Remarks Of Steven F. Goldstone, Chairman And CEO, RJR To The Washington Press Club




APRIL 8, 1998



I appreciate the invitation to be here today, and to take the opportunity to tell you, and all the shareholders, employees and others with an interest in my company and the tobacco industry, where RJR Nabisco is today and where we are going from here.

The hundreds of calls I have been getting over the last week -- from investors, customers, suppliers, retailers, growers and other interested Americans -- have only emphasized the need for a clear statement of the situation and the future of R.J. Reynolds, our tobacco company in Winston-Salem, North Carolina.

Today, it is clear to me that we have failed in our effort to achieve a comprehensive resolution of the contentious issues surrounding tobacco in our country. The extraordinary settlement, reached on June 20th last year, that could have set the nation on a dramatically new and constructive direction regarding tobacco, is dead. And there is no process which is even remotely likely to lead to an acceptable comprehensive solution this year. By that I mean a comprehensive resolution that sets clear and fair rules for the future but acknowledges that tobacco companies have a legitimate right to exist in our country. Although I believed on June 20th, as I do now, that the comprehensive resolution was a finely crafted solution to seemingly intractable controversies, the opportunity to implement it has clearly been lost.

It is worthwhile to take a moment to review what has happened and then to tell you where our tobacco company is going to go from here.

I became Chairman of RJR Nabisco two years ago. The company is the sixth largest consumer products company in the world. As Chairman, I am accountable to thousands of shareholders and over 80,000 employees all over the world. Our companies have developed some of the great brands of the world -- such as Winston, Camel, Oreos, Ritz crackers, Planters nuts and LifeSavers.

But I found it uniquely difficult to plan for the future when one of our companies is viewed as outside the mainstream of commerce -- absorbed in massive litigation, under regulatory and political attack, with no normal working relationship with federal or state governments.

It was obvious to me that 40 years of litigation -- in which the industry never lost a case -- was nonetheless not providing the best environment for my company and its employees. It was obvious to me that further escalation of the war -- even with further victories in court -- would not change anything for the better -- for anybody -- for my company, the public health community or the country.

So we sat down at a table with our chief adversaries and members of the public health community.

The result was a remarkable, comprehensive agreement -- tougher and more wide-ranging than any of us had expected -- that would have fundamentally changed the way tobacco products are regulated, marketed and sold in this country.

There has been a lot of water over the dam since then, but let me remind you what a few people said at that time about the June 20th settlement.

The New York Times said: "Tobacco negotiators announced a historic settlement proposal today that, if ratified, promises to change forever the way cigarettes are marketed in the United States, to provide billions of dollars in compensation to states and to permanently alter the nation's legal, regulatory and public health landscape."

One attorney general, who had participated, said: "This is the biggest public health achievement and corporate settlement in the history of this country."

A leading public health advocate, Matt Myers, of the National Center for Tobacco Free Kids, said: "This plan offers the best hope for protecting our children." He called it "the single most fundamental change in the history of tobacco control, in the history of the world."

What has happened since June 20? Well, instead of any real consideration of the merits of the settlement, Washington has rushed to collect more tobacco revenues while playing the politics of punishment -- not only destroying the negotiated settlement but threatening to injure farming communities, retail store owners, and everyone else who participates in this $50 billion industry, as well as every adult who chooses to use tobacco products.

The comprehensive resolution failed because the Administration, while publicly praising the concept, privately dismantled it piece by piece. The resolution cried out for strong, bold, political leadership, but precious little was forthcoming. The settlement was instead subjected to partisan positioning.

The comprehensive resolution failed because some leading public health advocates who, seeing the realization of all the programs they had fought for years to obtain, and some others they never even dreamed of asking for, added a new cry: a demand for retribution. The comprehensive agreement, which should have been a public health advocate's dream come true, was left behind in favor of a surprising new public health agenda -- the need to promote litigation and punitive damages against the industry.

The comprehensive resolution failed because the Congress, in the absence of leadership from the Administration, dissolved into a taxing frenzy on a disfavored industry and the 47 million customers it serves.

To be completely honest, it failed also because those of us in the industry did not appreciate fully the depth of the mistrust and anger that existed about the industry's past controversies.

This atmosphere, which we had hoped through this settlement to clear, eliminated any chance of rational and realistic discussion of the proposal and drowned out virtually all reasonable voices. People more interested in the political expediency of acting "tough" on the industry or in preserving the tobacco controversy for their own political benefit dominated the debate.

I must say that there were some who did resist the temptation to exploit the politics of the moment. Senator Orrin Hatch, a long-time, leading critic of the tobacco industry, after studying the agreement, endorsed the essential framework of the comprehensive settlement, including liability reforms, and acknowledged that "realistically, unless all the parties who were originally at the bargaining table and who made the settlement possible have some level of acquiescence in the bill . . . we risk jeopardizing enactment of a program and its successful implementation."

But the fair process of debate that we and the Attorneys General had hoped for ended up instead a process of discrimination and exclusion. The bill approved by the Senate Commerce Committee received significant input from interest groups of every shape and variety, except from the very industry sought to be regulated. We were expressly excluded. An industry which is the largest corporate taxpayer in America, which provides employment for almost two million Americans and which sells a legal product to over 47 million people was not entitled to be considered. It was a chilling reminder that many of our representatives in Washington believe that our industry simply has no right to be heard or to participate in the legislative process in the United States Congress.

So now you know why, in a nutshell, I have concluded that this legislative process, as far as tobacco is concerned, is currently broken beyond repair.

Why did this political process break down? My answer is one word -- money.

$368 billion is apparently not enough to satisfy all the wishes of the federal government. The amount has to be doubled or even tripled to pay for all sorts of new programs unrelated to kids' smoking. Just take a look at the President's budget submission this year and you get the idea.

Let me be clear on what the Commerce Committee bill would do. Although they say it would raise prices by $1.10 per pack, this is not true. The reality is, as every Wall Street analyst has commented, the price of cigarettes would be more than doubled or even tripled under the Committee bill. This would impose costs of hundreds of billions of dollars on adult consumers, to fund huge government programs. All of this is justified politically in terms of one thing -- stopping kids from smoking.

But remember that less than 2% of all sales go to underage smokers. I do not mean to minimize the problem, but the facts are the facts . . . less than 2%. So this proposal prescribes billions of dollars of tax increases imposed on more than 98% of a commercial market in a purported attempt to influence 2% of sales.

Not only that. This proposal ignores what every law enforcement officer knows. Do you know how many packs of cigarettes can fit into one trailer truck? 695,000 packs. That is 14 million cigarettes. It is simply irresponsible to brush aside the problems with black markets that neighboring countries have experienced when they have raised cigarette taxes by even lesser amounts. You cannot have effective enforcement of laws limiting access to these products if teenagers are buying cigarettes off the backs of trucks.

What, you may reasonably ask, is going on here?

No one knows definitively why kids smoke or what could be effective in convincing them not to. The recent report from the Centers for Disease Control shows a disturbing increase, and Michael Erikson, head of CDC's Office of Smoking and Health, frankly admits no answer to the question why. "There's been incredible rhetoric over the past few years," he says, "but very little has changed."

The negotiators of the settlement realized that there is no one silver bullet that will cause a reduction in underage smoking. This is why the settlement included a multifaceted, balanced approach to the problem, including meaningful laws to limit youth access, with real enforcement of them, along with voluntary advertising restrictions, education programs and gradual price increases of up to $1.50 in less than ten years. The package included every element ever suggested by mainstream public health experts, with an ongoing opportunity to evaluate and adjust the mix as we gained experience as to what would actually work.

All of this sound thinking has been ignored in the Washington debate. Instead, we hear only the calls for greater and greater taxation, all for the sake of our children.

As parents, we know that the reasons kids smoke are not related to price. In the trendy world of $100-plus sneakers, a few dollars to be fashionable or cool apparently are not a problem. If people would only listen, the kids tell us this themselves.

The Associated Press in Ohio reported these teenage views two weeks ago: "If kids want to smoke, they are going to do it whatever the cost, even if it means stealing," said one sixteen year-old. "It's not going to make me quit," said another.

Our children have told the Congress the same thing. At a recent House Committee hearing, this advice:

"If money were a huge issue, then kids wouldn't be buying marijuana," said one teenager.

Another teenager was asked: "Do you think raising price would deter some students from smoking?"

"No. Because if you look, it's kind of weird how . . . people would be willing to pay $150, $200 for shoes . . . And, when it comes to cigarettes, people will moan, they'll groan, but they'll still pay."

The local school professionals know this too. "Cost is not that big a factor. Most kids have enough money or can get enough to pay more for cigarettes," said a principal of an Ohio high school.

Remember also for a second where we were before this Washington debate took off into financial orbit. When the FDA regulation was announced in 1996, it did not include anything about price increases, not one cent. Yet the President said: "We have today met our responsibility to help our country protect its values, protect its children and ensure its future."

David Kessler said: "Our regulation focuses on restricting access and reducing the appeal to children . . . because that's the right public health strategy."

Secretary Shalala said that the 1996 FDA regulation, which, I repeat, did not involve a penny of price increases, was: "the most important public health initiative in a generation. It ranks with everything from polio to penicillin. This will be huge in terms of its impact. We will reduce the amount of teenage smoking by half over the next seven years . . . this is a comprehensive approach."

Now, just a couple of years later, all we hear is taxation, taxation, price increase, price increase, as the only possible solution to the problem.

The one difficulty with today's proposals is that they will destroy the domestic tobacco business. And I do not mean just my company. They will put growers out of business and destroy many of the communities where they live. They will hurt badly the thousands of small retailers across the country. They will unfairly burden those adults who do choose to smoke and who can least afford greater taxation.

You do not have to rely on me on this point. Just listen to Wall Street's unanimous view:

Gary Black, of Sanford Bernstein, called the Senate Commerce Committee proposal last week "a $600 billion proposal from the land of make believe."

Martin Feldman, of Salomon Smith Barney: "So where might the U.S. tobacco industry be by 2003 if McCain's proposals are legislated? The real retail price of cigarettes will exceed $5 per pack; a thriving black market will have developed; U.S. farmers and manufacturers will have lost market share to foreign entities, and the weaker U.S. companies may have filed for bankruptcy protection. The aspirations of the proposed bill . . . are more likely to be achieved by policy based on compromise and an understanding of industry dynamics than by trying to bludgeon the industry to death."

David Adelman of Morgan Stanley wrote that: "politics, not policy, is unfortunately dominating the settlement process . . . The proposal would likely force RJR Nabisco into bankruptcy . . . and would quickly result in a very significant black market, and will not resolve the nation's tobacco issues."

On top of Washington's urge to use the tobacco controversy as a unique opportunity to raise revenue, the debate has also taken on a truly coercive, big-brother tone. Not only do politicians not think twice about proposing huge tax burdens on adult smokers, but the adults of our country apparently cannot be trusted or allowed to exercise their own personal judgment freely.

I'll give you just one example. The Commerce Committee bill, in a stroke of a pen, would completely eliminate the camel image from my company's packaging. This is a trademark Reynolds has used for more than 80 years. It is known worldwide. Yet the Committee determines, with no debate, that a picture of a camel on a pack of cigarettes is too dangerous, even for adults, to see.

So I come back to it. The legislative process that produced these proposals does not give me any hope that it can produce a reasonable or rational result.

So where does all this leave us? My answer is just about where we were a year ago, before we signed the June 20th agreement, although we will undoubtedly incur extra costs and litigation expenses as a result of this failed settlement effort. Here is what I see.

First, I have told my colleagues in the industry that effective today, I no longer see any purpose in working toward the June 20th national settlement. I stand behind the comprehensive resolution embodied in the agreement, but I see no possibility in this environment to achieve it.

As a business enterprise, we therefore have to address how our company will go on from here.

We will be a responsible corporate citizen, while growing our tobacco brands and competing for the business of adult smokers. We fully accept that the U.S. market is going to continue its overall decline, but there is still a lot of room for our company to compete and prosper. Three out of four adults who smoke choose products other than Reynolds products, and each point of market share we can obtain through effective communication with this group will be significant for us.

We have also heard the concerns of the public, parents and others who want to take the steps necessary to ensure that tobacco products are not marketed or sold to kids. I have testified in Congress and I firmly believe that marketing directed at children is not only illegal, but immoral and unethical. Our tobacco company operates today on these principles. We will support and work towards achieving reasonable, effective and measurable efforts to reduce and eliminate smoking by minors.

I share a responsibility with the parents of our country to educate our children that they should not smoke. It is an adult product with known health risks. We don't need the 17 new federal boards and commissions that would be created by the Commerce Committee bill to get this message to our children. As a parent, I do not believe we have to rely on Washington to teach our children right from wrong.

In fact, I plan to work with my colleagues in the industry to encourage independent, non-government controlled efforts to educate our children about the lifestyle decisions children make that so concern us as parents.

Second, we knew that we would suffer for our attempt to settle and compromise, and that the plaintiffs' lawyers would trumpet it as a sign of weakness to solicit even more and more cases against us. This has already happened. We are facing hundreds more cases than we had just a year ago, from lawyers seeking jackpot judgments of every variety. But let me assure you -- and them -- that we are not, as they would have it, like a Brinks truck overturned in the middle of the highway.

To the lawyers who, as reported in the Wall Street Journal last week, have been advertising for plaintiffs on late-night T.V. and producing home videos on how to sue this industry, hoping that a huge pot of money would be theirs for the taking, I say you have been operating on a wrong assumption. We will not stop defending ourselves. We continue to have strong defenses to these claims, and American juries continue to respect basic notions of personal responsibility and the consequences of free choice. We have consistently prevailed in front of impartial jurors, and we will continue to do so. Gambling on a big new inventory of the same old cases is a bet you will not win.

Just a few weeks ago, the industry won yet another important case in Indiana, in which a renowned plaintiff's lawyer presented a full blown case, including all the industry's so-called damning documents. The jury nonetheless had no problem distinguishing political science from real science, and brought in a defense verdict in a second-hand smoke case. So I believe the industry should and will continue to win the vast majority of all these cases.

Also, we will undoubtedly have to litigate more claims brought by the states seeking medicaid reimbursement -- and let me take a moment to remind you what these cases are about.

The states have for years approved tobacco as a legal product and taxed it to the point of no return. They did this knowing the health risks associated with the products, and while knowingly granting their citizens the right to choose to smoke.

The state cases have no merit. Courts in Maryland, San Francisco, Washington and West Virginia have already thrown out these claims. Undoubtedly, where fair tribunals exist, others will follow.

Finally, and this is perhaps the most important point going forward, we are going to speak out and engage in the public policy debate affecting our industry and our customers. I don't mean just this country's 47 million smokers. I mean the hundreds of farming communities, the tens of thousands of small grocers and convenience store owners, the truckers, distributors, suppliers and others -- two million in all -- who have an economic stake in this industry. I pledge to devote much of my own time and my company's considerable resources to fostering a healthy, vigorous debate about the choices this country has about tobacco products.

I have talked to the CEO's who lead the other companies in the industry, and I have no doubt they will join me in devoting their resources to raise these issues in every town across the country.

The primary issue is taxation.

Is it fair to increase the tax on cigarettes by huge amounts to pay for new federal spending programs or to provide tax cuts for wealthy Americans?

The Commerce Committee bill would raise taxes so that Washington would make 15 times more than our tobacco company does on every pack sold. That is big business for Big Government.

But it is bad business for Americans. What would this do to real people . . . and to the family of a smoker who makes $25,000 a year? By the fifth year, it would increase his tax bill by almost $1,000 a year -- more than he will then pay in federal income taxes.

It is also bad business for the growers and their farm communities, who are our partners. Taxes this high and the reduction in volume they will cause, plus the further restrictions on foreign sales in this bill, will crush them too. Towns like Carrolton, Kentucky; Wilson, North Carolina; Danville, Virginia; or Carthage, Tennessee. And it is not just the farmers. It is the hardware store owner, the farm equipment man, the fertilizer distributor, the local banker, the local insurance agent.

Blake Brown, a leading agricultural economist, sums it up when he says these communities will be devastated. These jobs will be lost and not replaced. Washington does not realize that farmers don't want government handouts, and that a farmer welfare program will not even address the problems of the others in the community. Washington does not remember that these communities care as much about their children as anyone else in the country.

So, we are going to talk to people about all this. We're also going to talk to them about the intrusion of government into the free enterprise system and the censorship and coercion of individual liberty.

We're going to talk about protecting our constitutional right to advertise, market and communicate with adults, and protecting the rights of adults in a free society to hear us and make their own personal judgments, free from government coercion. We're going to see if adults want their federal government to censor the images they are permitted to see, like that dangerous camel that has been on the front of our package for 85 years.

This may all sound simply like political rhetoric to you, but I assure you that it is not. These are real issues facing real people involved in this business. They are issues that could not be more serious to them, and to me as a Chief Executive Officer. I have a responsibility to them and a duty to my shareholders and employees to do what I can to advance their interests in this commercial enterprise.

No doubt my words today will be met with more of the same litany of accusations about past misconduct that some people would rather focus on -- to the exclusion of any vision for the future. But I cannot afford to dwell in that debate. I have a business to run in an industry on which millions of people depend. We have to move on.

I have no doubt that when the debate occurs, the American people will bring some wisdom and common sense back to these issues.

In conclusion, I cannot tell you how disappointed I am that our effort to reverse years of acrimony and to chart a new direction have failed for now. Perhaps at some point a real opportunity for a comprehensive resolution will present itself. Perhaps another opportunity will not arise, as events play out over the next few years. But we have no possibility for reasonable reform today. So, we will continue to manage our business in the most responsible and competitive way we can. As long as our country continues its long-held view that tobacco products should be legal products available to adults who choose to use them, and that private enterprise has a legitimate role in producing these products for those adults, then that is exactly the job we intend to do.

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