SECRET
C.A.C. V - VICTORIA
CONFERENCE NOTES
Chairman's Opening Address
The Chairman thanked Mr. Parfi and all those in lukasco for the
splendid arrangements which had been made.
He welcomed back Mr. Long and Mr. McCarty and expressed regrets that
this would be the last Conference to be attended by Mr. Edens.
In his review of the 15 months since the last Conferencet the
Chairman said that the Group is adapting well to the effects of -itLflation,
recession, exchange rate movements, and strikes. He suggested that these
problems would continue for some time to come and that there could be added
difficulties and uncertainties resulting from the enlargement of the
European Common Market, the continuation of the North/South dialogue, and
the East/West confrontation.
There were conclusions to be drawn from the Annual Review of 1979
which was included in the Chairman's statement at the B-L-T Industries P.GH
on June 20th. Among these were the need to strive and plan even more
vigorously for increased sales and profits, and to seek real growth In
profits, cash, and assets after taking account of inflation and the effects
of exchange rate movements.
Item A - The Increasing Impact of Codes of Conduct on Multinationals
Mr. Rackham outlined the current situation and suggested the most
probable development of the various Codes of Conduct which are now
beginning to proliferate. All would have an impact on international
business and some would have particular impact on the BAT Group. k brief
summary note is attached.
Comments on the impact of Codes of Conduct were then made from the
perspective of countries represented at the Conference, as follows:-
Mr. Best for the UK, Dr. StUtzec for Germany, Mr. Stewart Lockhart for the
rest of Europe (with particular reference to the BAT Amsterdam issue),
Mr. Edens for the USA, Mr. Parfi for Canada, Mr. Widdup for Australia and
Mr. Long for Brazil.
Areas of particular concern included disclosure of information,
power of trananstional unions. Transfer of Technology, and Transfer
Pricing. Reference was also made to constraints resulting from national
legislation, quite &part from Codes of Conduct or Guidelines, partic-alarly
in the Cape$ of Germany and the USA.
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It was reed that B.A.T Industries should continue to give overall
support to the principles of the existing voluntary OECD Guidelines, while
recognising that total implementation could prove onerous in certain
territories, and particularly in certain non-OECD territories. In such
cases, the companies concerned should be encouraged to formulate their own
Codes of Conduct appropriate to local circumstances.
It was also agreed that Group Headquarters should develop a
capability not only to receive early warning of developments of
significance to the Group, but also to initiate a communication system on a
reciprocal basis.
Item B - Energy Management
Mr. Sheehy summarised the reports on Energy Management, which had
bean presented to the Board of B.A.T Industries in March 1980, for HPI,
BAC, UT Stores, the tobacco and retail Divisions of BATUS, and BAT Co.
Mr. Best reported on Energy Management in Wiggins Teape and in the
paper Division of BATUS.
It was evident that a great deal of work had already been done and
significant savings had already been made. There is, however, still a long
way to go and efforts are being vigorously pursued in all Operating Groups.
The two main issues are cost efficiency and vulnerability to supply
interruptions.
There appeared to be a requirement for inter-communication so as to
avoid duplication of innovative effort and to allow for dissemination of
new ideas and methods of conservation of energy. This will be progressed
from the Centre.
Item C - S. & H.
Six issues were discussed:-
1) Mr. Sheehy reported on recent studies and devel.opments which could
reasonably be interpreted as evidence that a 'safe' or 'tolerable'
cigarette now exists or will shortly exist. The definition of
I oaf e' is when any statistical risk to smokers is reduced to that
applicable to non-smokers.
it was agreed that:
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(a) The major thrust should be towards the 'safe' cigarette. C:)
This will include action by Public Affairs, Marketing and R.
D. Departments. 00
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(b) Efforts should be made to arrange for the industry to
co-operate with Governments to sponsor prospective
epidemiological studies on the relationship of smoking with C71
disease.
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(c) Efforts should be made to get the results of recent external
studies more widely known, while reducing as far as possible
the inherent dangers of so doing.
2) Mr. Sheehy spoke on the credibility of the industry Smoking and
Health stance, particularly in view of the industry's apparent rigid
stance on causation. A paper headed 'Change of Stance on Smoking
and Health' was circulated.
It was agreed that a change of stance should be considered which
would lead to more genuine co-operation with governments and medical
authorities by relaxing somewhat, but not abandoning entirely, the
rigid stance on causation. The change would be assisted if all
concerned were to place more emphasis on research and less on
propaganda. BATUS will further consider the paper which was
circulated and will make recommendations.
3) Mr. Sheehy circulated a paper headed 'Pros and Cons of a Medical
Consultant'. This issue had been discussed at C. A. C. III and C. A. C.
IV, at each of which it had been decided that arA outside medical
consultant should not be appointed.
After discussion, during which developments since last year were
taken into account, it was agreed that a medical consultant should
not be appointed.
4) Mr. Stewart Lockhart spoke on the motives of the anti-smoking
lobbies. He described the characteristics and activities of five
elements - political, quasi-religious, bureaucratic,
anti-capitalist, and intellectual.
It was agreed that industry action should be concentrated on:-
(a) Further research through ICOSI;
(b) Different and selective action for each element;
(c) Seeking potential allies among the anti-smoking elements;
(d) More trenchant action material to be produced by Trade
Associations;
(a) Sustained campaigns against the idealistic concept of
risk-free living and campaigns emphasizing freedom of
choice.
5) mr. Stewart Lockhart spoke on passive smoking. The weight of
current evidence and authoritative comment points to the fact that
passive smoking is not a health hazard under normal living
conditions. Further research would, however, continue. rs.)
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6) Mr. Stewart Lockhart spoke on the problem of social unacceptability.
Although less successful scientifically than the primary health
argument, there are three arguments used by anti-smoking lobbies on
social grounds. The technical and intellectual arguments are not
proving very successful and are largely based on false premises.
Howeverl the third, the emotional argument, provides to some extent
legitimate causes for grievance and these are being dramatised and
exploited.
It was agreed that the main lines of action which the industry
should take are:-
(a) Support for the ICOSI Social Issues/Social Costs Campaign;
(b) Campaigns in the industry and in companies to persuade
smokers to be more sensitive and courteous.
Item D - Unitary Tax Progress Report
Mr. Symons reported on the current Unitary Tax situation in the
United States. A bill is moving through the Californian Legislature which
would exempt foreign parent companies/US subsidiaries from the worldwide
reporting requirements of the Unitary Tax rules. In Washington there have
been hearings on two bills which would prohibit the application of
worldwide reporting on both foreign and domestically-owned companies.
Although progress is slow, it is moving in the right direction.
Item E - Outline of Present Activities
Presentations on their respective companies were given by Mr. Edens,
Mr. Par&, Mr. Widdup, Mr. Long, Dr. StUtxer, Mr. Stewart Lockhart (for BAT
Co., with particular reference to BAT (UK & E) and to certain other tobacco
companies), and by Mr. Best.
The presentations highlighted significant changes over the past
year, described the current situation and summarised the main current
problems and opportunities.
Mr. Sheehy summarised the main issues facing BAT Co. , tobacco
business. In view of worldwide inflation and the economic situation
generally, it would be difficult to maintain historical rates of return on
funds employed and to achieve profit growth In real terms. There would be
significant dependence on obtaining forecast price increases and on
productivity gains. More realistic forecasting is needed for future
investment for capital equipment and for working capital requirements.
Other major issues are:-
(a) Product and process technology, with particular emphasis on
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b) Machinery devopment; C@l
(c) Growth of international brands; 0%
(d) UK cash flow and the cost of Millbank. Co
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Item 7 - Situation Reports
Mr. Macadam reported on BAT Stores, comprising International Stores,
Argos and Pricerite, and the new Organisation effective July 1, 1980. He
described the current situation, outlined the basic problems and summarised
plans for the future.
Mr. Macadam reported on BAC, comprising the five Houses of
Lenthfiric/Morny/Cyclax; Yardley; Cermaine Monteil Cosmetiques Corporation;
Germaine Monteil Europe; and Juvena. He described the current situation of
BAC's businesses around the world and reported on performance, problems and
prospects for the future.
Mr. Symons reported on Mardon Packaging International (HPI). He
described in some detail MPI's different businesses and products, reported
on the current situation and outlined opportunities for the future.
Productivity
Item G
Mr. Sheehy gave a presentation on People Productivity and Asset
Utilisation in the Tobacco Operating Croup and in the Retail Division of
BATUS. He outlined the problems which had made it difficult to achieve
improvements in People Productivity and which had led to such improvements
being lower than previously forecast. On Asset Utilisation, results to
date had been good and a steady improvement is expected in the future.
There are still problems to be overcome and the pressure will be
maintained. Two of the main opportunities for improvement are 1)
rationalisation of specifications, components and factories, and 2) more
realistic short and long term sales forecasts.
Mr. Beat gave a presentation on productivity in the Wiggins Teape UK
Mills. Although paper making is not basically labour-intensive, there had
been a successful record of improvement. Mr. Best described how
Productivity of both People and Assets had moved over the last 10 years and
what improvements are planned for the future.
Item K - Consumerism
Mr. Widdup outlined the growth of the consumer movement ant
suggested how it might develop La the future.
Mr. Parfi gave a brief history of the consumer movement in Mortb
America, and reported on current regulations and legislation.
The general views which resulted from-the two presentations and from
discussion were:
(a) The Consumer movement is on the increase;
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(b) There was little general awareness of the cost (ultimately
to the consumer) of the various measures being promoted by CD
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consumer groups.
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Industry should neither over-react nor be lulled into a sense of
false security. It should adopt a responsible attitude and pay particular
attention to:
(a) High standards of product quality;
(b) Proper briefing of staff, especially sales staff;
(C) Effective and personalised handling of complaints;
(d) Good housekeeping and the impact on the environment;
(e) Proper handling of media and politicians;
(f) Low company profiles and the adoption of an industry
approach where possible.
item I - Corporate Relations
Mr. Macadam reported on the progress of activities in Group
Headquarters in the following areas:-
(1) Relations with financial institutions in the City.
(2) Relations with the Civil Service and Government in UK and with the
European Community.
(3) Internal Communications.
(4) Corporate identity of B.A.T Industries.
(5) Social Responsibility.
(6) -Co-ordination of Public Affairs activities.
(7) External Consultants.
The BBC Panorama film 'A Dying Industry?" was shown. During the
discussion which ensued, Mr. Stewart Lockhart reported on correspondence
with the Director-General of the BBC, Sir Ian Trethowan, and advised that
Counsel's opinion was being awaited before deciding what action might be
taken to recover material owned by BOLT.
Item J - Group Profit & Cash Forecast
Mr. Symons presented the Group Profit and Cash Forecast, which was
presented to the Board of B.A.T Tndustries in June 1980. He explained the
content and stressed the need for realistic forecasts for each of the five r%)
years ahead - particularly the latter years. To be realistic, forecasts CD
need to take account of economic conditions and to be comprehensive in
forecasting capital expenditure and working capital requirements. 00
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Mr. Macadam said that proper cash flow management is vitally N)
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important. Managers need to be aware of the cost of money and to be LM
accountable for its use. C=)
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item K - Group 10 Year View
Hr. Macadam presented the Group 10 Year View, which was presented to
the Board of B.A.T industries in June 1980 and which had been circulated to
delegates in advance. In highlighting the main points raised in the paper,
he stressed that there was heavy reliance on the achievement of forecast
profit margins and on recoveries in certain businesses. There appeared to
be limited involvement in growth sectors and the returns on proposed new
investment were all below the agreed 20%.
Item L - investment/Acquisition Strategies
Mr. Macadam presented a paper which had been circulated to delegates
in advance. The paper outlined five key issues which arose from the 10
Year View and which will be covered in the Investment Strategy paper to be
presented to the Board of B.A.T Industries in September 1980. Conclusions
resulting from discussion of the five issues were as follows:-
(1) Investmrnt Criteria
(a) The required level of return on assets should be decided for
each business separately;
(b) The minimum level of return on assets should not be below
20% for any business. With inflation levels significantly
above 10%, a return of nearer 25% should be sought;
W A rigorous and realistic approach should be adopted in the
case of currently poor performers for which no acceptable
improvement can be seen to be achievable within two or three
years (normally) or five years (at the most).
(2) Geographical Emphasis
(a) Despite the inherent risks, profitable growth opportunities
in selected developing countries should be pursued;
(b) At the same time, sound growth opportunities in developed
countries should be sought.
(3) Industrial Emphasis
(a) While not excluding the possibility of investing in new
growth industries in the longer term, the main immediate
concentration should be on expansion from the Group's
existing industrial bases by exploiting new markets or by
developing new products or concepts;
(b) Assuming that satisfactory levels of performance can be
achieved in each element of the existing businesses, no
major change is called for in the development of the'
industrial shape of the Croup as outlined for 1989 in the 10
Year View (i.e. a reduction in the Trading profit co
contributed by Tobacco from 63% to 522 of the total). C:@
However some increase In levels of investment in Packaging/ r"O
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Printing, and possibly in Home Improvements, will take L04
place.
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(4) organizational Implications
Several differing views were expressed on the best ways of
initiating and subsequently managing geographical extensions of
existing businesses into countries where Group companies are already
operating.
General concensus was reached on two principlev-
(a) In general, management accountability should lie with the
majority shareholders, who are basically responsible for the
allocation of resources and for 'bottom line'
accountability. However, there must be close co-operation
between the shareholding company and the company where the
technological expertise lies (e.g. the BATUS/Appleton/
Wiggins Teape relationships).
(b) An arrangement already exists within the Tobacco Operating
Group whereby the originator (or product/industrial) company
first invites the host country (or geographical) company to
participatt or become involver in any new venture. If
agreement cannot be reached, the originator company is free
to develop its business in the host country, but the host
country company has no investment in, and therefore no
ccountability for, the venture. The principle of this
accounta should be adopted (and possibly adapted) in the
case of new product/new market ventures within the Group's
overall existing businesses.
Mr. Macadam suggested that in spite of basic agreement on
principles, the matter is not all that simple, particularly in view
of other factors such as tax advantages, optimal financing
arrangements, potential for trade boycott, etc. These matters
should be resolved by the Centre and it was up to the Centre to
reconcile the differences, which means that the Issues need to be
properly defined, discussed and agreed.
(5) Resource Management
If Investment proposals are agreed which cannot be financed by
surplus cash, the priorities should be:-
(&) To seek short term measures to improve efficiency and
utilisation of resources;
(b) To consider selective divestment of low performers, both to
raise funds and improve overall performance;
(c) To consider increasing the equity of the Group, either
directly by a rights issue or indirectly by acquisitions for
shares (this will not be practicable until or unless ways
can be found to increase the P/E of B.A.T Industries
shares);
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(d) To relax the current policy of maintaining the Debt:Equity 4=)
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ratio below 50%, provided an early return to 50% is (%
perceived. L4
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Mr. Sheehy said that the word 'risk' had been mentioned on several
occasions and he felt that there should be no misunderstandings of
what it meant and implied. It could have either of two meanings:-
(1) An investment proposal on which. if all went according to
plan, 5he return would be acceptable, but in which there Is
a risO failure to achieve the planned return. Examples
could be investment in Tobacco in the Canary Islands,
Thimbles, sports goods in Canada, etc.
(2) An investment proposal whose purpose is to establish 'a
presence either for political reasons or in hopes, rather
than reasoned expectations, of acceptable returns in the
future. Examples could be Philip Morris' entry into Italy,
BAT's possible entry into Turkey, China, etc.
In either case the element and extent of risk need to be analysed,
carefully defined and deliberately accepted if the proposal is to go
ahead. A higher return is usually expected where the risk is
greater. An investment proposal where the return Is expected to be
very low or non-existent is not a 'risk-type' investment and its
acceptance or rejection will be on policy grounds. Investments in
welfare, anti-pollution, etc. would fall in this category.
'Item M - Summary of Future Plans
Mr. McCarty, Mr. Par@, Mr. Widdup, Mr. Long and Dr. StUt zer
presented summaries of future plans for each of their companies.
Mr. Stewart Lockhart gave a similar presentation for BAT Co. (with
particular reference to BAT (UK & E) and to certain other tobacco
companies), and Mr. Best for Wiggins Teape.
The presentations included opportunities for new investment,
acquisitions and mergers; probable divestments and disposals; probable
competitive activities; and ways of achieving productivity improvement and
profit growth In the face of a difficult business environment.
Item N - Organisation Structure
Mr. Macadam reported on the current Organisation of B.A.T Industries
and of the Headquarters of each of the six Operating Groups.
Mr. Par&, Mr. McCarty, Mr. Widdup, Dr. StUtzer and Mr. Long
described, for their respective companies:
1) Their present Organisation, with particular reference to
Organisation for diversification. F'Q
2) Their interaction with the Centre.
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3) The future development of their organisational structure. 4=)
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Two specific points arose:-
1) Hr. Park proposed that Imasco should report direct to B.A.T
Industries. Mr. Macadam said that this matter had been looked at
and would be considered further at the Centre.
2) Mr. Long said that changes would be needed at some time In the
future in the Organisation of CONTAB and how it should relate to the
Centre. Development towards the BATUS model might be a possibility.
Mr. Macadam said there were difficulties and complexities in the
CONTAB situation, but that here again the matter would be further
considered at the Centre.
Item P - Special Item - Format of C.A.C. VI
Hr. Macadam said that, as all delegates had agreed, C. A. C. VI would
be held in UK at Leeds Castle from Sunday, July 5th to Friday, July 10th,
.1981. The ZU11 Board of B.A.T Industries would be invited, but on this
occasion the ladies would not be present. He then invited comments or
suggestions on the format and content of the programme next year. After
discussion, it was agreed that:-
1) In future, the sessions should end by 1630 hours each day, even if
this meant extending the Conference into the Friday.
2) The dates for C. A. C. VI in 1981 would be as agreed above.
3) Mr. Macadam would consider the possibility of moving the date for
C.A.C. VII, in Australia in 1982, from July to June.
4) The programme is now just about right for content and balance. A
few items would be deleted and others added next year. Delegates'
views will be sought as usual later in the year.
5) There should be more uniformity in the way figures are presented in
order to economise time in presentation. This will be considered at
the Centre and proposals circulated to delegates for comment.
Ch"rman's Summing Up
The Chairman said that the Conference Wad been interesting and
useful, and that he thought it had gone very well. He felt that the
approach taken this year to the Smoking and Health item, whereby a few
specific major Issues were presented and discussed, was an Improvement over
the previous years. The three items , Group Profit and Cash Forecast, Group
10 Year View and Investment/Acquisition Strategies represented the
fundamental core and showed up the Importance of proper utilisation of
money and of the recognition of the true cost of money. This was also
evident in the summaries of future plans which were presented. 00
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The Chairman thanked delegates for all the work they had done in
preparing their presentations and in having contributed so constructively
to the discussions. Agreement was reached on a number of points and these
will be implemented during the year. He again expressed his regrets that
this would be the last C.A.C. which Mr. Edens would be attending and
extended to him his best wishes for the future.
28th July 1980
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BAT Industries document for Province of British Columbia 22 April 1999