This report covers full year 2007 through May Our last report covered We release a report every year.

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2 Overview In a world that continues to experience unprecedented economic, environmental and social challenges, PepsiCo - one of the world s largest food and beverage companies - recognizes our responsibilities to help make a difference. In this overview, we share our progress in addressing these challenges, identify where we believe we can have the most impact and acknowledge our opportunities for continuous improvement. Today, we are striving for a balance of achieving continued financial success while bringing purpose to our performance. We call it Performance with Purpose and we have defined three prime areas of influence: human, environmental and talent sustainability. Human Sustainability refers to our efforts to nourishing consumers with a range of products, from treats to healthy eats. Environmental Sustainability reinforces our commitment to work to protect our natural resources and operate in a way that minimizes our environmental footprint. Talent Sustainability focuses on developing our employees by creating a diverse and inclusive culture and making sure our company is an attractive destination for the world s best people. During this journey, we re shifting towards developing and enhancing metrics to more meaningfully reflect PepsiCo s global performance. While this will take time, we believe this will bring sharper focus to achieving demonstrable progress and to integrating sustainability goals more fully into our business operations. The talents and skills of our global workforce, coupled with our operational capabilities, provide our company with a unique opportunity to have a positive impact on society. Time and again, our people demonstrate they are committed to making a difference and to living PepsiCo s Sustainability Vision. Our vision is to continually improve all aspects of the world in which we operate - environment, social, economic -creating a better tomorrow than today. We have communicated this vision to our 185,000 employees worldwide in 45 different languages as part of our goal to bring greater good to the world. It s a responsibility every associate at PepsiCo takes seriously. This report covers full year 2007 through May Our last report covered We release a report every year. We have followed the G3 Guidelines of the Global Reporting Initiative. Our report includes PepsiCo operations that we own and operate. In the United States and in some other countries, independent franchise bottlers manufacture and distribute beverage products. Our three largest bottlers are The Pepsi Bottling Group (PBG), PepsiAmericas, Inc. and Pepsi Bottling Ventures LLC. Our ownership of each of these bottlers is less than 50% and because we do not control these bottlers, we do not consolidate their results or include their information in this report except as noted in the text. The report is expected to be read by employees, customers, consumers, shareholders, analysts and other non-governmental (NGO) groups interested in PepsiCo and sustainability PepsiCo Corporate Sustainability Report

3 Awards and Recognitions Data is prepared following PepsiCo-established metrics and protocols, which often follow external methods. For additional information contact the PepsiCo Sustainability Communications Department at (914) Select Regions PepsiCo was named to the DJSI World and North America Indexes. Business Ethics magazine named PepsiCo to the 100 Best Corporate Citizens list. The U.S. Environmental Protection Agency (EPA) recognized PepsiCo as Green Power Partner of the Year and Energy Star Partner of the Year. The Human Rights Campaign named PepsiCo as one of the Best Places to Work for Gay/Lesbian/ Bisexual/Transgender (GLBT) Equality. Working Mother magazine named PepsiCo to its Best Green Companies for America s Children list. The AIDS Responsibility Project (ARP) presented PepsiCo with the International Corporate Courage Award. CRO magazine recognized PepsiCo among the Best Corporate Citizens in the United States. Seven PepsiCo China bottling plants were recognized as Best Water-Saving Companies in China s beverage industry by the China Beverage Industry Association. China Rights Forum and China Business News Group named PepsiCo 2007 Outstanding Employer of China in the Shanghai Region. Catalyst honored PepsiCo with the 2007 Catalyst Award for its Woman of Color Multicultural Alliance. Black Enterprise magazine named PepsiCo as one of the 40 Best Companies for Diversity. The Cause Marketing Forum awarded Sam s Club/ Aquafina s Return the Warmth program with the top environmental honor, the Halo Award PepsiCo Corporate Sustainability Report 3

4 Indra Nooyi Q&A What does sustainability mean at PepsiCo? We define sustainability as Performance with Purpose. In today s world, consumers are bringing their principles to their purchasing. We, in return, are bringing a purpose to our performance. There are three specific components to Performance with Purpose. First, we offer foods and beverages that responsibly provide nourishment to people and societies. Second, we are intent on minimizing our impact on the environment in which we operate. And third, we work hard to create a safe, healthy and inclusive environment where the best people want to work. How does the Performance with Purpose mission tie in with our business? Performance with Purpose is at the foundation of every aspect of our business. Indeed, financial achievement can and must go hand-in-hand with sustainability. Our approach to creating superior financial performance is straightforward - drive shareholder value. We integrate a commitment to human, environmental and talent performance into all of our operations. Doing so creates a blueprint for PepsiCo to develop, manufacture and sell our products in a sustainable way, and gives us a competitive advantage in markets all over the world, which in turn drives long-term growth. How is PepsiCo responding to these difficult economic times? There s no question that these are challenging times. Like many companies, we re facing headwinds such as rising costs, an uncertain economic outlook and shifting currency rates. While we can t control the macroeconomic system, we need to adapt to the nearterm challenges to deliver our long-term growth plans. We re taking measured steps to continue generating long-term shareholder value. First, we re focusing on consumer value as much as innovation and premium products. Second, we re calibrating consumer price points and packaging options to keep our products in proportion with the rest of the food basket and to keep pace with changing consumer preferences and wallet constraints. And finally, we re investing where we believe we have the greatest leverage to maintain and ultimately accelerate our growth. What is PepsiCo doing to tackle consumer health concerns like obesity? Obesity impacts quality of life and poses a serious health risk. More than one billion adults are overweight and 300 million are clinically obese - in both developed and developing countries. We recognize our responsibility to address diet and nutrition concerns around the globe. We re mindful of the way the world is changing and we re listening to experts who provide deep insights and enabling solutions. As a result, we ve made steady progress transforming our portfolio, for example, by introducing new products that offer improved nutrition. We re reducing portion sizes and reformulating some PepsiCo Corporate Sustainability Report

5 of our existing products to reduce fat, saturated fat, salt and sugar. We are also adding more whole grains, fiber, fruits and vegetables and vitamins and minerals to our products. We agree with the World Health Organization, the National Institutes of Health and other leading experts that the ultimate solution to obesity is energy balance - the balance between calories consumed and calories burned through activity. We re committed to supporting both sides of this energy balance equation. Water is a key ingredient in many PepsiCo products. How is the company addressing water issues? We re working hard to reduce the amount of water we use to make our products. We re also promoting access to clean water around the world through alliances with non-profit groups and working with agricultural suppliers to assist them with efficiency improvements. Our efforts are focused where our assets and expertise can make the biggest impact. One such area is farming. On average, agriculture accounts for 70 percent of all fresh water use in the world and as much as 95 percent in many developing countries - almost all goes to irrigating crops. Changing the way that farmers use water in some of the fastest growing economies will help address water scarcity. In India, for example, PepsiCo is working with farmers to save approximately 30 percent of the water they typically use for growing rice. We ve introduced a unique form of direct seeding and paddy cultivation. In China, PepsiCo developed a low water use way to grow potatoes under desert conditions by using a pivot irrigation system. In all markets - but especially those that are growing rapidly - applying innovation and developing new methods for conserving water is vital to our business. How can the food and beverage industry make the biggest difference in terms of addressing environmental sustainability? PepsiCo has focused on three environmental areas that are critical to the industry: water, energy and packaging. We re continually looking for ways to bring to scale the good ideas being implemented across our business and we share this experience with our peers. Our goal is continuous improvement, driven by the ingenuity of our people, best practices, technology, education, and innovation. We ve always been an environmentally concerned company. In recent years, we ve stepped up our initiatives. Now that we have common environmental metrics across all PepsiCo divisions globally, we can better track, manage and understand our environmental footprint. I m certain this will lead to continuous progress PepsiCo Corporate Sustainability Report 5

6 Our Business PepsiCo is one of the world s largest food and beverage companies, with 2007 annual revenues of more than $39 billion and total operating profits of more than $7 billion. The company employs approximately 185,000 people worldwide and our products are sold in approximately 200 countries. Our businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. We manufacture and sell more than 500 products that serve the needs of consumers of all ages. Our common stock (PEP) is traded principally on the New York Stock Exchange. PepsiCo is also listed on Chicago and Swiss Stock Exchanges. In the fourth quarter of 2007, PepsiCo announced a strategic realignment of our organizational structure to position the Company for continued strong growth and more fully leverage the talents of its senior leaders. PepsiCo, which previously comprised PepsiCo North America and PepsiCo International, is now organized in three business units as follows: PepsiCo Americas Foods (PAF), which includes Frito- Lay North America, Quaker Foods North America and all of our Latin American food and snack businesses (LAF), including our Sabritas and Gamesa businesses in Mexico. PepsiCo Americas Beverages (PAB), which includes PepsiCo Beverages North America and all of our Latin America beverage businesses; and. PepsiCo International (PI), which includes all PepsiCo businesses in the United Kingdom, Europe, Asia, Middle East and Africa. In 2008, our three business units are comprised of six reportable segments, as follows: Frito-Lay North America Quaker Foods North America Latin Americas Foods PepsiCo Americas Beverages United Kingdom & Europe Middle East, Africa & Asia Our Operations Outside of the United States, our largest markets are Mexico, the United Kingdom and Canada. PepsiCo World Headquarters are located in Purchase, New York, USA. Pepsi-Cola North America headquarters are also located in Purchase, New York. Other North America headquarters include Frito-Lay North America in Plano, Texas, USA and Quaker Foods, Tropicana and Gatorade headquarters in Chicago, Illinois, USA. PepsiCo International headquarters are located in Purchase, New York, USA. There are international business units headquarters located around the world: PepsiCo Corporate Sustainability Report

7 PepsiCo Asia - Hong Kong, PepsiCo Europe - Switzerland, PepsiCo Latin America Region Foods and Beverages - Mexico, PepsiCo Middle East and Africa - United Arab Emirates, Sabritas - Mexico. In addition to our various headquarters, our major properties include: Frito-Lay North America (FLNA) - FLNA s most significant properties include its headquarters building and a research facility in Plano, Texas, both of which are owned. FLNA also owns or leases approximately 40 food manufacturing and processing plants and approximately 1,920 warehouses, distribution centers and offices. In addition, FLNA also utilizes approximately 40 plants and production processing facilities that are owned or leased by our contract manufacturers or co-packers. PepsiCo Beverages North America (PBNA) - In addition to its headquarters building in downtown Chicago, Illinois, which is leased, PBNA s most significant properties include its Tropicana facility in Bradenton, Florida, its concentrate plant in Ireland and its research and development facility in Valhalla, New York, all of which are owned. PBNA also owns or leases approximately 15 plants and production processing facilities and approximately 40 warehouses, distribution centers and offices. In addition, authorized bottlers in which we have an ownership interest own or lease approximately 65 bottling plants. PBNA also utilizes approximately 55 plants and production processing facilities and approximately 45 warehouses and distribution centers that are owned or leased by our contract manufacturers or co-packers. Quaker Foods North America (QFNA) - QFNA owns a plant in Cedar Rapids, Iowa, which is its most significant property. QFNA also owns or leases three plants and production processing facilities in North America. In addition, QFNA utilizes approximately 25 manufacturing plants, production processing facilities and distribution centers that are owned or leased by our contract manufacturers or co-packers. PepsiCo International (PI) - PI s most significant property, a concentrate plant in Ireland, is owned. PI also owns or leases approximately 170 plants and approximately 1,700 warehouses, distribution centers and offices. In addition, authorized bottlers in which we have an ownership interest own or lease approximately 50 plants and 400 distribution centers. PI also utilizes approximately 5 plants and production processing facilities and approximately 30 distribution centers that are owned or leased by our contract manufacturers or co-packers. Shared Properties - QFNA shares approximately 10 production facilities and approximately 5 warehouses and distribution centers with FLNA, 15 warehouses and distribution centers with both FLNA and PBNA, and 10 offices with PBNA and FLNA PepsiCo Corporate Sustainability Report 7

8 Our Stakeholders We touch the lives of many people through our businesses. We welcome honest discussion with individuals, groups and advocates who represent community, environmental and social interests. Issues of concern brought to the attention of PepsiCo will be considered with a view toward our businesses and our sphere of influence. We interact with many stakeholders. Our Consumers Through our human sustainability initiatives, we offer our consumers a wide range of products that deliver great taste, nutritional value,convenience and affordability. We are committed to playing a responsible role in health and wellness by encouraging consumers to adopt healthy, active lifestyles, beginning with the products we offer. Each year, we invest in innovation to better serve consumer wants and needs through new products and packaging. We continually expand our distribution network to make our products more widely available. And we work relentlessly to improve productivity so we can offer affordable products to a broad range of consumers. We have toll-free telephone numbers consumers can call with questions or comments. The call numbers are included on our product packaging. We also provide a number of websites where consumers can get information about our brands, including nutritional content and answers to many other questions about our products. Our Communities We recognize our responsibility to be a contributing member of our communities, both on a global and local level. We operate our businesses responsibly and seek to be a positive force. We support our communities through our businesses by contributing to not-for-profit groups and by working with organizations dedicated to improving the lives of people. We have advisory groups that focus on health and wellness, African-American and Latino/Hispanic issues. We also work to be good stewards of the environment, with the goal of reaching a net-neutral impact. In areas of the world where water scarcity is an issue, we are working to replenish the resources we ve used and we are partnering with nonprofit groups to promote clean water access. Our Employees Our employees are the greatest factor in our success. Their hard work, dedication and resourcefulness enables PepsiCo to compete effectively, serve the needs of customers and deliver the results our investors expect. Our Talent Sustainability principles reflect our commitment to providing a work environment that allows our employees to achieve professional growth and personal fulfillment. We ask our employees to respond to an Organizational Health survey generally every other year. Topics include benefits, working conditions, diversity and inclusion initiatives and career development, among others. The results of the survey are shared with associates and action plans to address issues are developed and made part of performance goals. Our Customers Our retail customers are supermarkets, grocery stores, mass merchandisers, club stores, drug stores, gas stations, convenience stores, restaurants, food service outlets, vending machine operations and others who carry our products and make them directly available to consumers. We provide our products as well as marketing support that contributes to their growth, profit and positive cash flow. Retail consolidation continues to increase the importance of major customers. In 2007, worldwide sales to Wal-Mart (including Sam s) represented 12% of our net revenue. This percentage included concentrate sales to our bottlers which are used in finished goods sold by them to Wal-Mart. We have dedicated teams for our customers, partners and suppliers and interact with them on a regular basis. We have a team dedicated to Supplier Diversity, including working with our women and minority suppliers to build their capabilities and business with PepsiCo. Our website includes a dedicated site for information on our women and minority supplier diversity program. Pepsi- Cola North America has partnered with Sam s Club over the last three years in a national, school-based recycling program. Our Investors We strive to provide investors a reasonable return on their investment, based on consistent financial growth in the marketplace and consistent financial results. We take a long-term view and make appropriate investments to strengthen our brands, develop our capabilities and pursue new opportunities. We seek healthy year-over-year growth and report honest, transparent and timely financial results. We regularly conduct webbased quarterly conference calls to provide updates to analysts and investors, and we broadcast our annual shareholder meeting on our website. Knowing the commitment of many investor groups to sustainability, we apply for admission to the Dow Jones Sustainability Index (DJSI) each year. PepsiCo has been named as a member of the North America Index three times and named a member of the World Index twice. The DJSI World Index identifies those companies that exemplify leadership in sustainability among the leading 10 percent of the world s top 2,500 companies. The DJSI PepsiCo Corporate Sustainability Report

9 North America Index identifies those companies that exemplify leadership in sustainability among the largest 600 North American companies. Our Partners Our bottlers and other business partners manufacture many of our products. We provide certain needed ingredients and supplies as well as quality assurance and technical assistance. We conduct our business to allow both our partners and PepsiCo to earn a reasonable return and grow together. Sales to our largest bottler, The Pepsi Bottling Group (PBG), represented approximately 9% of our total net revenue. We work with our partners on sustainability initiatives including resource conservation. Pepsi Beverages North America has a Bottler Sustainability Team whose mission is to advance environmental sustainability in Pepsi Cola s Bottling operations. partners for Frito-Lay North America and Quaker Foods North America to assist them in developing energy management systems and projects. This program has been very successful and will be expanded to include additional contract manufacturers and other key suppliers in Our Suppliers Our suppliers provide us with the goods and services needed in our business. We buy goods and services at competitive prices, allowing both our suppliers and PepsiCo to make a reasonable profit. We seek efficient suppliers with whom we can work and grow as long-term partners. We especially seek suppliers that are owned by minorities and women. We extend our commitment to sustainability to our suppliers through our Supplier Code of Conduct, Sustainable Packaging Policy and sustainable agriculture practices. In 2008, PepsiCo implemented a Resource Conservation Outreach program designed to share resources, tools, and expertise in the area of energy conservation with key suppliers. The initial phase of this effort involved reaching out to 12 contract manufacturing PepsiCo Corporate Sustainability Report 9

10 Our Economic Impacts We market hundreds of brands in more than 200 countries and territories around the world. The consumers who eat and drink our products spent an estimated $98 billion on our brands in A summary of PepisCo s 2007 Economic Performance can be found in Management s Discussion and Analysis and Consolidated Financial Statements included in PepsiCo s 2007 report on Form 10-K. We market hundreds of brands in more than 200 countries and territories around the world. The consumers who eat and drink our products spent an estimated $98 billion on our brands in PepsiCo has 18 mega-brands that generate $1 billion or more each in annual retail sales. In addition to benefiting our own associates, this powerful performance helps support our independent bottler network, distribution operations and contributes to the sales of retailers throughout the world. Our economic reach is broad and deep and sustainable PepsiCo Corporate Sustainability Report

11 Our Economic Contributions Shareholders - We provide shareholders with a strong return on their investments. In 2007, we paid $2.2 billion in dividends and provided shareholders with a 26 percent return, which is stock appreciation plus dividends reinvested. Associates - We directly employ approximately 185,000 people. Our customers and business partners, such as franchised bottlers and licensees, employ tens of thousands of additional people as they manufacture and distribute our brands. Retailers - We create income and profit for our customers, which mean jobs and opportunities in millions of retail establishments around the world. Our brands are among the most profitable brands that retailers carry. Suppliers - In 2008, we purchased billions of dollars of supplies, services and raw materials. These purchases help to support hundreds of thousands of additional jobs in many communities. taxes worldwide. These tax payments make an important contribution to the countries and communities in which PepsiCo has a presence. Public Policy PepsiCo believes that both as a Company and as individuals it is important to be engaged in the public policy and political arena. PepsiCo has always disclosed information on how we are spending resources for political purposes as required by law and regulation. In 2005, PepsiCo developed a Political Contributions Policy that provides shareholders with details on the policies, procedures and criteria used in connection with all political contributions. In addition, we are now providing details of PepsiCo political contributions on our website. Shareholders were involved in discussions leading to the development of this policy. Governments - Our businesses have a positive impact on the economies of the countries and localities in which we operate by generating billions of dollars of revenue for governments through taxes paid directly by PepsiCo and indirectly by PepsiCo employees, investors, commercial partners and suppliers. Technology - We share expertise and technologies that provide important benefits to communities and countries. In emerging markets, such as India and China, our agricultural development programs have significantly improved crop yields for local farmers. Taxes In 2007, PepsiCo paid $1.7 billion in income taxes, net of refunds, worldwide. In addition to income taxes, PepsiCo paid hundreds of millions of dollars in payroll, property, transaction-based and other miscellaneous PepsiCo Corporate Sustainability Report 11

12 Contributions and Community As a corporate citizen, PepsiCo, Inc. and its companies have a long and proud history of supporting communities in which they do business. We give to nonprofit community groups and initiatives through the PepsiCo Foundation, Corporate Contributions, PepsiCo Community Affairs and our various operating divisions. We encourage employees to volunteer. Additionally, we provide gifts-in-kind, support community and nonprofit events, conventions and journals and sponsor meetings.in-kind donations include food, beverages, equipment and services and are estimated at cost to PepsiCo. PepsiCo Foundation Since 1960, the PepsiCo Foundation has invested in leading programs and critical causes that have bolstered our sustainability priorities and strengthened communities. The PepsiCo Foundation focuses its grant making in the following areas: Global Health Environment Global Inclusion The PepsiCo Foundation also provides assistance for humanitarian aid and recovery efforts following major disasters. Community Affairs PepsiCo s Community Affairs is an integral part of the way we do business. We are currently active in these areas: Health and Wellness We participate in conferences, events and volunteer activities to increase awareness of PepsiCo s commitment to health and wellness in ethnic communities. We also form partnerships with community-based organizations to encourage active lifestyles. We have key partnerships with The National Council of La Raza and the National Urban League. Diversity and Inclusion We create awareness of PepsiCo s goals of recruiting diverse associates by representing PepsiCo at national recruiting conferences, such as the National Black MBA Associations, Inc. and the National Society of Hispanic MBAs.We provide leadership and support PepsiCo s commitment to increase procurement from minorityowned and women-owned businesses. We participate in events and conferences where we seek first and second tier suppliers. We provide support for events and initiatives of the following groups: U.S. Pan Asian American Chamber of Commerce (USPACC), National Minority Supplier Development Council (NMSDC); U.S. Hispanic Chamber of Commerce (USHCC) and Women s Business Enterprise National Council (WBENC). The PepsiCo Foundation continues its seed funding to the National Council of La Raza for a scalable national Latino education and workforce model. Government and Legislative In partnership with the Black Caucus and the Hispanic Caucuses, we build community awareness of PepsiCo s health and wellness commitment and program initiatives. We initiate and participate in panels and workshops with the goal of creating understanding and awareness of our commitment to health and wellness. In-Kind Donations PepsiCo provides in-kind donations for many nonprofit organizations. The largest program is America s Second Harvest and its network of food banks. We also make in-kind donations of products, premiums, equipment, meeting space and other services PepsiCo Corporate Sustainability Report

13 Our Commitment, Mission and Values At PepsiCo, we re committed to Performance with Purpose achieving business and financial success while leaving a positive imprint on society. We want to grow our business by being and by being recognized as a sustainability leader. Our approach to superior financial performance is straightforward drive shareholder value. By addressing sustainability issues, we deliver on our purpose agenda. Our performance and our purpose are not separate - it s a merger of financial achievement in each of the three elements that together form our purpose agenda: human, environmental and talent sustainability. Human Sustainability - Offering our consumers a broad range of products, from treats to healthy eats - and making it easier for them to make healthful choices. Environmental Sustainability - Protecting our natural resources and operating in a way that minimizes our environmental footprint, with the goal of reaching a netneutral impact. Talent Sustainability - Valuing our employees and ensuring PepsiCo is an attractive destination for the world s best people. This approach encompasses the many challenges that PepsiCo faces: rising obesity rates and the need for more physical activity, nutritional deficiencies in vulnerable populations in developed and developing countries, water scarcity and quality, climate change, and the need for responsible packaging. We recognize the importance of managing risk while overcoming our challenges. The people behind PepsiCo s brands are working hard to address these economic, environmental and social challenges. The talents and skills of our global workforce matched with our operational capabilities of developing, moving and selling the world s favorite foods and beverages can effect real world change. While we have made significant strides on this journey, there is still a lot to learn and do. It is our intent to lead the way. Mission We aspire to make PepsiCo the world s premier consumer products company, focused on convenient foods and beverages. We seek to produce healthy financial rewards for investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive to act with honesty, openness, fairness and integrity. Values Our commitment is to deliver sustained growth, through empowered people, acting with responsibility and building trust PepsiCo Corporate Sustainability Report

14 Here is what this means: Sustained Growth is fundamental to motivating and measuring our success. Our quest for sustained growth stimulates innovation, places a value on results, and helps us understand whether actions today will contribute to our future. It is about growth of people and company performance. It prioritizes making a difference and getting things done. Empowered People means we have the freedom to act and think in ways that we feel will get the job done, while being consistent with the processes that ensure proper governance and being mindful of the rest of the company s needs. Responsibility and Trust form the foundation for healthy growth. It s about earning the confidence that other people place in us as individuals and as a company. Our responsibility means we take personal and corporate ownership for all we do, to be good stewards of the resources entrusted to us. We build trust between ourselves and others by walking the talk and being committed to succeeding together. Guiding Principles We must always strive to: Care for customers, consumers and the world we live in. Sell only products we can be proud of. Speak with truth and candor. Balance short term and long term. Win with diversity and inclusion. Respect others and succeed together Code of Conduct PepsiCo has provided interactive training in its Values to associates worldwide. PepsiCo has also provided interactive training on its Code of Conduct. In 2008, more than 22,000 associates around the world completed mandatory Code of Conduct training. The training was offered in six languages. Of the active employees who were solicited, we achieved 100% completion. PepsiCo has had a Code of Conduct since It is regularly updated and it applies to all employees and to all divisions and subsidiaries. It is communicated to all our employees annually and applies to every business transaction. PepsiCo s Code of Conduct is available in 30 languages. Our Code of Conduct includes provisions relating to ethical business dealings, bribery, business gifts and entertainment, discrimination, harassment, confidentiality of information, insider trading, accounting and record-keeping, health and safety, human rights, environment, political activities, protection of company assets and whistle blowing. In addition to our Code of Conduct, we have specific company or internal policies regarding key topics such as the International Anti-Bribery Compliance Policy, Anti-Harassment/Discrimination Policy, Customer Trade Agreement Policy, Disclosure Policy, Equal Employment Opportunity Policy, Environmental Policy, Human Rights Workplace Policy, Food Safety Policy, Information Security Policies, Workplace Health and Safety Policy and Travel & Entertainment Policy. These policies apply to all of our employees worldwide. We regularly communicate and reinforce our Code of Conduct and our Values through a variety of means, including in-person training, Town Hall meetings, articles in our daily in-house e-newsletters, information on our intranet, management presentations and awards for ethical behavior. In addition, an annual Code of Conduct Month campaign is conducted globally to increase awareness of the Code. Specific employees, including management and any individual with access to sensitive information or in a position to acquire goods and services, are required to complete mandatory web-based training on our Code of Conduct and to certify their compliance with the Code. In 2005, PepsiCo established a compliance and ethics leadership structure, appointing a Vice President, Deputy General Counsel, Business Practice and Compliance, who is focused on business practices, ethics and compliance. In the event of a breach of the Code of Conduct, appropriate disciplinary action is taken, ranging from counseling to termination, depending on the type and seriousness of the matter. PepsiCo s outside auditor receives reports regarding potentially significant violations that relate to fraud, accounting, PepsiCo Corporate Sustainability Report 14

15 auditing and internal control matters. The Audit Committee also receives regular reports regarding compliance with the Code of Conduct. In order to maintain the confidentiality and anonymity of PepsiCo s hotline, PepsiCo does not publicly report on breaches of its Code of Conduct or other policies. Anti-corruption policies and procedures are included in our Code of Conduct. In addition, PepsiCo s International Anti-Bribery Policy was communicated to all Corporate and PepsiCo International employees in 2006 and webbased training was provided to approximately 15,000 employees on this policy in Any reports of potential corruption are investigated immediately under the direction of the Law Department. If employees are found to have engaged in questionable behavior they will be disciplined accordingly. When appropriate law enforcement authorities are notified, PepsiCo cooperates with law enforcement activity to the fullest extent possible. Corporate Governance Our governance includes the following: Board of Directors and Standing Committees Disclosure Committee PepsiCo Executive Committee Public Policy Coordinating Group Board of Directors and Standing Committees PepsiCo s business strategy and affairs are overseen by our Board of Directors. Our Board of Directors has three standing Committees: 1. Nominating and Corporate Governance 2. Audit 3. Compensation As of March 2008, there are 12 board members, including ten independent outside directors and two executive directors. Members of all Board Committees are independent outside directors. PepsiCo s independence director standards are defined in Section B of the Corporate Governance Guidelines entitled Director Qualification Standards. These standards conform to the director independence rules of the New York Stock Exchange. Disclosure Committee The purpose of the Disclosure Committee is to ensure that all disclosures made by PepsiCo to its security holders or the investment community are accurate and complete and fairly present the Company s financial condition and results of operations in all material respects, and are made on a timely basis as required by applicable laws and stock exchange requirements. PepsiCo Executive Committee (PEC) The PepsiCo Executive Committee (PEC) is comprised of a cross-functional, geographically diverse, senior management group which identifies, assesses, prioritizes and addresses strategic and reputational risk and is chaired by Indra Nooyi, PepsiCo s CEO and Chairman. This Committee meets regularly on all areas of the business. Public Policy Coordinating Group In July 2007, PepsiCo established the Public Policy Coordinating Group to address issues of public policy and sustainability. The group is under the direction of PepsiCo s General Counsel and includes senior functional heads as well as other Company leaders who are focused on Human, Environmental and Talent Sustainability: Human Sustainability, encompassing our products, is led by our chief Health and Wellness Innovation Officer, working with our R&D functions and divisions. Environmental Sustainability is led by the Executive Sustainability Leadership Team (ESLT) which is charged with advising and informing the Chairman and CEO, the PepsiCo Executive Committee, and the Board of Directors on matters of Environmental Sustainability. The ESLT is comprised of the heads of the supply chain at each of our four businesses, as well as senior leaders from Sales, Human Resources, Communications, Government Affairs, Legal, R&D, Purchasing, Finance and Investor Relations. They are supported by the Environmental and Sustainable Packaging Councils, which are comprised of subject matter experts across all divisions and are responsible for recommending and implementing actions. Talent Sustainability resides primarily with our Chief Personnel Officer, including diversity officers, training and compensation and benefits groups. Communications with the Board of Directors To facilitate communications with our shareholders, we provide various methods to contact the Board of Directors. These may be found under Contact the Board of Directors/Audit Committee in the Corporate Governance section of our website. In addition, PepsiCo s Proxy Statement, which is distributed to all shareholders, details the process for contacting the Board, a Committee of the Board or an individual member of the Board. Shareholder Proposals Shareholders wishing to submit shareholder proposals may do so in accordance with the instructions in our Proxy Statement PepsiCo Corporate Sustainability Report

16 Board and Executive Compensation Directors receive a straight-forward compensation package that includes a market competitive annual grant of deferred stock units which pay out one year after director retirement and an annual cash retainer that can be deferred into PepsiCo stock units. Directors do not receive any meeting fees, nor do they have a retirement plan or receive any benefits such as life or medical insurance. Pay levels for executive officers are designed to be competitive and, most importantly, align with the Company s performance. Pay-for-performance is a critical policy in designing our executive compensation and, as a result, our pay mix, defined as the amount of at-risk annual and long-term cash incentive awards and at-risk equity-based awards relative to total compensation, places the greatest emphasis on variable pay incentives. As a result, over 90 percent of our Chairman and CEO s target total compensation is variable and at-risk. Performance-related annual incentive awards are earned based on the achievement of Company and individual performance measures. In particular, Company performance includes financial performance measures related to profit, net revenue and market share. Individual performance includes measures relating to an individual s contribution to PepsiCo s strategic business imperatives, such as improved operating efficiencies and driving PepsiCo s Performance with Purpose priorities in the areas of human sustainability, environmental sustainability and talent sustainability. For more information please see our Proxy Statement. Conflicts of Interest Our Code of Conduct, which applies to all PepsiCo employees and directors, contains clear guidelines regarding conflicts of interest. PepsiCo s Corporate Governance Guidelines also include director independence standards to address potential director conflicts of interest. Director Nomination Process The Nominating and Corporate Governance Committee does not solicit director nominations but will consider recommendations for director nominees if the individuals recommended meet certain minimum Board membership criteria detailed in our Proxy Statement and, if so, if the candidates expertise and particular set of skills and background fit the current needs of the Board. This process is designed to ensure that the Board includes members with diverse backgrounds, skills and experience, including appropriate financial and other expertise relevant to the business of the Corporation. Annual Performance Evaluation of the Board The Board and its Committees conduct a self-evaluation at least once annually to assess Board and Committee performance. Capital Expenditure Filter All requests for capital expenditures over $5 million must include a review of sustainability issues and performance against appropriate benchmarks. Additionally, opportunities for improving the sustainability of the project surrounding the capital request must be highlighted. The goal is to incorporate more sustainability opportunities in projects right from the start. This is expected to help drive continued improvement in our sustainable development. Memberships and Partnerships PepsiCo has always prided itself on being a good corporate citizen and taking action or aligning itself with leading experts and organizations focused on emerging social issues. Examples of this include addressing health and wellness initiatives including diet and nutrition concerns, climate change, water resources and HIV/AIDs. Through our memberships and partnerships, PepsiCo endorses a number of initiatives related to our businesses. In addition to the initiatives noted below, on a global level, we have endorsed the United Nations Millennium Development Goals. Professional Trade Groups We are also members of many trade and professional groups and take an active role in these as suitable. These are sometimes local and specific to the business. Among these are: American Beverage Association (ABA) Snack Food Association International Life Science Institute International Society of Beverage Technologists National Safety Council American Industrial Hygiene Association American Society of Safety Engineers Con Mexico European Association of Industries of Juices & Nectars International Council of Beverage Associations CEEREAL European Breakfast Cereals Association European Food and Drink Federation (CIAA) PepsiCo Corporate Sustainability Report 16

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19 Risk Management PepsiCo is subject to risks in the normal course of business. These risks include: product demand; our reputation; information technology; supply chain; retail consolidation; the loss of major customers and failure to maintain good relationships with our bottling partners; global, economic, environmental and political conditions; the regulatory environment; workforce retention and outsourcing; raw materials and other supplies; competition; and market risks. In 2007, we continued to focus our risk mitigation efforts to further reduce PepsiCo s exposure to risks, and integrated those efforts in our businesses operating plans and budgets, where accountability is assigned and performance measured. Risk Management Process Our risk management process is intended to ensure that risks are taken knowingly and purposefully. As such, we leverage an integrated risk management framework to identify, assess, prioritize, manage, monitor and communicate risks across the Company. This framework includes: The PepsiCo Executive Council (PEC), comprised of a cross-functional, geographically diverse, senior management group which identifies, assesses, prioritizes and addresses strategic and reputational risks; Division Risk Committees (DRCs), comprised of crossfunctional senior management teams which meet regularly each year to identify, assess, prioritize and address divisionspecific operating risks; PepsiCo s Risk Management Office, which manages the overall risk management process, provides ongoing guidance, tools and analytical support to the PEC and the DRCs, identifies and assesses potential risks, and facilitates ongoing communication between the parties, as well as to PepsiCo s Audit Committee and Board of Directors; PepsiCo Corporate Audit, which evaluates the ongoing effectiveness of our key internal controls through periodic audit and review procedures; and PepsiCo s Compliance Office, which leads and coordinates our compliance policies and practices. Risk Identification This takes place annually from both a top-down (PEC) and bottom-up (DRC) viewpoint. Our risk identification efforts seek to evaluate both external risks (customer trends, consumer trends, government and public policy risks), as well as risks associated with internal capabilities. Risk Assessment After identifying our most significant inherent risks, each assessing body (PEC, DRCs, Risk Management Office RMO) reviews the most significant risks from both a probability, impact and vulnerability perspective at two levels inherent and residual. This assessment requires that we fully understand the existing capabilities, controls, programs, insurance coverage and other mitigating factors that enable an accurate assessment of the risk. Risk Prioritization After assessment, all risks that exceed a predetermined threshold are prioritized by both assessment itself as well as the ability to influence and/or mitigate. In addition, the RMO aggregates the risk assessment information to look for risk interdependencies and common mitigation solutions. Risk Response Following our prioritization of risks, the PEC and DRCs are required to explicitly determine the response to each significant risk. The responses include accepting, avoiding, mitigating and transferring (via third party insurance). The DRCs also identify which risks will be monitored on an ongoing basis and what measurement index will be used for such a purpose. Communication Each DRC is required to summarize its risk management efforts by providing meeting minutes, as well as semiannual submissions of risk maps. Risk maps are used to document specific information about identified risks, including the likelihood, the impact and risk response. For PepsiCo s top risks, PepsiCo has assigned Executive Risk Owners responsible for understanding the risk across the Company and providing annual updates to the PEC as well as the Audit Committee and Board of Directors, depending upon the risk area. A semi-annual risk management update is provided to the PepsiCo Audit Committee, during which our risk profile, risk mitigation efforts and risk management process are discussed PepsiCo Corporate Sustainability Report

20 Human Sustainability Human Sustainability a key element in our purpose agenda - means nourishing consumers not only with healthy products, but rounding out the equation by promoting active lifestyles Our Goal Our goal is to offer consumers a range of products that deliver great taste, nutritional value, convenience and affordability. We are committed to playing a responsible role in health and wellness by encouraging people to adopt healthy, active lifestyles - beginning with the products we offer. We have world-class scientists singularly focused on science-based nutrition standards and guidance when developing food and beverage products in order to positively impact health. Our state-of-the-art research and development facilities ensure that we re leveraging our talent and operational capabilities. We continue to make great strides in transforming our portfolio of products to meet consumers needs by: Introducing new food and beverage products that offer nutrition benefits and reduced portion sizes Reformulating some of our existing products to reduce nutrients of concern including fat, saturated fat,sodium and added sugars Adding whole grains, fiber, fruit, vegetables, key vitamins and minerals We believe it is our responsibility to understand the diet and nutrition needs of populations around the globe, in order to reduce the risk of chronic diseases associated with poor diets. This includes heart disease, diabetes and obesity. While there s a lot of debate about different solutions to obesity, we believe a key solution to maintaining a healthy weight is energy balance -- the balance between calories consumed and calories burned through activity. We believe the way to make a difference is through comprehensive, multi-faceted efforts that involve tapping the expertise of many external partners and working both sides of the energy balance equation. In addition, we want to make smart choices easier for consumers by providing a wide variety of healthful food and beverage products with easy-to-understand nutrition labeling. At PepsiCo, we actively lead and engage in key privatepublic partnerships to increase our understanding of nutrition and health, deliver real improvement in our products, encourage responsible marketing practices and support programs that motivate consumers to adopt healthier, more active lifestyles. By doing this, we believe we can help consumers make the choices they want and live healthy lives. Our Portfolio We are proud to offer a wide variety of great-tasting foods and beverages that deliver enjoyment as well as nutrition, convenience and affordability. We are continually transforming our portfolio of products to keep up with growing demand for healthier choices through: New Products and Approaches Reformulation of Existing Products Strategic Acquisitions Expanding PepsiCo s Global R & D Network We re expanding our global research and development capability under the leadership of one of the world s leading endocrinologists and other experts in science, nutrition and health policy. This move brings a new level of expertise and focus to our efforts to develop products that address consumer cultural tastes and food PepsiCo Corporate Sustainability Report