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Senior Executives Caught in the Ethical Cross Hairs: Shareholder Loyalty or Social Responsibility?

“You shall not bear false witness against your neighbor. ” For at least 3,400 years and probably much longer scholars, philosophers, theologians, and others have pondered the question of truth. What is truth? Can the whole truth ever be known? What is a lie? Is it ever acceptable to tell a lie? Are some lies worse than others? What are the characteristics of a lie? Why do people tell lies? In this case, the above questions are explored and examined. Of course, it is impossible to completely cover such ancient and weighty issues in a case study, so we have limited our exploration to relatively few topics.

In this case we look through the business lens, emphasizing the impact of truth and lies on business and the corporate world. Among the issues explored in this case are lying to the government, the public, and competitors, justifications and excuses for lying, and whether lying is ever acceptable. To more clearly illustrate the issues and to stimulate critical thought, we look objectively at the conduct of the U. S. tobacco industry in the years prior to 1999, with special emphasis on the congressional hearings of 1994 and 1998.

Any serious discussion of lying must begin with at least a cursory consideration of truth. After all, without truth there can be no lies. But we must also recognize an ultimate fact from which humans cannot escape: the whole truth can never be known, limited as we are by our intellect and senses. Perhaps it is safest to start with the premise that lying, at least from a human point of view, depends on one’s intent. Since the whole truth cannot be known, “truth” as we know it requires that there be no intent to deceive. In other words, a person does not lie if that person is not aware that the statement he utters is false.

Mosaic Law recognized the importance of intent in many instances and that recognition has been passed down to American law, as statutes often criminalize the “knowing and intentional” commission of some act. Indeed, one of the major differences between murder and manslaughter is intent. The former requires intent or premeditation and is punishable by death in Florida and many other states; the latter does not require intent and is punishable by a prison term of not more than fifteen years.

Sissela Bok, a professor at Brandeis University, has defined a lie as “an intentionally deceptive message in the form of a statement. A statement is not limited to verbal utterances; writing and other forms of expression may be statements. Not everyone agrees with Bok and her definition, but for our purposes it will suffice. Ultimately, lying may be viewed as an attempt to gain power, power over information which in turn gives the liar power over the one who is deceived. When one is lied to, one’s power of choice is diminished. The lie may misinform, eliminate or obscure alternatives, alter estimates of costs and benefits, or affect how certainly we view our choices.

If one does not know the true alternatives, how may one make an intelligent, reasoned choice? If someone tells a lie, the one deceived no longer has truly free choice. People who learn they have been deceived become suspicious, resentful, and disappointed, and understandably so. Deception has a profound psychological impact. Whether one is deceived by a trivial lie or a grandiose lie, the impact is the same in that the one deceived becomes more suspicious and less likely to believe anything he or she hears from the liar. A person may be harmed by a lie even if he or she is not the person being deceived.

This is something most people have experienced. For example, Andrew tells a lie to Bill about Charles. Charles’ reputation in Bill’s mind, or perhaps their friendship, suffers because of the lie. Andrew told the lie to Bill, but Charles suffers even though he was not the one deceived. Having established a working definition of lying and a basic understanding of how lies impact our psychology and decision-making processes, we now turn to an age-old question that lies at the heart of our discussion: when, if ever, is it acceptable to tell a lie?

Most of us probably would reply that lying is acceptable in certain situations, but is it really? Is it ever acceptable to take away another’s freedom of choice by lying to them? In theory it may be comfortable to draw invisible lines and say, “I’ll lie about these things but nothing else,” but in reality do we lie about only those things? Can we really avoid the slippery slope by telling ourselves, “This far, but no farther”? No matter how justifiable or excusable a lie may seem at the moment, doesn’t telling even that “good” lie cause us to become more willing to lie the next time?

When we tell even “good” lies, aren’t we making it easier for us to tell a “bad” lie in the future by blurring the lines between black and white? Since the beginning of recorded history, men and women have debated whether lying is ever acceptable and if so, under what circumstances. Among the most influential of these intellectuals are St. Augustine of Hippo, St. Thomas Aquinas, and Immanuel Kant. In North Africa in the years 396-430, an early Church father named Augustine wrote a series of treatises and books that have largely shaped Christian and Western thought.

Augustine firmly believed that all lies are wrong, but allowed that some lies are worse than others and established eight categories of lies. He maintained that a person should never tell a lie, though even he struggled with this absolute prohibition. More than 800 years after Augustine died, Thomas Aquinas took up discussion of the issue in Summa Theologica. Aquinas, relying on Augustine, concluded that there are three types of lies: lies told in jest, helpful lies, and malicious lies. Aquinas said all lies are wrong, but only malicious lies place the soul in jeopardy.

Immanuel Kant (1724-1804), a German philosopher, took an even more extreme position than Augustine and Aquinas. For Kant, lying is never acceptable under any circumstances for any reason. Even when lying might seem to be justified in the minds of some, Kant argues that any lie always harms all people because it debases the source of law. Furthermore, when a person tells a lie, that person has destroyed his human dignity. Theorizing about any subject or issue is often quite different from putting that theory into practical action.

What happens when a person is faced with an actual situation in which he must choose a lie or the truth, knowing that his answer will determine whether another person lives or dies? Even then, the answer is not as clear as it may seem. Even then, good people may differ in their approach to truth telling and in their belief as to what constitutes the morally right course of action. Consider the differing beliefs of the Ten Boom sisters. One of the most famous examples of the “good” lie is provided by the experiences of Corrie Ten Boom, a Dutch Christian who helped hide Jews from the Nazis during World War II.

A devout Christian who believed lying is morally wrong, Corrie nevertheless lied to the Gestapo to protect the Jews in her house. She reasoned that lying, though wrong, was justified because it was better than telling the truth, which would have caused the arrest and likely the execution of the Jews. Interestingly, Corrie’s sister, Nollie, disagreed. Nollie was also a devout Christian, but she felt lying was never acceptable. She believed that God would honor those who told the truth. Nollie’s veracity led to her arrest and the arrest of a Jewish woman, but six days later the Dutch resistance freed them both.

Nollie saw her freedom and that of the Jewish woman as proof that God would never allow evil to befall truth tellers. Thankfully, the vast majority of us will never face a situation like Corrie Ten Boom’s, when our choices to lie or to tell the truth could well be the difference between life and death. But in our daily lives we encounter less serious situations when lying may be (or at least seem) justified. For example, suppose Richard’s roommate, Sean, just broke up with his girlfriend. Sean tells Richard he doesn’t want to speak to his ex-girlfriend if she calls.

A few minutes later, the phone rings. Richard answers the phone and Sean’s ex-girlfriend asks if Sean is home. What should Richard do? Most of us probably would lie and say, “No, Sean isn’t home. May I take a message? ” Is the lie justified? Would it be better if Richard evaded the question? What if Richard equivocated and said, “I’m not sure exactly where Sean is,” since Richard does not, in fact, know which room of the apartment Sean is in at that exact moment? Are any of these statements by Richard acceptable?

Some people take a “commonsense” approach to lying, often used by utilitarian philosophers, choosing to lie only when the lie is less harmful than telling the truth. This approach looks at lying in context of the whole situation and allows the liar more flexibility and freedom. In the above example, this approach would justify a lie told by Richard if he truly believed it was better for everyone that he tell the lie. This approach is not without its problems, though. First, can we ever truly know what is “for the greater good”?

Second, this approach seems to say that telling the truth and telling a lie are the same as long as the result is for the good. This attitude of neutrality toward lying and the dependence on ends to justify the means disturb more than a few people. For those who believe that certain lies are acceptable, the basis of the acceptability that is, the “thing” that makes the lie acceptable is an excuse. Although justification is a type of excuse, it’s important to understand a fundamental difference between justification and other excuses.

Justification embraces the lie and defends the telling of the lie as morally correct, whereas other excuses make no attempt to give a reason why the lie was a “good” lie. One type of excuse is “that what is seen as a fault is not really one”. For example, John tells a lie to a friend at a party. Two days later, the friend confronts John with the lie and John replies, “I was just joking around. You shouldn’t take seriously what I said. ” Another type of excuse is that though there has been a fault, the person who told the lie isn’t to blame because he isn’t responsible.

An example of this would be a lie someone tells while delirious from a fever. Generally speaking, excuses point to four moral principles as defenses: harm, benefit, fairness, and veracity. In other words, all excuses fundamentally rely on one or more of those principles to explain why the lie was told. In the first case, a person may lie in hopes of avoiding harm to self or others. For example, David makes a 1. 5 GPA in his first semester of college and tells his parents he made a 3. 5 because he doesn’t want to be chastised. A person may lie to gain a benefit for self or others.

The professor who lies or exaggerates in a letter of recommendation for a student who is trying to get a job demonstrates this type of lie. The third principle is fairness. A person might lie because he feels that lying is the only way to achieve a just end. For example, Sarah puts a false name on an essay she has written for a competition because she thinks the judges, who know her, will be unfair to her if she uses her real name. The final principle is veracity. The idea here is that a person will lie to preserve the truth. For example, telling one lie to undo the effect of a previous lie.

Compared to other excuses, justification functions under a separate set of rules. The principles mentioned above might pertain to justification, but justification involves something more. Above all, justification requires that the lie be made public and exposed to the judgment of reasonable people; by making public the lie and the reasons for the lie, the liar demonstrates his belief that the lie was just and seeks public justification of the lie. LYING TO COMPETITORS, THE PUBLIC, AND THE GOVERNMENT In the corporate world, lying is an important issue to be considered by businesses but by no means is it the sole issue.

Considering the views presented to this point never tell a lie, lie only if it serves the greater good, and all points in between what viewpoint should businesses embrace, especially for-profit businesses that have shareholders? Should a company lie to the government about the dangers of a product if lying will boost sales, prevent regulation, or protect the company from lawsuits? Is it acceptable to lie to the public to ensure shareholder profits? Is it proper for a company lie to a competitor to gain the upper hand in a merger, a buyout, or some other business deal?

Lying to a competitor or the government can cause them to divert their maneuvers and can help in the strategy to run the competitor out of business or to “defeat” the government in the legal arena. Given the competitive nature of business in a capitalistic society, businesses may develop a survivalist mentality; an “us or them” approach in dealing with other companies and the government that results in the government and other businesses being viewed as enemies that must be either thwarted or destroyed. Beyond the desire to survive, businesses want to thrive.

To thrive, a business must increase profits and keep its shareholders happy. Traditionally, businesses have seen no way to reconcile maximization of profits and moral treatment of the public, the government, and the competition. Even when it is possible to do both, businesses traditionally have given first consideration to profits and have acted morally only if doing so doesn’t interfere with maximization of wealth. Underlying all of this, of course, is the question of precisely what is a corporation’s duty to its shareholders. Is the duty to maximize profits or to make a profit?

Do corporations have a duty to the public at large? Do businesses have a duty to the government or to competitors? If the answer to the latter two questions is yes, then what is that duty? Are the needs and wants of shareholders subordinate to that duty? While most people think that turning huge profits is a corporation’s chief duty to shareholders, it is not the only duty. Cultivating trust and goodwill between the public and the corporation is something of value to many shareholders, and most people are aware of corporate contributions to schools, parks, charitable organizations, and so forth.

Some people have turned the whole question on its head, not asking if a corporation breaches its duty by not lying to maximize profits, but arguing that corporations breach their duty to shareholders when they don’t act in a morally responsible fashion. The argument contends that doing good for the community and being honest with the public, the government, and other companies makes the corporation look good in consumers’ eyes. Consequently, the consumers buy more often from the corporation, profits rise, and shareholders benefit.

Though this argument may be sound, most companies still adhere to the belief that profits reign supreme and that maximization of profits is more important than telling the truth. As was mentioned previously, there is considerable difference between discussing a moral issue like lying in the abstract and deciding how to put the theory into practice in the real, concrete, day-to-day world. To help students apply the foregoing moral issues to the real, business world, we turn our attention to the U. S. tobacco industry in the years leading up to 1998.

We will examine the lies that were told by the industry, explore the excuses for those lies, and ask questions that go to the very heart of business ethics. The sale of tobacco and cigarettes has been quite profitable to those selling it. Today “Big Tobacco,” with annual net income over 50 billion dollars, is one of the most profitable industries in the world. Despite the financial success of tobacco, the industry has been one wrought with controversy. The basis for this case is the rather disturbing testimonies of several Chief Executive Officers in the tobacco industry during the 1994 “Waxman” hearings.

In addition to these hearings, the executives were called back on the stand for what some thought would be an encore performance during the 1998 congressional hearings. The most recent round of hearings was a product of the class action suit brought by over 40 states to seek reimbursement from the industry for tobacco-related Medicaid expenditures. The tobacco story is one filled with deception, lies, and money. Whistle-blowers, internal leaks, and questions of unethical marketing campaigns are just some of the elements the industry has brought into the media’s spotlight.

This case presents a summary of the facts surrounding the hearings. Although it may be evident that the authors of this case do not approve of the behavior of the executives or the industry as a whole, it is important that you make your own decision regarding the executives’ methods and what some would call their corporate strategy. The following issues surface in this case and will be used as anchor points for interactive class discussion and exercises. As you read the case, it may be helpful to take notes with these topics in mind.

Executives’ decisions (corporate decisions) to deny (or rather disregard) the harmful effects of tobacco and nicotine throughout history. Did the executives know the scientific evidence regarding the effects of tobacco and nicotine when they testified to the contrary? What motivates people to lie? Is this different from what motivates executives to lie? Perhaps as agents of the shareholders, executives have a fiduciary duty to lie (If it leads to profit maximization)? Is it cheaper to provide a safe product or avoid the truth and pay the liability claims later?

Should this be a business decision? What is the economic impact of enforcing stricter regulations on the tobacco industry? What ethical issues are involved in the marketing strategies of the tobacco companies? Does targeting certain segments in the market cross the ethical boundary? In addition to the narrative information provided in the following sections, a timeline of key events in the tobacco industry is available at Exhibit 1. In addition, this timeline provides an accurate summary of what the many the tobacco companies knew and when they knew it.

A complete collection of the issues discussed in this case can be found at: http://www. pbs. org/wgbh/pages/frontline/shows/settlement/ Over the years, court cases have consistently raised several questions for the tobacco industry. This section provides a list of the issues and their basic elements in order to provide some perspective as you read the remainder of the case. Issue 1: The tobacco industry has been accused of marketing their products toward all segments of the consumer market, even children.

Issue 2: The tobacco industry has denied the addictive nature of cigarettes. Issue 3: The tobacco industry has denied that tobacco use can cause a myriad of health problems and denied that tobacco use has been specifically linked to many of the major causes of death (cancer, heart disease, etc). Issue 4: The tobacco industry has been accused of tampering with the nicotine levels in cigarettes to increase the likely dependence on the product. Issue 5: Whether the tobacco industry has an obligation to sell the consumer a safe product.

Prior to 1996 there had been more than eight hundred antismoking lawsuits filed, but the cigarette manufacturers had never paid a single dollar in damages. The tobacco industry’s pugnacious litigation strategy had prevailed for over forty years. As one lawyer for R. J. Reynolds boasted: The industry’s hard-ball tactics have made the litigation [of these cases] “extremely burdensome and expensive for plaintiffs’ lawyers . . .

To paraphrase General George Patton, the way we won these cases was not by spending all of [R. J. Reynolds’ money, but by making the enemy spend all of his. ” Despite the failure of these claims, the federal government was quite actively involved in researching the tobacco industry and its impact on the nation. In 1994 David Kessler, then-Commissioner of the FDA, announced plans to consider regulating tobacco as a drug. This action prompted Rep. Henry Waxman’s (D – Calif. ) to form the Subcommittee on Health and the Environment to convene a panel of tobacco corporate executives as part of the fact-finding initiative.

Table 1 provides a list of the executives the subcommittee called to testify at what became known as the “Waxman Hearings. ” Table 1 – Tobacco Industry Representation at the 1994 Congressional Hearings Philip Morris USA William Campbell, CEO RJ Reynolds Tobacco Company Jim Johnson, Chairman and CEO U. S. Tobacco Joe Taddeo, Board President Lorillard Tobacco Company Andrew H. Tisch, Chairman and CEO Liggett Group Inc. Ed Horrigan, Chairman and CEO American Tobacco Company Donald S. Johnston, President and CEO Brown and Williamson Tobacco Company Tommy Sandefur, Chairman and CEO

Source: Federal Information Systems Corp. , Federal News Service: April 14, 1994. The five issues presented in the beginning of this case provide an accurate summary of the issues discussed in testimony. The subcommittee also addressed other issues that had been prevalent in litigation involving the industry. During the hearing, the subcommittee discovered that Philip Morris had been using questionable tactics as far back as 1953. An example of PM’s tactics was the creation of the Tobacco Industry Research Committee (now the Council for Tobacco Research (CTR)).

Philip Morris had followed the advice of the public relations firm Hill and Knowlton to create the committee to launch a monumental public relations campaign to counter mounting evidence linking tobacco to lung cancer. In response to this discovery, the executive director of CTR, Dr. James Glenn, testified that CTR was independent of the industry and that there was no causal link between smoking and health diseases. This testimony directly contradicted a Wall Street Journal investigation, which had reported that CTR was at the center of “the longest-running misinformation campaign in United States business history.

The degeneration of the industry’s credibility continued when Brown & Williamson’s Chief, Thomas Sandefur, Philip Morris’ President, William Campbell, and other industry CEOs intransigently declined to admit to Rep. Waxman’s subcommittee that smoking was addictive. The executives did so “even as the aforementioned internal company memos revealed that cigarette manufacturers had long understood and hidden nicotine’s addictive properties. ” The industry’s blatant obstinacy before Congress swayed the tide of public sentiment and presaged an onslaught of epic proportions.

As previously mentioned, the tobacco companies’ leaders were adamant in making the point that tobacco was not addictive. Mr. Campbell even quoted a 1988 Surgeon General’s report by stating “People can and do quit smokingthere are more than 40 million former smokers in the United States, and 90 percent of those who quit, did so on their own, without any outside help. ” CEO Campbell continued to defend the fact that cigarettes are not addictive throughout his testimony and provided the subcommittee with no information about unethical tampering with the products to keep consumers buying them.

Later in the testimony, two former scientists and an ex-production manager of Philip Morris publicly stated that Philip Morris President William “Campbell and the company were aware of nicotine’s addictiveness and deliberately controlled nicotine levels to satisfy smokers. ” These statements directly contradict Campbell’s testimony: “Philip Morris does not manipulate or independently control the level of nicotine in our products. ”

Philip Morris attorneys retorted that Campbell did not say that tobacco is not addictive, instead, he said that he did not believe it is addictive; a “personal viewpoint he has every right to hold. Mr. Johnson, CEO of RJR Tobacco, follows Mr. Campbell’s lead in his testimony before the committee. He responds to the subcommittee’s question of whether the company manipulates the levels of nicotine in order to “hook” smokers by saying, “we do not do anything to hook smokers or keep them hooked. ” He even continues with “Let me repeat: We do not manipulate nicotine to addict smokers. ” In the interest of time, Mr. Sandefur, CEO of Brown & Williamson Tobacco, submitted a written statement for the record and provided no oral testimony for the subcommittee.

Despite the format of his testimony, it provided no indication that Brown & Williamson agreed with the views of the committee. The subcommittee then questioned Mr. Tisch, CEO of Lorillard Tobacco. Mr. Tisch relates that the only nicotine used in Lorillard products is derived from the mix of tobacco used in the manufacturing process and not by any additional methods (tampering). He also states “Lorillard does not take any steps to assure a minimum level of nicotine in our products. Lorillard does not add nicotine to cigarette tobacco for the purpose of manipulating or spiking the amount to nicotine received by the smoker.

I respectfully suggest to you that Lorillard has acted, and will continue to act, in a completely responsible manner in this as well as all our business practices. ” The remaining CEOs provide similar testimony in the remainder of the hearing. After their formal statements, Senator Waxman began specific questioning of the tobacco executives and they continued to provide evasive answers and denied any impact their products may have had on the health of their consumers. For instance, when asked whether “smoking causes heart disease” Mr. Johnson responded, “It may. He proceeded to respond in kind to similar questions from Rep. Waxman regarding lung cancer, emphysema, bladder cancer, stroke, and low birth rates. In a final attempt to get an answer from the executives, Rep. Wyden, a member of the subcommittee, described all of the professional medical associations and societies that have declared nicotine an addictive drug. The evidence also indicated that smoking is “quite addictive. ” Following Rep. Wyden’s presentation, Mr. Campbell refutes the evidence and provides no relief to the members of the subcommittee.

Rep. Waxman provided closing comments for the 1994 hearing and relayed a strong message of concern over the responses of the executives. “It started, I guess Mr. Chairman, more than six hours ago where we began to talk about whether nicotine was addictive. I brought out, and our colleagues did, all these studies, all these experts, saying nicotine was addictive. And what we found, low and behold, is the one organized body of thought [tobacco executives] that says it is not — are people with the financial interest to say that nicotine in not addictive.

That pattern is continued through the day. ” Representative Waxman’s efforts in 1994 opened the door for further scrutiny of the tobacco industry. Despite the past success of the tobacco industry in “spending-down” any potential plaintiffs’ attacks, the number of potential lawsuits were mounting and legal strategies were being tested that would eventually bring the tobacco giants back into the courtroom. Following the hearing in 1994, one such legal strategy was discovered by “four old law school friends from Ole Miss, including the Attorney General of Mississippi. Those who had been harmed by the product (the consumers) had filed all of the previous lawsuits. The tobacco companies were quite adept at beating any attempts at proving cause or negligence on the part of the cigarettes or the companies’ marketing efforts. Instead of this approach, this group of Mississippi lawyers figured although “the State did not smoke [it], it had suffered considerable damage from tobacco related illnesses. ” Therefore it seemed appropriate that the state could file for damages rather than continuing the stream of ill-fated individual tort claims.

With this line of reasoning, the State of Mississippi filed suit against the tobacco industry in 1994 to recoup the “tens of millions of dollars it spends each year to provide medical care to victims of tobacco-related illnesses. ” The complaint maintains that the cigarette manufacturers concealed from and misled the public about information demonstrating the dangers of smoking. The state’s suit was seeking unspecified damages for restitution and unjust enrichment, indemnity, common law public nuisance, and injunctive relief. The Mississippi suit was scheduled to go to trial on June 2, 1997. Before this case became a reality, “the prevalence of whistle-blowers, incriminating corporate memoranda and the growing number of states joining the lawsuit caused one of the cigarette makers to falter. In an unprecedented maneuver, the Liggett Group, the smallest of America’s top five cigarette manufacturers, broke ranks with the other cigarette makers by settling five Medicaid recoupment suits brought by state Attorneys General.

The March 1996 settlement amounted to $31 million dollars, to be paid over twenty-five years. In an extension of its previous five-state settlement, Liggett settled with the attorneys general from 22 states suing to recover health care costs attributable to smoking. As part of this settlement, Liggett released the following statement: ” we at Liggett know and acknowledge that cigarette smoking causes health problems, including lung cancer, heart and vascular disease, and emphysema. We at Liggett also know and acknowledge that nicotine is addictive. Liggett acknowledges that the tobacco industry markets to youth, which means those under 18 years of age. ”

The pioneering effort of the Liggett Group left the other companies with no where to turn but toward the negotiating table. Up to this point, the executives had not compromised the long-standing tradition of denying the reality of their business. Considering the size of the mounting suit and the risk of losing the case if it ever was heard in court, a settlement strategy looked more attractive as each day passed. Meanwhile, the legal strategy discovered by the attorneys in Missouri allowed state after state to file similar suits against the tobacco companies and eventually, all fifty did so.

With the extreme number of cases being filed against the tobacco industry, the federal government became involved and finally convened hearings in late 1997. Since the Liggett “incident”, the other tobacco companies had been quite active in addressing the states’ suits; however, no formal resolution could be made at the state level. With federal jurisdiction established, the federal government was not only interested in the legal interpretation being presented by the states’ attorneys general, but was intrigued by the possibility of recouping significant amounts of Medicaid dollars.

The latter was quite attractive considering the challenges in funding the state health care appropriations and the looming crisis for Medicaid and Social Security. Although some of the senior leadership changed during the four-year period between 1994 and 1998, the testimony changed much more dramatically. Table 2 summarizes the new breed of leaders that participated in the 1998 hearings. Table 2 – Tobacco Industry Representation at the 1998 Congressional Hearings Philip Morris Cos. /Philip Morris USA Geoffrey Bible, President and CEO RJR Nabisco/RJR Tobacco Steven Goldstone, President and CEO UST Inc. /US Tobacco Vincent Gierer Jr. President and CEO Loews Corp. /Lorillard Tobacco Company Laurence A. Tisch, Co-Chairman and Co-CEO BAT Industries PLC/B&W Tobacco Nicholas Brooks, President and CEO Source: PBS Online and WGBH/FRONTLINE, 1998. Geoffrey Bible joined Philip Morris USA in 1968. Since succeeding Mr. William Campbell as chief executive in 1994, he had led the company’s fight against what he described as “outside threats,” suing governments and news organizations that portrayed tobacco as deadly. Despite his aggressive posture in past litigation, he led tobacco executives to taking a more conciliatory tone during the 1998 hearings.

Three of the executives written testimonies discuss the proposed settlement the companies negotiated with the states’ attorneys general. The details of this settlement are provided in the section that follows; however the principle issue in this posture is that it is strikingly different than the one used in the 1994 testimonies. Mr. Bible was the first chief executive called in the case, during the sixth week of testimony in the Warren E. Burger Federal Building. The following excerpts from his written statement on January 29, 1998 are provided to highlight the change in strategy the companies used in this round of hearings. The opportunity that enactment of the Proposed Resolution presents is a future of cooperation and progress in which the decades-old policy debate over tobacco policy would be resolved in a comprehensive, meaningful and efficient manner — and to do so now. This cooperative spirit is already reflected in the fact that the tobacco industry and its leading adversaries sat down together for the first time and, after much hard work, were able to find common ground on some very contentious issues. ” The alternative is to cling to the past — a past that embraces what many have seen as the “jackpot” approach of ad hoc, unpredictable and protracted litigation and controversy — an approach leading only to continued conflict, lack of meaningful progress and instability. ” “I urge this Committee to seize this opportunity to look towards the future, and to act now to achieve the meaningful reforms presented by the Proposed Resolution by enacting it into law. ” In addition to these statements, Mr.

Bible provided feedback on the issues of addiction and causation in unprecedented reflections on these topics; topics the executives made a mockery of in 1994. Mr. Tisch, CEO of Loews Corp, and Mr. Goldstone, CEO of RJR Nabisco, provided written testimonies that were similar in tone and quite contrary to the opinions of their predecessors in 1994. (Note: This Mr. Tisch is a different Mr. Tisch than the one involved in the 1994 hearings). Tisch: “With respect to the Proposed Resolution, I am convinced, Mr. Chairman, that it is time to put confrontation behind us.

If cigarette use is going to remain legal in this nation for adults who choose to smoke, we must rationalize how we are going handle this product. We must decide the terms and conditions upon which the product may continue to be sold. ” Goldstone: “My view is simple. When you sell a legal product with significant health risks, you should be cooperating with government not fighting it. ” “In my early months as chief executive, I thought long and hard about how to balance this belief with my responsibilities to thousands of shareholders, as well as my obligations to 80,000 employees and thousands of retirees.

I also had to consider the important interests of other people affected by this business: growers, distributors, retailers and customers. ” “This is a business unlike any other business. The Tobacco Company sells a legal product that presents known health risks to smokers. At the same time, the country needs a sound, advanced public health policy that educates people about all the issues concerning tobacco products. I believe the two are not incompatible. ” What changed between 1994 and 1998?

Had the disclosure of massive piles of tobacco company documents been so revealing that the companies could no longer hide behind the corporate veil? Or had Big Tobacco realized that settling would be a better long-term financial strategy than continuing to lose enormous amounts of time and money in unpredictable litigation? This case does not provide the answers, but the details of the settlement might provide some insight into the objectives of the senior leadership involved in drafting it. Depositions from each of the executives in the 1998 hearing can be found at: http://www. pbs. org/wgbh/pages/frontline/shows/settlement/depositions/

As mentioned in the discussion of the 1998 hearings, the executives approached the committee with a proposal that had been drafted in 1997 with the states. The initial settlement was never approved because the politicians attempted to modify it beyond the point of practicality. The bill introduced by Sen. John McCain (R-Ariz. ) was the most publicized of the attempts at passing legislation that would limit the ability of the tobacco industry to operate effectively. The bill called for aggregate payments totaling $574 billion over 25 years and $125 billion to be paid in the first six years regardless of reduction in sales.

This payment schedule was independent of any fees the companies were obligated to pay the state’s lawyers. In fact, the bill was so unreasonable from an economic standpoint that RJR Nabisco pulled out of the settlement talks on April 8, 1998. Steven Goldstone, CEO of RJR Nabisco, had been one of the more willing executives to admit the industries’ wrongs and work with the government to correct the situation. He believed the McCain bill would “bankrupt his company. ” As a result, several other tobacco companies began to pull out of negotiations.

The federal government was unable to pass legislation that was acceptable to the tobacco companies, but the states were able to salvage the settlement negotiations in November 1998. Florida, Minnesota, Texas, and Mississippi were the first states to settle and negotiated a combined $40 billion payment over 25 years. The other 46 negotiated an additional $206 billion. This settlement was much less strict in several respects than its predecessor and the award was significantly less than the original $368 billion the tobacco companies had offered in the proposed settlement in June of 1997.

Despite this apparent failure, the settlement still required the tobacco companies to pay large amounts of damages to the states and cover enormous awards to the lawyers who represented each state. This settlement concluded one of the most difficult times the industry had ever experienced. The details of the settlement are too lengthy to present in this case, but the website below provides additional information. Although the settlement appears to be quite devastating to the tobacco companies, consider again Philip Morris’ annual revenues in 1997of $72 billion and a net income of approximately $7 billion.

Sharing the payments required above with several other firms shouldn’t be too difficult for them, should it? Or is this asking too much of a business who’s sole mission is to “maximize shareholder value? ” Consider the estimate that it will only take a price increase of $. 32 per pack to provide the necessary funding required by the settlement. Depending on the individual consumer’s price sensitivity, analysts have predicted varying impact of such a price increase on sales figures. Is this enough of a penalty for an industry that costs the country an estimated $8. 9 billion in health care per year?

It is also quite interesting to note how the federal settlement included the now infamous Liggett Group. Liggett enjoyed the benefits of the deal without paying anything in additional compensation (over and above the $31 million from 1996). This “no pay” provision would protect Liggett unless the company’s 1999 sales were more than 125% of the 1997 sales figures. In affect, the company is able to enjoy the additional revenue of elevated prices while decreasing sales. This benefit was estimated at an additional $100 million per year, none of which would be paid to the states as part of the recoupment of Medicaid funds.

In addition, the company realized a 60% increase in value the day the settlement information was released to the public. Perhaps it paid off for Liggett to be the “first-mover” in the ethics market? In all fairness to the tobacco companies, surely they have some relevant arguments amidst all the controversy. For example, the tobacco industry is heavily taxed by the states. In fact, they commonly remark that the amount spent on health care for those suffering from smoking-related diseases is quite a bit less than the total amount collected in taxes by the states. W.

Kip Viscusi, a Duke University economist, conducted one commonly cited study. The Viscusi study considered the higher medical costs incurred by smokers, higher insurance premiums, lost work time, and lost tax revenues due to smokers’ earlier deaths. Although not the most ethical topic, he then balanced these costs against the savings realized in nursing home, pension, and social security costs because of smokers’ premature deaths. According to Viscusi, the savings outweighed the costs by five cents per pack of cigarettes. Once one considers the excise taxes, the difference increased nearly six times.

Clearly, arguments based on benefits accrued through death are better left to economic theorists than to juries. However, in an argument based solely on economics, such as a suit in restitution, the cold figures are directly relevant. Using figures of the Office of Technology Assessment (OTA) which estimate 1990 government spending totaled 8. 9 billion dollars on costs directly associated with smoking, the tobacco industry points to the 13. 3 billion dollars in excise taxes collected on cigarettes to support their theory that state tobacco revenues exceed state health expenditures.

Is this a fair argument, or another example of a lack of social responsibility and concern for the health of consumers that seems to permeate the tobacco industry? We leave this for you to decide. One more issue that has several conservatives concerned is that the precedent set by the scrutiny placed on Big Tobacco might cause the system to run amok. Tobacco is a popular target in the present political climate, but the procedures created to attack tobacco cannot be legitimately limited solely to tobacco once they are put in place.

Other products are necessarily subject to the same type of attack. Governmental intrusion into areas of purely personal conduct, such as the use of tobacco, may be unwarranted and unnecessary. The government cannot hope to mandate proper diet, reasonable exercise routines, or healthy lifestyles. Such encroachment into personal freedom simply is not a proper function of government. If the courts accept the restitutionary theory offered by the anti-tobacco forces, the back door will be opened to governmental action against virtually any type of product, despite legislatively set public policy.

Again, we offer this for your consideration. Exhibit 1 – Timeline of the Tobacco Industry 1954 – A scientist at Memorial Sloan-Kettering Cancer Center detected that tobacco tar caused cancerous tumors in mice. 1958 – According to the April 23, 1958, memo, J. R. Lincoln, a Philip Morris research executive, demanded the removal of benzopyrene from cigarettes, and went on to suggest a publicity campaign to offset a health scare, protect profits and shield the industry from liability lawsuits.

It also stated “We must do this not because we think it is harmful but simply because those who are in a better position to know than ourselves suspect it may be harmful. ” Since then, scientists have demonstrated conclusively a direct link between lung cancer and benzo(a)pyrene, a chemical commonly found in cigarette smoke. 1962 – The Surgeon General convened an advisory committee to examine the health hazards of smoking and its central conclusion was “cigarette smoking is a health hazard of sufficient importance in the United States to warrant appropriate remedial action. 1962 – In response to the Surgeon General’s actions the tobacco industry publicized that it would fund a completely “autonomous” research center, the Tobacco Industry Research Committee, to investigate and disclose to the public any data concerning tobacco use and health. 1965 – Federal Cigarette Labeling and Advertising Act mandated warnings on cigarette packages but barred the requirement of such warnings in cigarette advertising.

First use of the ‘Caution: Cigarette Smoking May Be Hazardous To Your Health’ warning. 967 – Brown & Williamson company meeting at which a chief researcher stressed that the industry’s real business was not tobacco but the sale of nicotine. 1969 – Public Health Cigarette Smoking Act strengthened the warning label by requiring the phrase: Cigarette smoking is “Is Dangerous” vis-a-vis “May Be Dangerous” to your health.

Also proscribed cigarette advertising in any medium of electronic communication was subject to FCC jurisdiction. 1980 – British American Tobacco Co. parent of B&W) had internal memos regarding the company’s stance on causation. They felt the company’s “integrity [was] seriously in question” and that the effects of tobacco were obvious “in the eyes of the ordinary man in the street. ” (Document not discovered by State of Minnesota attorneys until Oct 1996). 1992 – Cipollone v. Liggett Group, Inc was decided by the Supreme Court, and although Supreme Court decision changed much of the tort law, the plaintiffs had to drop the suit after Liggett appealed because they couldn’t afford to continue.

Internal documents were revealed indicating tobacco company knew of the addictive nature of nicotine and the harmful effects of its product. 1994 – Four old law school friends from Ole Miss, including the Attorney General of Mississippi, discovered a chink in the tobacco companies’ armor. Reasoning that the State did not smoke but had suffered considerable damage from tobacco-related illnesses, the State of Mississippi in May 1994 filed suit against the tobacco industry to recoup the “tens of millions of dollars it spends each year to provide medical care to victims of tobacco-related illnesses. 1995 – November 1995, the vice president for research and development at Brown & Williamson Tobacco Company, Jeffrey Wigand, shocked the nation when he turned whistle-blower. During a deposition in Mississippi’s Medicaid suit against the industry, Wigand divulged that “former B&W chief Thomas Sandefur had acknowledged nicotine’s addictive power. ”

In anticipation of litigation, Sandefur had a “company lawyer deleted 12 pages from the minutes of a meeting attended by Wigand and other top scientists from B&W’s affiliates in which there was discussion of developing a ‘safer cigarette. 1996 – June Senator Frank Lautenberg, D-N. J. , introduced a bill permitting states to retain 33% of any rewards awarded under the Medicaid lawsuits. Generated significant incentive for states to file and still provided a substantial of the awards for the federal government (67%). June 1997 – Tobacco companies draft a settlement with the states’ attorneys general. November 1998 – Florida, Texas, Minnesota, and Mississippi lead the way in finally settling with the tobacco companies. The remaining 46 states settled soon after.

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