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An hour with Altria Group, Inc.

June 24th, 2014

By Edward Sweda

Opening the company’s 2014 Annual Shareholders Meeting at precisely 9:00 A.M., Martin J. Barrington, Chairman and Chief Executive Officer of Altria Group, Inc., had plenty of good news to report to shareholders who had assembled at the Greater Richmond Convention Center on the morning of Wednesday, May 14.  During his report on business, Barrington said that 2013 was a “strong year” for Altria, that dividend growth was positive and that total shareholder return was 28.6%.  Marlboro’s share in 2013 was 43.7% — greater than the next ten brands combined.  Altria’s Copenhagen and Skoal brands combined for a 50.7% share of the smokeless tobacco market in the United States.

The company also pledged to continue to follow its four “core strategies”:

  1.                 Invest in Leadership (“We will invest in excellent people, leading brands and external stakeholders important to our businesses’ success.”)
  2.                 Align with Society (We will actively participate in resolving societal concerns that are relevant to our businesses.)
  3.                 Satisfy Adult Consumers (“We will convert our deep understanding of adult tobacco and wine consumers into better and more creative products that satisfy their preferences.”)
  4.                 Create Substantial Value for Shareholders (“We will execute our business plans to create sustainable growth and generate substantial returns for shareholders.”)

But there was also bad news for Altria and its shareholders.  Just fifteen days earlier, a panel of Illinois’ Fifth District Court of Appeals had unanimously reinstated a $10.1 billion bench verdict in a light cigarette class action, the Price case.    Barrington did bring up this ruling during his business presentation, but only after claiming that Altria had had “success in managing litigation” during 2013.  While acknowledging that “substantial litigation challenges” remain, Barrington expressed satisfaction over two company victories, the rejection of a light cigarette case in California, the Brown case, and a New York Court of Appeals ruling against the plaintiffs in a medical monitoring case, the Caronia case.

During the question and answer session, I cited the recent ruling in Price.  “In 2005, the Illinois Supreme Court overturned the $10.1 billion bench verdict on what we now know is the false premise that the U.S. Federal Trade Commission (FTC) had authorized the conduct that was the basis for the company’s liability.  Subsequently, the FTC itself and the U.S. Supreme Court in its 2008 ruling in the Good case both made that clear.  While the company will appeal that April 29th ruling by the Fifth District Court of Appeal, my question is: What steps has the company taken to prepare to pay this multi-billion dollar judgment if the appeal to the Illinois Supreme Court is unsuccessful?”

In response, Barrington did not identify any specific steps that company may have taken.  He expressed confidence that the ruling would eventually be overturned.  He also told the shareholders that Altria prepares for all possible outcomes but that we are “a long way” from the point where a final judgment in the case would have to be paid.”

Two shareholder resolutions were considered at the meeting.  The first, filed by Trinity Health, noted that the World Health Organization has said that tobacco and poverty “have become linked in a vicious circle, through which tobacco exacerbates poverty and poverty is also associated with higher prevalence of tobacco use.  Several studies from different parts of the world have shown that smoking and other forms of tobacco use are much higher among the poor.”  The resolution called on Altria to initiate efforts “to prepare appropriate materials… informing poor and less formally educated tobacco users of the health consequences of smoking our tobacco products along with market-appropriate cessation materials.”  Father Michael Crosby introduced the resolution and stressed that Altria is financially benefitting on the backs of the poor at the front end of production (noting that many tobacco farm workers are undocumented and perform grueling work at the minimum wage rate of $7.25 per hour) and at the back end of sales since so many people who are addicted to nicotine are poor and have less formal education.  Fr. Crosby also brought up a major concern about child labor on tobacco farms.  See http://www.hrw.org/news/2014/05/14/us-child-workers-danger-tobacco-farms

Management opposed the resolution, alleging that “the matters raised in this proposal currently are being addressed and that the actions requested by the proponents are neither warranted nor in the best interests of shareholders.”  The resolution was defeated, having received 3.72% of the votes.

The second shareholder resolution, which was submitted by the Province of St. Joseph of the Capuchin Order in Milwaukee, dealt with the issue of disclosure of lobbying policies and practices.  This resolution called on Altria to prepare a report, to be updated annually, that would disclose four items: “1. Company policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying communications.  2. Payments by Altria used for (a) direct or indirect lobbying or (b) grassroots lobbying communications, in each case including the amount of payment and the recipient.  3. Altria’s membership in and payments to any tax-exempt organization that writes and endorses model legislation. 4. Description of the decision making process and oversight by management and the Board for making payments described in sections 2 and 3 above.”

Proponents of the resolution noted that, while Altria currently makes some disclosure, there is still incomplete disclosure about lobbying spending at the state level.  As proponents noted in the presentation in support of the resolution: “Lobbying is shareholders’ money that is being spent.  Does our company stand behind its spending?  Why should Altria intentionally keep us in the dark about how they are spending shareholder money?  What does Altria have to hide?  These are reasonable questions to ask.”    Also, Altria serves on the private enterprise board of ALEC, the American Legislative Exchange Council.  While the company has listed its involvement with ALEC, shareholders have no way of knowing how much Altria is contributing.

Management opposed this resolution as well, claiming that preparing and maintaining the report requested by proponents “would impose additional and unnecessary burdens and costs and would not be in the best interests of Altria and its shareholders.”  The resolution was defeated, having received 6.46% of the votes.

Altria’s 2014 Annual Shareholders Meeting was adjourned at 9:55 A.M.

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