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/
1998 SETTLEMENT
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.
http://www.naag.org/glance.htm
DISCUSSION
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.
1967 – 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.
More comprehensive timelines of the issues presented in this case can be found at:
http://www.pbs.org/wgbh/pages/frontline/shows/settlement/timelines/
Bibliography
Here is the tobacco case study for the marketing ethics discussion:
LYING
AND
TOBACCO
Senior Executives Caught in the Ethical Cross Hairs:
Shareholder Loyalty or Social Responsibility?
Case Development: Shelton S. Bridges, IV & Stephen M. Mounts
“You shall not bear false witness against your neighbor.”
The Ninth Commandment
Exodus 20:16
INTRODUCTION
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.
THE TRUTH, THE WHOLE TRUTH, AND NOTHING BUT THE TRUTH?
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.
CHOICES AND LIES
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.
IS LYING EVER ACCEPTABLE?
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?