Philip Morris: Inside America's Most Reviled Company Part 1By
There is going to be a Day of Judgment. If there isn't a day up there, it's when you're lying on your deathbed. And you're going to say to yourself: `Well, what did I achieve in my life?' It's not how much money you've made, or how big a house you've got, or how many cars. It's what you did for your fellow man. It's `What did I do to make the world better?' That's what it's going to come down to."
The man uttering these words seems as sincere as a pastor in the pulpit on a Sunday morning. Yet his many critics think of him and his corporation as a villain, a beast, even the devil incarnate. The speaker, remarkably, is Geoffrey C. Bible, chairman and chief executive of Philip Morris Cos. He oversees the world's largest tobacco company, arguably the most reviled corporation in America.
In the U.S., where more than 400,000 people die annually from smoking-related diseases, it could be said that Bible's company, with its 50% market share, is to blame for the often agonizing deaths of some 200,000 smokers a year. So how can Bible, of all people, speak so passionately about an individual's obligation to society?
That, of course, is a dilemma that each of Philip Morris' 144,000 employees must wrestle with. Rarely has an industry or a corporation been so deeply vilified and so thoroughly discredited as Big Tobacco and its biggest player, Philip Morris. Few employees have escaped the loathing heaped on their company. Almost all have faced The Question, the inevitable inquiry laced with accusation that sooner or later always gets asked--at the PTA, a dinner party, or Little League: "How can you work for a company that kills people?"
It's not a question that is easily answered. Execs at Philip Morris tend to frame their response in self-righteous, almost combative terms. Cigarettes, they will tell you, are lawful products that any adult should have the right to buy. It is a matter of freedom of choice, no different from the right to own a handgun, drink a martini, or eat a Big Mac. But probe a little deeper and it becomes clear that their attitudes are far more complex and that many at Philip Morris make a difficult peace with the company's mission.
Indeed, Philip Morris is a company fraught with contradictions. In the past year, it has spent $100 million to persuade kids not to smoke. By the end of this year, it will have paid nearly $8.5 billion to reimburse states for the cost of treating smoking-related illnesses. But visit the company's New York corporate headquarters, where 8 of the top 12 executives are smokers, and it's clear that tobacco infuses the entire culture. Philip Morris received the only exemption to New York City's sweeping ban on smoking in the workplace. Ashtrays are built into the granite walls outside the elevator bank at every floor and also hang above the urinals in the men's rooms. Conference tables hold wooden boxes filled with Philip Morris cigarettes, and the scent of tobacco lingers in the broad, carpeted halls.
The contradictions extend to the company's uneasy relations with the outside world. Although widely despised, Philip Morris is one of the world's most generous corporations, annually contributing $60 million in cash and $15 million in food to fight hunger and domestic violence and to support the arts. Its employees give up to $5 million a year to charities.
None of that, of course, has silenced the company's critics, who insist the harm done by the company's products taints all else. "At every opportunity, this industry has fought legislation that might have saved lives," asserts Matthew Myers of the Campaign for Tobacco-Free Kids. "Their executives have lied about what they knew. And to a degree unmatched by any other industry that makes products that can harm people, they have gone after children."
WALLED OFF. For years, the sound and fury of the debate over the industry's products and tactics all but silenced the company and its executives. Bible became a corporate recluse as his company retreated into itself, creating a self-defensive culture to wall itself off from attack. The tobacco giant shut down virtually all outside communication. It was as if Philip Morris, one of the world's largest and most powerful corporations, with sales of $74.3 billion last year, had all but disappeared.
Even Philip Morris' own employees felt cut off--and ill-equipped to defend the company against attack. Although they collect some of the biggest paychecks in the industry and enjoy lavish benefits, employees responding to a massive in-house survey last year brought to the surface some surprising complaints. They made it clear they wanted senior managers to step up efforts to improve the company's image and to communicate more openly.
With its reputation--and its stock price--in shreds, Philip Morris recently embarked on an unprecedented campaign to rehabilitate its image. As part of that effort, it allowed BUSINESS WEEK behind the corporate veil for a series of candid interviews with managers of its far-flung operations.
The person who has had to confront the tough questions about smoking more directly than any other is the compact and combative man at the very top, Australian-born Geoffrey Bible. A thin-skinned accountant, Bible's tough-talking defense of tobacco quickly earned him the sobriquet "the Crocodile Dundee of the tobacco industry." The company's many adversaries might dismiss him as a company mouthpiece motivated solely by greed. But a rare interview with the 62-year-old Bible, who has spent 31 years at Philip Morris, reveals a far more complicated figure.
If he had not been named CEO in 1994, a job for which Bible insists he had no ambitions, he likely would have retired by now. "I've been working since I was 14," says Bible, whose first job was stamping dates on drivers' licenses for Australia's Transport Dept. "I would have liked to retire at 60."
Instead, Bible finds himself leading Philip Morris during the most tumultuous period of its 97-year history. Asked if he would have preferred to pilot the company in a less contentious era, Bible turns wistful. "Life ain't like that, mate," he muses, between puffs on a Marlboro Light Menthol. "`Into each life some rain must fall. And too much has fallen in mine.' Ever hear that tune by the Ink Spots? It's the luck of the draw, isn't it?"
No one, however, could ever have anticipated the typhoon that has engulfed him and his embattled employees. In the last year, with litigation threats looming, Philip Morris stock has fallen by half, lopping $83.2 billion off its stock market value. That sum exceeds the total market cap of such companies as Mobil, Hewlett-Packard, and Eli Lilly. In Bible's own words, his beloved company has become "the dog of the Dow."
That's not something Bible will accept passively. In his years at Philip Morris, he has consistently shown a willingness to move aggressively to build up the company. As head of overseas tobacco operations from 1987 to 1990, he championed the purchase of local cigarette companies in former communist countries, a risky move that has allowed the company to build a commanding position in Eastern Europe.
Bible's most formative experiences, though, took place far from the corporate halls of Philip Morris. He speaks movingly of the five years he spent, from 1959 to 1964, working for a U.N. relief agency that helped Palestinian refugees in the Middle East. "I've seen a lot of misery in my life," he says, recalling the thousands of people in extreme need of food, medical attention, shelter, and clothing he saw. "If you see these little toddlers with flies all over their eyes, a rag over them and nothing else in 100-degree heat, you sort of get a real taste of what hunger is."
WAGING WAR. It was something he never forgot. As a 1995 volunteer on a Citymeals-on-Wheels outing in New York, Bible heard that there was a waiting list of more than 1,000 homebound seniors. Within months, a $1.3 million check arrived from Philip Morris to wipe out the wait. Other sponsorships, though, have had to give way beneath the pressure of public opinion. Philip Morris supported women's professional tennis for almost three decades but gave it up a year ago. At an event attended by Chris Evert, Billie Jean King, and other tennis stars last November, Bible became so choked up as he recalled the company's crucial role in elevating the sport that he had to pause at the podium before finishing his remarks.
This glimpse into the private Bible hardly squares with the public image of a confrontational executive who has often posed for the annual report with a lit cigarette defiantly in hand. Initially as CEO, Bible waged war with critics, filing lawsuits against detractors, from television network ABC to the Food & Drug Administration. Then, in 1997, with his back to the wall, he sat at a negotiating table to hammer out the most controversial peace pact in business history. To the consternation of some of his own execs, Bible joined industrywide talks, agreeing to eliminate Philip Morris' venerable Marlboro Man from its ads and to pay an estimated $175 billion of the $368.5 billion settlement.
UPHILL BATTLE. Those first tentative steps out of the bunker didn't lead very far. The deal, announced with much fanfare, collapsed after 10 months, the victim of politics and public opposition. Bible now says he considers his efforts to gain a legislative settlement "naive," though it did lead to the industry's subsequent $206 billion deal last November to settle lawsuits filed by 46 states to recoup smoking-related medical costs. Still, nearly every week brings more bad news: On Nov. 12, Philip Morris agreed to pay a record fine of $75,000 for failing to properly disclose the amount of money it spent to lobby New York lawmakers from 1996 to 1998.
Sitting in a sparse conference room on the 22nd floor of the company's New York headquarters, Bible clearly resents Philip Morris' pariah status. "The company is filled with decent, hard-working people, no different than any other. We go to church. Our children go to school," he says. "We need to do more to restore self-pride amongst our employees...and to have our place at the table like any corporation."
He bristles at the widely held belief that Philip Morris executives lied about the dangers of tobacco. "We are working all over the world in the most genuine, upright, forthright, honest fashion that we possibly can," insists Bible. "I'm not aware of any lies whatsoever."
Bible acknowledges that Philip Morris faces an uphill battle to regain the confidence of the public, a goal he hopes to achieve through the company's newly launched public relations campaign. Yet he plans no transforming moves to alter the company's portfolio of businesses, no plans for major acquisitions outside the company's core interests in tobacco, food, and beer. His strategy for Philip Morris has not changed: It is to fight hard and to win in the courtrooms. "We will come out of it," he says. "About that I have no doubt at all."
Next to Bible, the man who has to worry most about the tobacco business is Michael E. Szymanczyk, the towering, six-foot-eight CEO of Philip Morris USA, the $5.2 billion domestic tobacco unit. It may well be the company's most difficult job, where professional strain and personal harassment come with the territory. When promoted in 1997, Szymanczyk became its fifth CEO in 10 years.
Szymanczyk, now 50, has had to develop a toughness that's almost unimaginable. Last year, just before Christmas, anti-smoking protesters showed up at his Connecticut home. They defaced an evergreen tree with empty cigarette packs, hung a mock wreath, festooned with cigarette butts, on the front door, and sang Christmas carols with crude antismoking lyrics. The incident upset his wife, but Szymanczyk says "I can't be distracted by people like that. It's hard to believe someone would be so mean-spirited."
He cannot recall the first time he got The Question, but when it comes up, usually in one of its gentler forms, he's ready. "I don't want anybody to get sick," he says, "but you can't live someone's life for him. You can't remove all the risks in life. That's what I believe."
Szymanczyk had at least some idea of what he was getting into when he was offered a job at the tobacco company as senior vice-president for sales in 1990. His first instinct was to dismiss it out of hand. "I wasn't so sure I wanted to go into the tobacco business," he recalls. "It was a controversial business, and I just hadn't ever seen myself in it." A telephone call to a mentor, a businessman 20 years his senior, persuaded the former Procter & Gamble soap salesman to overcome his doubts. "He told me: `It's a tough business, but I've always thought those kinds of businesses need to have the very best people."'
In attracting new talent to Philip Morris, Szymanczyk has to use a more creative approach. Rather than stage big campus recruiting drives, he and other top executives quietly cultivate relationships with likely candidates, inviting small groups to dinner. Szymanczyk puts a lot on the table: starting salaries of $40,000 and up, guaranteed bonuses, even tuition reimbursements. This year, Szymanczyk claims, 47% of those offered jobs took them--his best recruiting season ever.
Now the chief U.S. tobacco strategist is leading dramatic change at Philip Morris. After settling lawsuits with state governments a year ago, Philip Morris and indeed the industry have had to institute a radical shift in mind-set, from total noncompromise with antismoking forces to what Szymanczyk calls one of accommodation.
That shift is most apparent in the area of youth smoking. Szymanczyk has ended cigarette sampling and mail distribution of cigarettes, halted vending-machine sales, and banned mass-transit and outdoor ads. The company has also trained more than 30,000 retailers how to recognize fake I.D.s. All told, Philip Morris upped its investment in youth smoking-prevention programs tenfold this year to $100 million.
Distributing that money, however, has proved difficult. Recently, for example, Philip Morris awarded a $4.3 million grant to the National 4-H Council. Activists quickly mounted a lobbying effort to get state groups to reject the grants on the basis that Philip Morris' efforts are little more than public relations initiatives. More than half of them have since turned down the funding. "Some of the stuff I see just amazes me," says Szymanczyk. "We're trying to do things that are responsible, and you have people who say `Don't take their money."'
That emphasis on preventing kids from lighting up--along with rapidly escalating cigarette prices--has meant that Szymanczyk is managing an ever-shrinking business. For nearly two decades now, the U.S. market has been declining by 1% to 2% a year. In 1999, due to price hikes averaging 75 cents on a $2.35 pack to cover the costs of the industry's settlement, cigarettes sales will fall nearly 10%, the highest single drop ever.
Philip Morris, however, has shown it can be successful in a declining business. Last year, with industry shipments down 4.6%, the company's stable of brands attained a record 49.4% share. This year, its share is expected to climb to just over 50%. Marlboro alone will account for one of every three cigarettes sold in the U.S. But as the company pays hefty settlement charges, doling out $3.4 billion last year alone, U.S. profit margins have plunged--to 9.7%, down from 33.8% in 1996. "Our objective is to take this business and to produce cash for the company to invest," says Szymanczyk. "Long term, who knows what we'll be as a company?"
The man who will take up the slack for Szymanczyk is German-born Paul W. Hendrys. As tall and lanky as his American counterpart, Hendrys is chief executive of Philip Morris International Inc. At 52, he is a passionate consumer of his company's products, having smoked since 19. Yet, Hendrys says, he has quit some 20 times over the years, often for a few weeks or months, before restarting.
"Look," he says, in clipped, German-accented English, "I have always had the intention to prove to myself that it's easy for me to quit. So very often when I go on vacation, I say: `Look, I won't smoke at all.' So I quit for a couple of weeks, and then I'm back." Some might see in that pattern proof of cigarettes' capacity to addict, but not Hendrys. He believes the benefits of smoking, the pleasure he gains from it, and the stress it relieves, outweigh the risks.
OVERSEAS GROWTH. It's not surprising that Hendrys feels some stress. As U.S. markets shrink, overseas markets have become the critical avenue for growth. The company has only a 14% share outside the U.S., where higher percentages of people smoke, where nonsmokers are far more tolerant of the habit, where opposition is less organized, and--most important--where consumers are less litigious.
To exploit those markets, Hendrys has been refining a strategy he hit on almost 20 years ago, when he joined the company as a regional-sales director in Germany. Back then he used a savvy maneuver to outflank Reemtsa, his former employer: When Reemtsa tried to spark a price war by lowering the cost of West, its Marlboro-lookalike brand, Philip Morris introduced its L&M brand as the cheaper alternative. The move protected Marlboro's premium pricing, while smashing competition at the lower end. It also helped push Philip Morris' market share in Germany, the largest European smoking market by far, to 41%, up from just 10% in 1980.
Now, Hendrys' primary objective is to duplicate that success throughout the world as a way of offsetting the decline in smoking in the U.S. "The American market is a big market, but we're talking here about a world market of 5.2 trillion cigarettes," he says, at international headquarters in Rye Brook, N.Y. "And I tell you, we will take our fair share."
Could anything stop Philip Morris' worldwide campaign? Protective governments remain a problem, and there is always the possibility that a strong antismoking movement could emerge. Hendrys is trying to use the experience in the U.S. to head off such a movement. The company now has 83 youth prevention programs in 55 countries outside the U.S., sometimes over the opposition of local competitors. "We don't want kids to smoke because it exposes us to attack as an industry," says Hendrys.
It's also true, though, that Philip Morris dominates the high end of the market with its premium brands, cushioning it against any drop-off in smoking by kids. And if kids don't start smoking, where will Philip Morris get its future customers? Hendrys figures he can keep stealing share in a fragmented global marketplace.