And while Pepsi's is not always the first name among those handful cited for work in corporate citizenship, governance watchdogs agree that through consistent attention to the most important issues–without pressure from shareholders or regulators–the Purchase, N.Y.-based company has quietly transformed itself into a governance leader.

Although the independent monitors are especially hard markers, Pepsi is one of a very few companies that regularly passes their tests–receiving a perfect '10′ global rating from GovernanceMetrics International's and a score of 95.4 against the S&P 500 from Institutional Shareholder Services Inc., for example. So for serving up a unique combination of flavors–one part, smart fast-paced growth and one part, high integrity–without compromising either, Treasury & Risk Management chose PepsiCo to receive its annual award for excellence in corporate governance.

Perhaps the company's strongest attribute is a deeply independent board with powers that, if needed, can keep management in check. Twelve of its 14 directors are considered independent. That includes presiding director Robert Allen, the former CEO of AT&T Corp., who has been a PepsiCo director since 1990. "Having an independent director presiding over executive sessions of the board, especially when you have a shared CEO and chairman position, is an attribute of a well-governed company," says Rob Cox, vice president, deputy general counsel and assistant secretary at PepsiCo.

PepsiCo's board is not classified and hasn't been for years, which means that shareholders vote on the full board each year. Other directors include John Akers, former CEO of IBM Corp., who chairs the compensation committee, and Dina Dublon, the former executive vice president and CFO of JPMorgan Chase. Indra Nooyi, PepsiCo's president and CFO, and chairman and CEO Steven Reinemund are the two inside directors. Finally, the board gets high marks for the number of shares held by directors. "It is [also] a very conservative board for what they are paying themselves, given the size of the company," says Ric Marshall, chief analyst at watchdog group The Corporate Library.

The Internet is PepsiCo's latest compliance tool. Starting in 2006, it will roll out multi-level Web-based training programs for 22,000 senior employees and others in sensitive positions around the world where conflicts could emerge. These employees already must certify each year that they are in compliance with PepsiCo's code of conduct, but the new interactive site will test their understanding of issues like insider trading, harassment and safety using possible real-world scenarios. A separate series of Web-based courses will be offered to executives on business ethics and other compliance-related issues.

The company is also making it easier for international employees to report misconduct by establishing an Internet reporting process and acquiring dedicated international phone lines so employees can call toll-free. "We want people to come forward and ask questions, to create a culture where people are willing to raise issues and challenge behavior," says Pam McGuire, PepsiCo's senior vice president and deputy general counsel of business practices and compliance. "We have an open door and are encouraging people to speak openly and honestly." Perhaps the compliance office's most ambitious deployment involves a database and case management system that will allow for better monitoring and tracing of complaints at the facility level, enabling the company to identify causes quickly. Compliance reports are shared regularly with the audit committee, but the database will provide more quantitative metrics on the compliance program.

ALWAYS A FEW HICCUPS

As with many large companies, PepsiCo has had its rough spots. Last year it watched as one of its board members, Franklin Raines, chairman and CEO of Fannie Mae, was ousted after a probe of Fannie's accounting. Doubly embarrassing for PepsiCo was the fact that Raines, a director since 1999, was chair of its audit committee. To its credit, the PepsiCo board appears to have taken swift action by announcing that Raines would not stand for re-election, which took effect in May. The company also revealed last year that the SEC was considering taking action against two of its divisions for the roles of two non-executive employees in a 2001 payments probe involving Kmart. No SEC action has yet been taken, but PepsiCo has stated the allegations do not involve its accounting for transactions or financial statements.

The first year of Sarbanes-Oxley Section 404 compliance resulted in no material weaknesses for the company. But as with all public companies, PepsiCo has made adjustments, many of which have given new duties to the finance operations. In recent years, each division has had a SOX coordination team in place to oversee financial control testing and reporting results. Once those results are signed off on, they go to a separate corporate-level SOX team for review, before the results are shared with senior management.

As with most companies its size, PepsiCo has put in place more documentation and controls testing to ensure sound processes and improved segregation of duties. Monthly T&E expense reports must be approved by managers and are audited regularly. Strict processes have been put in place for selective vendors and senior approvals are now required on more spending on third-party services.

"Strong corporate governance is the foundation for financial integrity," says Matthew McKenna, senior vice president of finance. PepsiCo is showing how that can be done day in and day out, without sacrificing its fizz.