Tobacco Documents Online

Outline of Major Points A. Philip Morris is the world's largest consumer packaged products company. We manufacture and sell thousands of brand name food, beer, and tobacco products around the world. 1. Kraft General Foods is the largest food company in the United States and is the second largest the world. 2. Miller Brewing is the second largest brewer in the United States and is the third largest in the world. B. The Company employs 166,000 people worldwide and has operations in 44 states. We have extensive contacts in California, with 53 facilities and over 10,000 employees in this state. C. In 1991, non-tobacco sales accounted for nearly 60% of revenues of $56 billion. D. Over the last five years, Philip Morris stock has yielded an average return of 31% per year, three times greater than the Standard & Poors average return over the same period. We recently announced a 23.8% increase in our dividend. E. Philip Morris is the second most valuable company among the Standard & Poors 500, with a market capitalization of -1- Presentation to Stanford University

approximately $76 billion. F. Philip Morris is widely held by institutions, which account for over 70% of our shareholder base. G. Our cigarette business contributes roughly $3 billion (favorable) to the U.S. balance of payments. II. We Believe that We Are Responsible A. Prevention of Youth Smoking 1. Philip Morris USA adheres to a strict industry code designed to prevent cigarette sales to minors. For example, a. All models in advertisements must be, and must appear to be, at least 25 years old. b. No advertising in publications directed to minors. c. No sampling to minors. d. Billboard advertising must be at least 500 feet away from schools, playgrounds, and youth centers. 2. The Company supported the development of Tobacco: llelpfng Youth Say No, a booklet to help parents teach their children to recognize and resist peer influence to smoke. Prominent educators, including the former chairwoman of the California State Board of Education, participated in preparing 2

the booklet. 3. Trademark Program a. We aggressively sue any companies which make unauthorized use of cigarette trademarks, including manufacturers of youth-oriented products (e.g., Sega Company). b. The Company extensively advertises its position on trademark use -- "If you use these trademarks, we'll see you in court!" B. International Marketing Practices 1. The vast majority of Philip Morris's cigarettes are sold in countries which require a warning notice. 2. More than ninety percent of the world's population lives in countries where health warnings are already required by law. 3. Philip Morris International has voluntarily adopted a policy of placing a health warning on a!l cigarette packages worldwide. C. Smoking and Health 1. Philip Morris has a!ong-standing commitment to the support of medical and scientific research relating to diseases statistically associated with tobacco. 3

2. We recognize that smoking is a risk factor relating to certain diseases and have contributed millions of dollars to support independent research in an effort to discover the causes of these diseases. 3. In the last 10 years, the Company has made direct grants of over $25 million for such research. 4. Philip Morris has contributed $55 million as its share of CTR grants totalling over $160 million. 5. The CTR has made a number of grants to Stanford researchers, totaling approximately $x. I II. Facts about the Tobacco Business A. Smoking is lawful in every country in the world. There are over 50 million smokers in the United States. The tobacco industry makes a substantial contribution to the economy. B. fndustry Regulation. 1. The manufacture and marketing of cigarettes are subject to hundreds of regulations enforced by the FTC, the BATF, and various state agencies. In addition, there has been substantial Congressional oversight of the industry for decades. 2. Since 1966, all cigarette packages in the United States have carried a warning notice. Since 1970, all advertising in the United States has carried a warning notice. 4

C. Awareness 1. Independent surveys establish an extremely high awareness of the claimed risks of smoking.. 2. In 1985, the Surgeon General stated: "The smoker today is well educated about the health hazards of smoking." 3. In a poll by Audits and Surveys, Inc., 99% of those questioned had heard that smoking is dangerous. 4. According to an HHS survey, only 1%o to 3% actively disbelieve the claims concerning the health risks of smoking. 5. The 1989 Surgeon General's Report reported high awareness levels among high school students: 97% of those surveyed stated that smokers face a slight, moderate, or great risk of harm by smoking. D. Impact of Advertising 1. Cigarette advertising is designed to maintain brand loyalty and brand switching. 2. There is no clear correlation between advertising and the initiation of smoking or consumption levels. a. In 1989, Surgeon General Koop stated: "There is no scientifically rigorous study available to the public that 5

provides a definitive answer to the basic question of whether advertising and promotion increase the level of tobacco consumption." b. In striking down Canada's ban on tobacco advertising as unconstitutional, a Canadian court, after hearing extensive expert testimony, found that the government could not establish a nexus between advertising and consumption. c. Research by various universities, the World Health Organization, and the federal government has revealed that: i. Changes in total advertising have little or no effect on consumption. ii. There are no systematic differences between juvenile smoking in countries where advertising is banned and in countries where it is permitted. iii. Those countries which have experienced the sharpest declines in consumption are not those which have banned advertising. IU. Problems with Divestment A.. Informed adults have the right to choose whether or not they wish to smoke. The anti-smoking movement seeks prohibition, but Congress and state legislatures will not embrace such a proposal. Pressure on trustees to divest tobacco stocks is an inappropriate 6

alternative to the legislative process. Presumably, Stanford does not support prohibition or the elimination of freedom of choice for informed adults. B. Divestment simply results in an exchange of shares from the seller to the buyer. 1. Divestment does not (i) affect smokers' choices regarding smoking or (ii) lead companies to abandon the tobacco business. 2. There are many willing buyers of Philip Morris stock. 3. Even if divestment, were to drive a company out of the tobacco business, other sellers would step in. C. Divestment Demands are Insatiable. 1. If Stanford divests its tobacco stocks on moral grounds, how will it avoid future requests to divest the stocks of other companies based on similar moral arguments? 2. The stock of many companies could be the target of a divestment demand: defense contractors; marketers of Salvadoran coffee; alleged polluters; and companies that market inferior infant formulas or drugs in Third World countries. N O 3. The slippery slope is not hypothetical (e.g., shareholder ~ proposals on a variety of subjects which 3M, Time Warner, ~ -7- ~ 0~

Gannett, Eastman Kodak, Mobil, General Reinsurance, Bristol. Myers, and' Travelers Insurance have received). 4. If Stanford sells its Philip Morris stock will it also sell stock it may hold in companies which are suppliers and customers of our tobacco business? Will it refrain from investing in index funds which include Philip Morris stock in their portfolios? Will it reject grants from the tobacco industry? D. Divestment entails significant transaction costs and lost profits. 1. Even without knowing the costs Stanford would incur in selling Philip Morris stock, it is clear that divestment entails significant costs, such as those relating to brokerage, research, lost dividends, and lost appreciation. 2. A New Jersey study indicated it would cost the State's Employee Compensation Fund between $330 and $515 million in broker fees and lost profits to divest of South Africa related securities. 3. Harvard divested of roughly 1.2 million shares of Philip Morris's stock. Since that time, the stock has nearly doubled in price. Considering appreciation and dividends, Harvard gave up roughly $50 million. 4. Rice University rejected a divestment proposal in order to preserve the high returns it receives from Philip Morris stock. 8

E. Role of Trustees 1. Trustees should not make financial decisions as a means to effectuate social policies which are more properly addressed in the political arena. 2. As stated in the University of Chicago's Kalven Committee Report: "The university...cannot take collective action on the issues of the day without endangering the conditions for its existence and effectiveness.... In brief, it is a community which cannot resort to majority vote to reach positions on public issues." V. Specific Questions A. Targeting 1. Philip Morris markets cigarettes in a responsible and lawful manner to all adult smokers, and we actively support efforts to prevent minors from smoking. 2. Many minorities and women choose to smoke our products. We advertise to these and other consumers in an appropriate manner. A requirement that we advertise only to white males implies that only that category of customers is capable of making an informed choice regarding smoking. 3. Addressing criticism of cigarette advertising in minority publications and on billboards in minority neighborhoods, Benjamin Hooks stated: "Buried in this line of thinking...is the 9

rationale that blacks are not capable of making their own choices and need some guardian angels to protect their best interests. This is an insidious form of paternalism. Blacks, like the rest of the populace, can make the choice of whether to smoke or not. " (Outdoor Advertising Association of America Newsletter, January 1990). B. Contributions to Minority Groups 1. We are proud of corporate citizenship and of our contributions to minority groups, cultural organizations, and other social causes. 2. Philip Morris has been an important contributor to the minority community for decades. In the 1950's we supported the NAACP, the Urban League, and other groups when few other companies were willing to do so. We maintained our support even though we were the target of a boycott led by segregationists. 3. Many minority groups support our positions on such issues as discrimination against smokers, smoking restrictions, regressive taxes, and marketing freedoms. We welcome such support. None of our contributions to any charitable organizations is contingent upon a quid pro quo. C. International Practices 1. Nearly every country in which we sell cigarettes requires a warning notice. Philip Morris International has adopted a -10-

policy to use a warning even in the absence of a legal requirement to do so. 2. In many countries, the cigarettes sold by government monopolies have tar and nicotine deliveries far higher than those of American cigarettes. Partly for this reason, American cigarettes are popular overseas. Philip Morris sells many low delivery brands around the world, including Philip Morris Ultra Lights, which are comparable to the lowest delivery product we sell in this country. D. Promotion and advertising at sporting events 1. The use of cigarette brand names at sporting events is designed to appeal to adults who smoke. Many Philip Morris customers attend: the sporting events which we sponsor, including auto racing and tennis. 2. Sports promotions are not designed to, and do not, encourage minors to smoke. a. Sports figures (and other celebrities) do not endorse cigarettes. b. Promotional clothing items bearing cigarette brand names are available only in adult sizes. c. Advertising generally, and event sponsorship in particular, ~V N do not affect the decision to smoke or consumption levels. 04 ~ -11- 0

d. All sponsorships and promotions are conducted in accordance with legal requirements (e.g., the broadcast ban) and self-imposed policies. 3. Many corporations provide essential to supports as well as cultural events. For example, the emergence of professional women's tennis, for example, was a direct result of support by Philip Morris. 4. As long as cigarettes remain a lawful product, we should be free to advertise and promote our products to adults in a lawful manner, including through the promotion of sports events. E. Advertising the Dangers of Smoking 1. in a sense, we do advertise the claimed dangers of smoking in that every cigarette package and advertisement in the United States carries a federally mandated warning. 2. tn connection with the Marlboro Grand Prix in New York, we have agreed to underwrite messages to discourage youth from smoking. 3. In light of the extremely high level of awareness of the risks associated with smoking, additional warnings would serve no purpose. 4. It is unreasonable to expect a manufacturer to advertise to its N consumers that they should not use its products. N N ~ ~2 N - - r

F. Minimum Age Legislation 1. Philip Morris USA supports the passage and strict enforcement of laws that would set a minimum age of 18 for cigarette purchases in all 50 states. 2. We believe that 18 is an appropriate minimum age. If legislatures set a higher age, we would fully comply with the law. G. Future of the Tobacco Business 1. Philip Morris is committed to the tobacco business. We derive substantial revenues from the sale of cigarettes and must honor our obligations to the shareholders. 2. Philip Morris cannot simply shut down its tobacco business. Absent outright prohibition, there will always remain a market for cigarettes. 3. Prohibition would have significant ramifications, from the emergence of a black market to lost tax revenues for government. V. Alternatives A. Earmarking Research 1. Stanford could earmark all or a portion of the income that it derives from its tobacco stocks for scientific research projects -13-

relating to those diseases that have been statistically associated with smoking. 2. Other institutions might follow Stanford's lead. Stanford could consider organizing a combined research program with other institutions to be funded by income derived from their tobacco holdings. 3. Research could be combined or coordinated with related research that has already been funded by CTR and the industry. B. Policy of "Voice° 1. Another alternative to divestment would be to play a more active role as a shareholder and engage in discussions with Philip Morris on topics of concern to Stanford. 2. Doing so would be consistent with the position a number of universities have taken in response to divestment proposals in other contexts, including South Africa.

r Possible Handouts 1. 1991 Annual Report 2. Second Quarter Report 3. Divestment Position Paper 4. Actions and Initiatives: What Philip Morris USA is doing to prevent minors from smoking. 5. Tobacco: Helping Youth Say NO 6. "ITS THE LAW°