-ground field office located in Costa Rica, opened in fiscal 2004 to provide technical resources and ongoing support to coffee farmers throughout the world.
- Funding of coffee community projects was started in fiscal 1998.
- Starbucks Black Apron Exclusives™ program launched in fiscal 2004 to showcase and recognize the production of rarified coffees of exceptional quality, and reward the origin farming community with funding for a local project.
- Loans that enable farmers to access credit began in fiscal 2001.
- An alliance with Conservation International began in 1998 to promote environmentally sound practices aimed at preserving biodiversity in some coffee-growing regions in Latin America.
- The purchasing of certified coffees, such as Fair Trade Certified™ and organic coffees – both of which promote aspects of a sustainable farming model – began in fiscal 2000.
- A partnership with the African Wildlife Foundation to advance sustainable farming practices in East Africa was initiated in fiscal 2005.

(Customer relations, 2007).

Conclusion

Upon the completion of my research I have found that Starbucks is on the path to be a very successful company. I have found that Starbucks responds to the public wants and needs in a very fast and efficient manner, this is key to having a successful business in todays economy. One must be fast to respond in every aspect of business today, we also see that Starbucks has made great improvements in social responsibilities. One can see that in today’s society many people see the company’s involvement in sustainability just as important as the business practices themselves. In recent years we are beginning to see that business that have changed their corporate governance to include, have cut cost and cut the impact that they leave on the environment.

Many companies that have not been known for their part in trying to less the devastation on the environment, like the oil companies, have started to make changes in their governance principals and practices to reflect sustainable practices. We see that Starbucks has done just that, in that they have changed the way in which they do business and operate on a day-to-day basis in order to help preserve the environment. While doing this they have also put things into motion that give back to the environment, and their shareholders. Starbucks has all this while remaining profitable and continuing to grow and innovate within the company.

I feel that Starbucks is going to be successful if they keep up the responsiveness and responsibility that they hold to their shareholders, because all though having these traits are all necessary and excellent ways to conduct business, they do not change the facet that, no matter what business or industry we are looking at, they are all in business to make money. This is the reason for the environmental risk analysis, if the company is trying to preform an projects that will help reduce waste but does not help cuts cost even cost them more money than they will get out of it, this would be a bad investment, and not a good thing to invest in or start.

Appendix

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Source: http://www.seriouseats.com/images/starbuckslogos.jpg

References

Customer Relations. (2007). My Starbucks. Starbucks Corportation

Garza, G. (2007). The History of Starbucks. Retrieved from: http://www.catalogs.com/info/food/the-history-of-starbucks.html

Heritage. (2012). Our Heritage. Retrieved from: http://www.starbucks.com/about-us/our-heritage

Timeline. (2009). Starbucks History. Retrieved from: http://www.xtimeline.com/timeline/Starbucks-History