Kellogg’s Risk Assessment Essay
Kellogg’s Risk Assessment
Many inventions are discovered by accident and that is the case of Kellogg’s. In 1898, W.K Kellogg and his brother Dr. John Harvey Kellogg attempted at making granola and failed but their failure led to flaked corn which then became Kellogg’s Corn Flakes. Kellogg’s Company engages in the manufacture and marketing of ready-to-eat cereal and convenience foods. The company’s success is due to the continuous improvement in the product line to adapt to changes in consumers’ taste.
The company’s purpose is to do more than simply offer products beneficial to the consumers. The company is always seeking ideas to improve the customer’s experience of consuming the product through the packaging, graphics, and labels. Kellogg’s’ vision is to “enrich” and offer products that are more environmentally friendly and satisfy the world through foods that matter. Kellogg’s’ activities in the United States are subject to regulations. Some of the government agencies that regulate Kellogg’s include the Food and Drug Administration, Federal Trade Commission and the Departments of Agriculture, Commerce and Labor. The company’s facilities are subject to various U.S. and foreign, federal, state, and local laws and regulations regarding the release of material into the environment and the protection of the environment in other ways.
Kellogg’s has an Emerging Issues Team that helps keep their Executive Leadership Team up-to-date of evolving health, nutrition and food safety issues that could potentially impact the consumers and business. In addition, the Crisis Incident Management Team evaluates and manages incidents that can have a high impact on the business such as natural disasters, product recalls and health epidemics. Kellogg’s has a Social Responsibility and Public Policy Committee whose duty is to oversee all aspects of their corporate responsibility approach. The audit Committee is composed of four non-management Directors and they meet with management, internal auditors, and the independent registered public accounting firm to review accounting, internal control, auditing and financial reporting matters.
To help prevent fraud and other unethical practices, the board and senior management set the “tone at the top”. It is important for the company to have a corporate culture that promotes ethical conduct. Kellogg’s has an Office of Ethics and Business Conduct that clarifies company policy or reporting issues related to ethics and business conduct. The Ethics Office provides online training and basic information on legal and regulatory requirements, policies and standards of the Global Code of Ethics.
Each year the employees are given a questionnaire that asks about information of relationships or activities that may lead to a conflict of interest and about any known violation of policies or practices. The ethics office support the internal controls that are put into place to ensure employees obey the personal and professional standards. The internal audit program evaluates the appropriateness and effectiveness of these internal controls. In order to have a better understanding of the company’s financials, the ratios give an insight as to how the company is doing compared to the industry.
The current ratio can give a sense of the efficiency of a company’s operating cycle or its ability to turn its product into cash. Kellogg’s’ current ratio of .7 compared to the industry ratio of 1.2 suggests that the company would be unable to pay off its obligations if they came due at that point. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. When comparing Kellogg’s’ return on assets ratio of 8 to the industry’s ratio of 10.8, we see that Kellogg’s is not being too effective in converting money it has to invest into net income.
Management needs to make clever choices in allocating its resources so that they can make a large profit with little investment. As for the company’s inventory turnover of 6.8 compared to the industry average of 2.9, the ratio shows that Kellogg’s has greater sales efficiency and a lower risk of loss through un-saleable stock. Kellogg faces a potential risk with their long-term debt. Kellogg’s’ long-term debt to equity ratio of 2.49 compared to the industry’s average of .68 indicates that the company has been aggressive in financing its growth with debt.
This can result in unstable earnings as a result of the additional interest expense if the company cannot maintain lower interest rates on their long-term debt. The long-term debt from 2010 went from 4,908 million to 5,037 million in 2011. On February 15, 2012 Kellogg’s’ entered into an agreement to acquire Pringles, owned by Procter & Gamble’s, for $2.695 billion. The purchase comes with some risks for Kellogg’s shareholders since the transaction is intended to be funded by international cash and issuance of about $2 billion of short and long-term debt. The company’s strategy to pay down the debt requires limiting share repurchases to employee option exercises for the next two years.
To ensure that the employees provide long-term performance, the company uses stock-based compensation, including stock options, restricted stock and executive performance shares. When comparing the operating profit from 2010 of $1,990 million to 2011 operating profit of $1,976 million, there is a decline which was negatively impacted by the supply chain investments and reestablishment of the incentive compensation program as a result of the company’s strong pay-for-performance orientation. The table below shows the $6.4 million increase in key executive compensation from 2010 to 2011. The increase is mainly due to salary increase and restricted stock award and securities options increase. The management compensation plan that is tied to profit results may cause management to provide erroneous numbers.
It seems today everyone is going “green” and therefore consumers are paying close attention to how their food is made and where it is sourced. With that in mind, Kellogg’s has begun to use only sustainably grown palm oil in Europe. The company has invested in Green Pal sustainable palm oil certificates to encourage the expansion of more responsible palm oil farms. Kellogg’s’ faces a challenge in addressing the growing concern against destructive agricultural practices that has alarmed many companies into ensuring their ingredients are environmentally friendly.
Kellogg’s’ faces growing urgency as more consumers shy away from products containing palm oil if they cannot verify the source. Kellogg’s’ has to keep up with the “green” mentality and do what it takes to educate their consumers about their environmentally friendly products. In conclusion, Kellogg’s appears to be an acceptable client. There are several areas of the company that require attention for example the long-term debt and the acquisition of Pringles. Also, going “green” is an issue that can be challenging to the company since they have to address the concern against destructive agricultural practices. Overall, I look forward to working with Kellogg Company and being of assistance.
Kaye, Leon. “Kellogg’s Commits to Sustainable Agriculture and Water Stewardship.” 24 April 2012. 18 Jan. 2013. < http://www.triplepundit.com/2012/04/kelloggs-sustainable- agriculture-water-stewardship-2011-corporate-responsibility-report/>. “Kellogg Company” DailyFinance. 17 Jan. 2013
“Kellogg Company.” Morningstar. 18 Jan. 2013
<http://insiders.morningstar.com/trading/executive-compensation.action?t=K>. Kellogg’s. 2012. 18 Jan. 2013
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 9 November 2016
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