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R.J. Reynolds’ Shareholder’s Report from Winston-Salem: A “Good Year,” a Proposal to Merge and a Death Toll that Must Not Be Acknowledged

May 18th, 2015

By Edward L. Sweda, Jr.

Like clockwork, the 2015 Reynolds American (RAI) Annual Shareholders Meeting started precisely at 9:00 A.M. on Thursday May 7, 2015 at the company’s headquarters in Winston-Salem, North

Ed Sweda

Carolina.  Seventy-five minutes later, the meeting was adjourned.

Before I could attend the meeting, I had to proceed through intense security, with machines provided by Security Detection, empty my pockets and hand over my camera to the RAI staff.

Wajnert

The meeting was held again in the company’s main auditorium that seats around 200 people.  On the dais were the following representatives of RAI management: Thomas C. Wajnert, the Non-Executive Chairman of the Board, who ran the meeting; Dara Folan, Senior Vice President, Deputy General Counsel and Secretary; Mark Holton, Executive Vice President and General Counsel; Andrew Gilchrist, the Chief Financial Officer and Executive Vice President; and Susan M. Cameron, RAI’s President and Chief Executive Officer.  After announcing the rules of conduct for the meeting and potential penalty for violation of the rules, Mr. Wajnert turned to Ms. Cameron for an overview of the company’s business performance for 2014.  Curiously, Ms. Cameron began by noting that 2014, while being a “good year” for RAI, “seems a long time ago.”  She cited some specifics of RAI’s 2014 performance, including Camel’s high market share and VUSE’s “successful national expansion.”  She described RAI’s plans to acquire Lorillard Tobacco Company as the “Right Decision at the Right Time” that is still awaiting regulatory approval by the U.S. Federal Trade Commission.  She also called on the U.S. Food and Drug Administration to adopt different regulations for e-cigarettes than for combustible cigarettes.  Ms. Cameron made no mention of any of the company’s customers who died during 2014 from smoking-caused diseases.

Much of the remainder of the meeting dealt with farm labor issues.  Many members of FLOC (the Farm Labor Organizing Committee of the AFL-CIO) were in the audience; they dominated the 30-minute question-and-answer session.  While Mr. Wajnert admitted that “bad conditions exist” on tobacco farms in North Carolina, he claimed that “we are working with our growers” to try to remedy those conditions.  FLOC representatives cited ongoing violations of child labor laws in the tobacco fields and emphasized that many of the farm workers were doing extremely hard and dangerous work for a minimum wage salary of $7.25 per hour.  Another major grievance was the fact that RAI, despite its claims of transparency, continues to refuse to provide FLOC with a list of tobacco growers with which RAI has contracts to provide it the tobacco for its cigarettes.

During the question-and-answer session, I asked the following question on ongoing tobacco litigation.

“During last month’s RAI First Quarter Earnings Conference Call, Chief Financial Officer and Executive VP Andrew Gilchrist said that ‘a significant portion of our legal budget at this point is being spent on Engle.’  The Engle verdicts in Florida keep on coming.  Just last week, a Florida jury returned a verdict of over $6 million for a plaintiff.  Meanwhile the Boston Globe last month reported on an upsurge in tobacco product liability lawsuits being filed in Massachusetts – an upsurge that was spurred on by a recent state supreme court ruling that is favorable to plaintiffs.

“I have a two-part question.  Would you clarify that when Mr. Gilchrist or other executives refer to the company’s legal budget, that it includes not just salaries of company lawyers and payments to local counsel but also the payment of judgments in cases where plaintiff verdicts have survived all appeals?

“Secondly, instead of using broad adjectives like ‘significant,’ would you give shareholders the specific dollar amount of the company’s legal budget and a breakdown by category of cases?”

In response, Mr. Holton said that the amount paid in judgments is not included in the “legal budget” category.  He also said that the company provides overall amounts for the legal budget, though not broken down by category of cases, to the U.S. Securities and Exchange Commission.

Two shareholder resolutions were defeated.  The first, supported by the North Carolina AFL-CIO, called on RAI’s Board of Directors to prepare a report “on the steps the Company has taken to reduce the risk of acute nicotine poisoning (‘Green Tobacco Sickness’) for farmworkers in the Company’s supply chain for tobacco.  The report should include a quantitative summary of the results of the Company’s inspections of its suppliers.”  The supporters of the resolution noted that children “who are under age 18 work as tobacco farmworkers in the United States and are exposed to Green Tobacco Sickness as an occupational risk.  A 2014 Human Rights Watch report described symptoms of Green Tobacco Sickness in nearly three-quarters of 141 child tobacco workers, ages 7 to 17, who were interviewed and worked in North Carolina, Kentucky, Tennessee and Virginia in 2012 or 2013.”

The second resolution, which dealt with issue of forced labor in tobacco fields, was sponsored by the Province of St. Joseph of the Capuchin Order in Milwaukee, Wisconsin.  Specifically, the proposal noted that, “with U.S. immigration reform stymied, undocumented workers (often the main workforce in many agricultural areas) can be exploited.  In their country of origin they often must pay contract labor brokers thousands of dollars to cross our borders; once here, they often are under the control of other labor contractors in order to work on U.S. farms.  This practice results in forms of forced and compulsory labor on many, if not most, U.S. farms, including tobacco farms.”

The proposal called on RAI’s Board of Directors to “create a policy that all its suppliers throughout its tobacco procurement supply chain verify (with independent monitoring) their commitment and compliance regarding non-employment, directly or indirectly, of laborers who have had to pay to cross the U.S. border to work or, once here, to work on U.S. farms.”

Father Michael Crosby presented the proposal and noted that currently RAI is financially benefitting from forced labor.  That is a fundamental moral issue that must be addressed, he added.

In seconding this resolution, I noted that RAI’s opposition statement that the issue of forced labor is “an issue that should be addressed in a comprehensive manner as part of immigration reforms and policies at the national level” was technically true but amounted to an excuse to pass the buck since there is no likelihood that the current Congress will allow a comprehensive immigration reform bill to be voted upon, given the track record of the House majority in the last Congress.

So, in this regard as in so many other aspects of Reynolds American’s business, the status quo continues.

 

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