B&w Corporate Governance

Corporate Governance

Corporate governance

refers to the system by which corporations are managed and controlled. It guides the relationship among a company's shareholders, board of directors and senior management. These relationships provide the framework within which corporate objectives are set and performance is monitored. Three categories of individuals are key to corporate governance success: 1) the common shareholders, who elect the board of directors, 2) the board of directors themselves, 3) top executive officers led by the CEO." It is necessary to emphasize that corporate governance is an important issue for all corporations. After a series of recent scandals involving Enron, WorldCom, Tyco, etc, there has been a renewed interest in corporate governance. The Sarbanes-Oxley Act, passed by the US Congress in 2002, focuses on combating corporate and accounting fraud and imposes new penalties for violations of securities laws.

The company I have chosen for my paper is Brown and Williamson (B&W) Tobacco Company - the third largest tobacco company in the US . Found in 1876, Brown & Williamson (or Brown Brothers Tobacco Manufacturing Co., as it was known back then) became a partnership between George Brown and Robert Williamson in 1893. In 1906, the company was incorporated under North Carolina state law, and grew steadily in its quality brands, expanding its product line. In 1927, the company was acquired by British American Tobacco (BAT is the 2nd largest tobacco company in the world, after Philip Morris) and reorganised as the Brown & Williamson Tobacco Corporation.

In 2004 Brown and Williamson merged with R. J. Reynolds Tobacco Company and continued its operations in tobacco industry . The company has its own Code of Conduct and corporate governance policy. The case I am going to look at in this paper is directly related to the corporate policy of Brown and Williamson.

In 1989, Dr. Jeffrey Wigand was hired by Brown & Williamson and was eventually promoted to the position of Vice President of Research & Development. All this time, his personal objective, according to his statement, was to produce a safer cigarette - one that would reduce the risk of lung and heart diseases generally associated with excessive tobacco consumption. His objective, however, was in apparent contradiction with the goals of the company- although aware that nicotine consumption was indeed perilous, B&W realised that developing a safer cigarette might clearly label all their previous products as unsafe. This issue was particularly relevant in the case of tobacco industry, where dangers associated with smoking are difficult to prove beyond a reasonable degree of doubt (Even today, the data is unclear because it is extremely difficult to disassociate tobacco from other things that cause the same diseases. LOGICALLY, tobacco is dangerous - this has been well known for well over 100 years. But statistically, it is virtually impossible to quantify.). During the course of his research, Dr. Wigand discovered that B&W was aware of the dangers associated with nicotine consumption, following advances in research and statistical methodology during 80s and 90s. Thousands of pages of reports documented these dangers in great detail. The documents were, of course, classified, and B&W took care to minimise any risk of exposure. Aware that Dr. Wigand's research went directly against the information contained in these classified files, B&W put pressure on Dr. Wigand to stop his research, according to Wigand. In 1993, Dr. Wigand was fired, apparently for poor performance and lack of communication skills .

In 1994, the Mr. Sandefur, the CEO of B&W testified before the House Subcommittee on Health & Environment. Together with six of his colleagues from the biggest US tobacco producers, he stated his belief that nicotine carried no dangers of addiction. In his own words, "I believe nicotine is not addictive." Aware of the falsehood of this claim, B&W sought to put pressure on its former R&D VP, demanding that he signs a new confidentiality agreement. Dr. Wigand proved to be resilient, and, after a prolonged period of threats, he eventually decided to go public with his knowledge. The information he disclosed proved that B&W was aware of the health hazards associated with nicotine consumption and that this knowledge reached to the highest levels, thus directly proving that Mr. Sandefur lied in his testimony.

In 1996 tobacco companies paid approximately $300 billion in lawsuits - lawsuits that would have never been successful had it not been for the information that Dr. Wigand provided. Jeffrey Wigand became one of the most famous whistle-blowers in the history of the USA. According to Mr. Moore, Attorney General of Mississippi, "the information Jeffrey had is the most important information that has ever came out against tobacco industry."

Identification of Critical Governance Issues

According to Article I of the Code of Conduct of Reynolds American Inc - the company that merged with B&W - "every director, officer and employee... are expected to comply with the Company's Code of Conduct and underlying policies and procedures." In other words, every employee was bound by the rules enumerated in the Code of Conduct, no matter how high an office they occupied with the organisation. The Code of Conduct proceeds to state that "compliance with applicable laws is a critical element of our ethical standards." Finally, the document states that "employees who are aware of suspected misconduct, illegal activities, fraud, abuse of Company assets or violations of the Code are responsible for immediately reporting such matters to their management." It should be noted in this instance that Dr. Wigand did, in fact, attempt reporting the clear case of fraud that was going on in B&W to his superiors - only to discover that the minutes of his meetings were being carefully monitored, rewritten and edited by lawyers if necessary. Finally, the Code of Conduct clearly stated that "there will be no retribution against any employee for making such a report" - another possible violation of the B&W Code of Conduct, since the reasons given for Dr. Wigand's dismissal were considered to be subjective and the argument that his dismissal was directly linked to his research and to his unwillingness to toe the company line would not be unreasonable.

The single biggest violation of the B&W Code of Conduct, however, was committed by the very person who was supposed to safeguard it - the CEO himself. Not only did the CEO violate