What really happened at Coke

November 21, 2012, 4:33 PM UTC

This story is from the January 10, 2000 issue of Fortune. It is the full text of an article excerpted in Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012, a Fortune Magazine book, collected and expanded by Carol Loomis.

Forced out: As CEO, Ivester was a master of the details, but they added up to a picture some very important people didn’t like.

FORTUNE — First of all, let’s clear up any mystery about why Doug Ivester — at age 52 and after only a little more than two years on the job — suddenly resigned as chairman and CEO of Coca-Cola. He was pushed. Hard.

Sure, he was beleaguered by a string of setbacks in his short, unhappy tenure. But aides who worked with him every day — and who were as shocked as anyone when the dogged executive threw in the towel — report that everything was business as usual on the first day of December, a Wednesday, when Ivester flew from Atlanta to Chicago for a routine meeting with McDonald’s (MCD) executives.

Upon his return, everything seemed to have changed. What hasn’t come to light until now is that while Ivester was in Chicago he attended another, very private meeting — this one called by Coke’s two most powerful directors, Warren Buffett and Herbert Allen. At that meeting the two directors informed Ivester that they had lost confidence in his leadership.

For most of the past year Buffett had remained in the wings, while Allen had had numerous conversations with Ivester about his cramped management style. This time it was different, according to well-placed sources close to the situation. Together, Buffett and Allen, the board’s two 800-pound gorillas, told Ivester that they had reached an irreversible conclusion: He was no longer the man who should be running Coke (GE). It was time for a change.

The meeting was nonconfrontational — even sympathetic — and it apparently ended without a conclusion as to the next step. Conceivably Ivester could have decided to fight. But it’s also conceivable that Buffett and Allen could have decided to force the issue, perhaps as early as the next board meeting, scheduled for two weeks later. Their leadership as directors is outsized, considering that Buffett’s Berkshire Hathaway (BRKA) (of which he owns 31%) controls about 200 million shares, or 8.1%, while Allen owns or controls about nine million shares.

Whatever they were all thinking when they left the meeting, Ivester returned to Atlanta and called an emergency board meeting for that Sunday, at which he quit. His announcement stunned executives, directors, employees, and Wall Street — even the man who was named to replace him, Doug Daft, a 56-year-old Australian whose experience has mostly been running Coke’s businesses in Asia.

It was hard to believe that a man who once said, “I know how all the levers work, and I could generate so much cash I could make everybody’s head spin,” had come to such a quick, stark end as a corporate leader. Or that a man almost obsessed with doing things in an orderly, rational way would leave behind such a mess. Not only must Daft put Coke’s financial performance back on track, but he’ll also need to mend fences on all sorts of fronts, from bottlers to foreign governments to customers. Among his first priorities will be to name a second-in-command, something the board will demand of him. A good bet for the job would seem to be Jack Stahl, head of the Americas group, a “people person” and a veteran of the crack finance department that Ivester built and ran in his glory days as CFO.

Whoever is chosen, the board has made clear it wants no more one-man high-wire acts. It wants results. Now. On Ivester’s watch Coke’s earnings declined for two years running. Its return on shareholders’ equity is expected to decline to 35% this year from 42% last year and 56.5% in 1997. Its market value, which grew 34-fold to $147 billion from $4.3 billion during Goizueta’s 16-year tenure, stands essentially flat, at $148 billion, after Ivester’s two-year stint.

Ivester’s sudden fall from one of the world’s premier corporate jobs is more than just a tale of bad luck or plans gone wrong. It is a management story full of leadership lessons. It features colossal arrogance and insecurity. Its main character was blind to his own weaknesses and unwilling to take advice. He became increasingly isolated and obsessed with controlling the tiniest details — think Jimmy Carter in his final year as President.

For two decades Ivester had toiled away patiently inside Coke, the last ten years aiming directly at the top spot and dazzling CEO Roberto Goizueta with his hard work and creative execution of company strategy. A onetime accountant — an outside auditor from Ernst — he was carefully groomed by Goizueta and put through all the paces to give him the breadth of experience he would need in marketing, in global affairs, in charm and public speaking. But for all his brilliance — and nobody doubts that Ivester is brilliant — he somehow failed to grasp the vital quality that Goizueta had in abundance: that ethereal thing called leadership.

To be fair, if the planets were all aligned favorably for Goizueta, Ivester was star-crossed. He inherited the job upon Goizueta’s death in the fall of 1997, just as the Asian financial crunch took hold. Coke was on the back end of a bottler-consolidation strategy that had given it a steady stream of extra earnings. The weak dollar that had helped Coke’s earnings for years suddenly strengthened.

But the ultimate measure of a CEO is how he handles crises, and again and again, in the view of certain directors and powerful bottling executives, Ivester was a day late and a dollar short. “It’s a little like mountain climbing,” says a source close to the board. “Anyone can get to a certain level. But very few can function well in the really rare air. Doug was simply unable to give people a sense of purpose or direction.”

Almost from day one it was apparent that Ivester lacked political skills. After Goizueta’s death, the history of the company began to be rewritten, with Ivester taking greater credit for revamping the company’s bottler system and dragging the company out of the technological dark ages. By letting that story stand, Ivester gave great offense to one very powerful constituent, Donald R. Keough, who’d been Goizueta’s president and COO. The real mystery to the story is this: Why would Ivester want to run the risk of offending Keough, who, as the chairman of Allen & Co., was the right-hand man to one of his most powerful board members, Herbert Allen, and who, as a native of Nebraska, was an old friend of his other most powerful board member, Warren Buffett, and who, just for good measure, was on the board of McDonald’s, Coke’s largest customer? As times got tougher, the gregarious Keough by default became the unofficial father confessor to the disaffected throughout the Coca-Cola system — customers, bottlers, employees.

The story has some eerie echoes of the messy leadership transition Coke went through a generation ago. In 1980 the company’s 90-year-old patriarch, Robert Woodruff, emerged from his own retirement to overrule then-CEO J. Paul Austin’s choice for a successor and pick from a slate of candidates a dark horse, Cuban chemical engineer Roberto C. Goizueta, to lead the company. Ivester, like Goizueta, was in many ways an unlikely choice. He had emerged from a corporate backwater. Like Goizueta, he was painfully reserved. His rags-to-riches story was different from Goizueta’s but no less extraordinary. Ivester grew up the only child of factory workers in a conservative Southern Baptist household in tiny New Holland, Ga. He was evangelical in his approach to his work — some would say rigid. He was big on discipline, telling Fortune last year, “The highly disciplined organizations are the most creative. If you can create high discipline, in effect you’ve created security and safety … It’s follow-up. It’s returning phone calls. It’s adhering to the control system. We operate with a rigid control system. It is an enabler, not a restricter.”

Ivester had a system for everything. He’d schedule meetings with top aides at 30-day intervals, 12 months out. His far-flung group presidents knew to leave him voice mail almost nightly. Whenever anybody got a communiqué from Ivester, they knew to respond by the date in a corner of the memo or they’d hear from him.

Analytical and data-driven, Ivester spent heavily on technology for the quick and efficient delivery of vast amounts of information. His goal was to make Coke the ultimate Learning Organization, and he made his case convincingly. A year and a half ago Fortune conjectured, “Ivester may give us a glimpse of the 21st-century CEO, who marshals data and manages people in a way no pre-Information Age executive ever did or could.”

New blood: As the new CEO, Doug Daft will have to mend fences on all sorts of fronts, from bottlers to foreign governments to customers.

He took pride in being a substance-over-style guy — but that translated into taking no heed of image and perception issues, which are merely all-important to a company like Coke. He took pride in managing for the long haul — but that made him unyielding in the face of immediate circumstances. And while he was in command of a vast number of details, he seemed to lose sight of the big picture.

Ivester pursued an inflexible acquisition strategy even in the face of the brewing anti-big-American-business backlash. That cost him Orangina and the Cadbury Schweppes business in most of Europe. His aggression stirred up a hornet’s nest; Coke now faces investigations into alleged anticompetitive practices by regulators in Austria and elsewhere in Europe; it is appealing a ruling against it in Italy.

Handling the Belgian crisis last summer, Ivester had all the data but missed their larger meaning. He determined that what had made the schoolchildren sick was that Coca-Cola had been made with a bad batch of carbon dioxide. It was a minor problem, hardly a health hazard, he judged. By the time he addressed the issue publicly, it was a full-blown crisis.

When it came to the loss of Carl Ware, Coke’s highest-ranking African American, Ivester demonstrated a shocking naiveté. Ivester had enlisted Ware, a senior vice president, to head his diversity council after the company was socked with a race-discrimination lawsuit last spring. Then Ivester shuffled management last fall — and in the process moved Ware into a position in which he would be reporting to Daft, another senior vice president, instead of directly to Ivester. The change outraged Ware, who announced his intention to retire, and caused some board members to question Ivester’s judgment.

While those problems were grabbing headlines, Ivester’s emphasis on substance over style caused Coke’s marketing to suffer. One recently departed Coke marketer recalled feeling pressured to document how much revenue the company could expect from every dollar he spent on marketing, which, he said, “made you concentrate on the sure-thing single instead of the home run.” While Ivester’s Coke was great at blocking and tackling, it neglected the big stunt ad or marketing campaign needed every three to five years to rev up excitement in the brand. The biggest news Coke made on the marketing front was its decision in November to raise prices on its concentrate.

That move illuminates what may have been Ivester’s biggest blind spot as Coke’s CEO: The job is not just the running of a company but the leadership of a kind of principality, in which big, powerful bottling companies are substantial fiefdoms. Almost 90% of Coke’s business is in the hands of bottlers, and the balance of power — as well as diplomatic relations — must be maintained.

It wasn’t a good idea to alienate Coke’s 11 big anchor bottlers around the world, especially given the incestuous nature of the business. Take, for example, the largest one, Coca-Cola Enterprises (CCE), the cornerstone of the anchor bottling system created by Goizueta, Ivester, and Keough. CCE handles 70% of the company’s bottles and cans in the U.S. and, as it happens, its business in Belgium. It is a nearly $15 billion Big Board company, almost as big as Coca-Cola, and 39% owned by Coca-Cola. It also, as it happens, is run by Summerfield Johnston Jr., the grandson of Coca-Cola’s first franchised bottler and a hunting buddy of Coke board member Jimmy Williams. On its board is Howard Buffett, son of Warren Buffett.

As Coca-Cola’s problems grew, CCE’s stock price plunged; it fell from $37 in June to $18 in mid-December, wiping out more than half the company’s market cap. The troubles in Belgium began the decline; an ill-considered comment Ivester made about developing vending machines that could automatically raise prices in hot weather further angered bottling executives, who are the ones actually in the vending-machine business. Finally, significantly raising the price bottlers had to pay Coke for concentrate seemed an unconscionable affront — and whacked their stock some more.

“We’re big boys with big businesses,” says one high-ranking bottling executive. “But the perception on the Street was that Ivester was running the Coca-Cola Co. at our expense. Some had the view that he was raping the bottlers.”

But Ivester continued trying to go it alone. At one point Don Keough sent him a six-page letter with constructive suggestions on how he could improve his situation. What did Ivester do? He sent Keough a one-line response, thanking him for his input.

Ivester was never one to show signs of weakness. “I just don’t know what it’s like to feel a lot of stress,” he told Fortune last summer in the heat of the Belgian crisis. And he has adopted an almost breezy attitude since turning in his resignation. He has told Coke system executives that he is unembarrassed and essentially well-off. He’s made a lot of money. As of last February, he owned 5.3 million shares of Coke (including 2.5 million shares he could acquire by exercising options), which, at mid-December’s price of about $60, would be worth $318 million. Last year Ivester had a salary of $1.25 million and a bonus of $1.5 million, which, according to the proxy, reflected the company’s performance and “the committee’s confidence in Mr. Ivester’s leadership in difficult times.”

What happened? How could so brilliant a CEO as Roberto Goizueta have dialed such a wrong number? Simple. Goizueta was planning on living a long life, stepping back into the role of chairman, and letting Ivester run the company with his discreet guidance. It probably would have worked. Ivester was indeed a brilliant No. 2.

But in retrospect, maybe we should have seen this coming. Back in October 1994, Ivester, then newly named president and COO, took center stage at a big industry trade show and delivered a speech that was unforgettable for its surliness. It was called “Be Different or Be Damned,” and it was some debut. Ivester seemed almost to be trying to differentiate himself from the larger-than-life Goizueta. He described himself as a wolf — highly independent, nomadic, territorial. “I want your customers,” he told the stunned audience.” I want your space on the shelves … I want every single bit of beverage growth potential that exists out there.” Make no mistake, he told them, he was their competitor. He would not pretend to be their statesman. He would be different or be damned. Or, as it turned out, both.