I
C. A. C. IV GUARUJA
CONFERENCE NOTES
Chairman's Opening Address
In his opening address, the Chairman described the historical background
and evolution of CAC's from their original Smoking and Health beginnings.
The Chairman made certain suggestions, for discussion at the end of the
Conference. relating to future CAC's and particularly to those planned up
to and including 1982. He suggested that:
1. The B.A.T Industries' Board should be invited In
every third year and this particular meeting should
always be held in the U. K.
2. Wives should be invited every other year.
3. Because of the change in year end, future CAC's
should take place in July rather than in May.
4. With the very ready agreement of Mr. Pari and
Mr. Widdup. CAC's for the next three years should
therefore take place as follows:
1980 - Canada. Sunday 13th to Friday
l8th July. Ladies invited.
1981 - U. K. Ladies not invited.
1982 - Australia. Ladies invited.
Although the past year had been difficult, the Group had survived the
experience quite well. However. in the Chairman's view, the future did
not appear to offer prospects of markedly more tranquil times. There
would be further escalation of oil prices. increasing social and political
turmoil, instability of world currencies (particularly the U.S. dollar).
and few if any countries would be rid of inflation.
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AU these occurrences will affect all our businesses in varying degrees.
This underlines the need for the Group to react in a rapid and positive
manner to protect its Interests and to keep ahead of competitors. In
addition. every effort should be made to anticipate emerging problems
and to take timely action to offset them.
In this regard. the Group must vigorously tackle any parts of the business
where performance is not. and in -unlikely to become. acceptable. Such
trouble spots must be corrected swiftly or eliminated. Decisions of thils P..)
nature are not easy or comfortable to make, but they become even harder
If situations are permitted to deteriorate through lack of action.
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The Chairman welcomed Mr. Beat and congratulated him on his recent
appointmenttotheB.A.TIndustries'Board. He also welcomed
Mr. Longland. who was representing, in part, the Group's retailing
interests.
The Chairman closed his address by congratulating Mr. Bruell on the
announcement of his appointment to the Board of British-American Tobacco
Company and thanking him and those of the Souza Cruz staff involved with
the preparation and administration of the Conference for the excellent
arrangements which had been made.
Item A. Outline of Present Activities
Mr. Edens, Mr. Pari, Mr. Widdup, Mr. Bruell and Dr. StUtzer each
gave presentations on their respective companies. Mr. Stewart
Lockhart gave a presentation on BAT (UK & E) and Mr. Best on the
Paper Division.
The presentations highlighted any significant changes over the past year,
described the current situation and summarised the main current problems.
Item B: Miuation Reports
Mr. Longland reported on International Stores. He described the current
situation, outlined the basic problems and sumraarised plans for the future.
Mr. Longland also reported on the imminent acquisition of Argos
Distributors.
Mr. Macadam reported on the Cosmetics Division. He described the
current situation of BAC's businesses around the world and reported on
performance, problems and prospects for the four Houses. He also out-
lined the planned sales and operating profits in five years' time for each
slow of the Houses, for two possible acquisitions and for the Division as a whole.
The figures indicated rapid growth for the Division. although It would Still
only provide. between IS and 21% of Group profits. However, BAC is now
the seventh or eighth largest cosmetic company In the world. and the only
course of action is to pursue the policy of profitable growth so that a
decision on the future of the Division can be made in two or three years'
time.
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item C. Smoking & Health
Dr. Green gave an outline of recent events In the medical and scientific
areas. The past year had been relatively quiet but four events stood out:
1. Publication of the work of Auerbach, Hammond
and Garfinkel. This was a combination of
epidemiology and clinical study and the change
between the 1950's and the 1970's provided
evidence of lose risk through smoking lower
tar or filter cigarettes.
2. The Report of the S & H Research Programme
in the U.S. This was a favourable report
from the Industry's point of view as it points
to the possibility of "safer" cigarettes.
3. The Surgeon General's Report. This rece@ved
very limited distribution and comparatively
little publicity. It was a workmanlike document
and would be a source of reference for some time
to come. It contained very little that was new.
but the chapter on allergy could have serious
Implications for the Industry.
4. Draft of the third Hunter Report (the second
- Report had not yet been issued). The main
points of note were (a) the implications for the
International business of UK-based tobacco
companies and (b) the emphasis on nicotine and
reduction of nicotine yields.
Interest in nicotine levels was a feature of all four publications and
recent experiments in R & D gave new indications about nitotine.
Mr. Stewart Lockhart reported on the achievements and plans of ICOSI.
He warned of four potential trouble spots:
1. The Fourth World Conference an S & H to be held
in Stockholm in June. 1979.
2. Holland, where a competitor's advertising and
promotion activities had seriously damaged
Government/Industry relations and prospects
for joint action.
3. UK. after the voluntary agreement ends next year.
4. Eire, where exceptionally strict regulations could
be imposed.
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After discussion. it was agreed that the role of ICOSI should be to
support national trade associations rather than to lead them.
Mr. Sheehy reported on S & H matters discussed at Vancouver. Notes
an significant Items were circulated to all delegates.
Mr. Widdup presented a film made by the Tobacco Institute of Australia
entitled "Smoking and the Non-Smoker".
Item D. Appointment of Outside Medical Adviser
mi.. Sheehy presented two papers which had been circulated before the
Conference:
1. Paper headed "Independent Medical Adviser"
dated 26th.April. 1979.
-2. Mr. Morini's Note dated 25th April, 1979.
The decision taken at CAC III that an outside medical adviser should not
be al pointed was confirmed.
Item E. Non-S & R Matters referred by Tobacco Division Conference
Mr. Sheehy reported on non-S & H matters discussed at Vancouver.
Notes on the main Items were circulated to all delegates. In addition,
Mr. Sheehy Included in his report:
1. The need for significantly above-average growth
of the export business, to be accompanied by an
adequate return on assets employed.
-2. The intention that product development work and
evaluation of marketing benefits would be under-
Aaken an the annular cigarette.
3. The decision that the programmed filter concept
will continue to be Included in the R & D
programme.
4. The Intention that the best means of evaluating
compensation" behaviour will be examined.
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Mr. Sheehy said that it was Intended that the companies represented at
Vancouver would meet once every two years. A similar meeting would
be held in the Intervening year with representation from other companies
such as Malaysia, Argentina and Mexico.
Item P. Future Tobacco Acquisitions
Mr. Sheehy reported that there were distinct possibilities of making two
acquisitions in Latin America. a possibility in Greece, rather less
promising possibilities in Spain and AFT and other remote possibilities,
such as in Switzerland.
Item G. 3 Year Forecast & 10 Year View
Mr. Symons presented the Group 3 year profit and cash forecast and
explained the conteni. He also explained the workings and implications
for B.A.T Industries of ACT (Advance Corporation Tax).
Mr. Longland presented the Group 10 year view and explained the content.
He circulated papers ouUining major Divisional growth options included in
the forecast and comparative ratios of some competitors.
He warned that inflation and exchange rate sensitivities would have.a more
significant impact on the Group's results than possible business failures.
Particular risks were (a) rigorous price controls being used in the Western
World in an attempt to curb inflation and (b) a world recession which.
although perhaps temporary, would have a significant impact, particularly
on retailing.
Item H. Investment I Acqu Is iti on Strategy
Mr. Longland introduced Investment Strategy by re-stating the principal
investment policies and strategies of B.A.T Industries. These are:
1. Growth in dividend of 2i% P. a. in real terms
(subject to Government controls).
2. Non-tobacco operating profits should represent
at least 401% of Group total although related
assets may be as high as 601%.
3. Operating Divisions should be of substantial size.
4. Priority In use of resources will be given to M.)
investments related directly to existing activities. CD
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5. A fifth division. if added, should be capable of C@
earning E100 million in 10 years (at current
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values) at an investment cost not exceeding E500
million.
6. Group gearing should not exceed 50%.
7. Efforts should be made to increase the
proportion of investment in Third World countries
and, as a consequence, it is accepted that a
greater number of minority shareholding positions
may have to be accepted.
Mr. Longland also proposed that:
1. Because of the ACT problem the Group should
seek to make investments in the UK which,
through organic growth, might minimise the
amount of ACT written off.
2. The Group should aim to earn an Operating Profit
return on its net Operating Assets of at least 20fo.
After discussion, it-was agreed that:
1. Although no specific, quantified objectives have
been set for investment in Third World countries,
the basic policy is clear. However, care should
be exercised in the selection of countries for
investment.
Furthermore, each country should be considered
on a long term basis so that the right initial
decision can be made on ownership and
responsibility for any new investment.
2. If a substantial new investment were to be made
in Printing and Packaging. a Packaging Division
would be formed as a 5th leg.
else,
Mr. Longland then introduced Acquisition Strategy and reported on
progress La the Acquisition Study since last year. The present position
is that:
1. Batteries. Catering, Hotels, Security and Safety
and Insurance have been dropped from the Study.
2. It was agreed that MY Retailing and Home
Improvement manufacture are different
businesses and that they should be considered
separately.
3. MY retailing is still attractive to some
companies but it lb unlikely that aq initiative
will be Laken in UK or that it would form a fifth 00
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4. Although limited interest was expressed in Home
Improvements manufacture, It is only really..
attractive to Germany, where there are special
circumstances. However. Pegulan should be
supported not only in the domestic market but
also in ventures outside Germany. particularly
In those countries in which there is a Group
company.
5. Multfple Stores should be considered by the
appropriate Retail grouping it it were seen as
a possible means of achieving rapid and
profitable growth within the Retail Division.
6. At CAC HI It was decided that the Paper Division
should further consider Packaging. It was
subsequently realised that there is no real link
between the Paper Division and the printing and
packaging industry. B.A.T Industries therefore
took over the project. Negotiations to acquire
all the equity of one UK packaging company are
at an a.dvanced stage and there are real
possibilities of acquiring another should the
first fall through.
Items I and J. Organisation Structure and Organisational Relationships
The Chairman reported on organisational changes which had resulted
from the move of B.A.T Industries to Windsor House and on Intentions
for future non-executive Directors.
The Chat -rman referred to the role of CONTAB and described the role,
purpose and Organisation of BATUS. which would be responsible to
B.A.T Industries for the general overall management of the Group's
investments in the US. After a transitional period, the Board of
BATUS would comprise the Chief Executive Officers of BATUS and of
the main US Industry Groups, US financial representation and
representatives from the Board of B.A.T Industries. Initially.
Mr. P. Sheehy would be non- executive Chairman. The importance of
continuing direct advisory communications on day-to-day operations on
a functional basis was stressed. s. g. Appleton/Wiggins Teape, B & W
Tobacco/Tobacco Division, Millbank, etc. It was accepted that the
matrix form of Organisation as represented by a territorial-type
structure Is very complex and It was agreed that initiatives must be,
and must be seen to be. taken in the territorial area and not outside it.
It was also agreed that the formation of BATUS and its Industry Groups
should not result in an extra bureaucratic layer; rather it should
eliminate at least one and In some cases two of the existing layers. To
achieve this, the principle of clear guidelines for the longer term must C:)
be adopted and this principle applies equally to other organisational
relationships as well an to B.A.T Industries/BATUS and BATUS/US 00
Industry Groups. C:)
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Item K. Group Management Resources
Mr. Pare spoke on the role of the Chief Executive Officer iLnd on
securing the succession of the top management team.
The role of the CEO is changing rapidly'. He must now be more involved
in relations with Government, the financial community and in general
community activities. He must be properly equipped to undertake the
new time-consuming type of role which is now demanded. One way of
easing the workload is to separate the role of Chief Executive Officer
from that of Chief OperaUng Officer, whereby the Chairman and CEO
would be mainly concerned with day-to-day external activities and with
longer term. strategic internal activities and the COO would be concerned
with the Implementation of strategy and day-to-day internal activities.
In order to secure the succession it is necessary to put people in place as
early a's possible and to accept the inherent risks in doing so. the need
for the right managers is paramount. In acquisitions. problems always
arise if more attention is paid to the product line than to.the quality of
management.
Mr. BrueU spoke on the transferability and development of managers.
For foreign nationals to accept transfer they must be given sufficient
notice of the proposed move. must be satisfied that the move is temporary
and an opportunity for development. and must be seen to be contributing
when transferred. In general, managers are not willing to accept transfer
at the end of their careers.
Item L. Chelwood
The Chairman presented the three papers which had been circulated
in advance-
1. Extract from CAC III Conference Notes.
2. Paper headed "The Role and Purpose of
Chelwood" dated 21st. February, which was
presented to the Board of B.A.T Industries
on 27th February.
3. ExtractfromMinutesofB.A.TlndustriesI
Board meeting held on 27th February.
The Chairman reported on progress since CAC 111. defined the role of
Chelwood as an efficient training establishment and stressed the need to
maintain standards and to avoid attendance at Chelwood being seen merely
an a status symbol.
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Item N (I). Employee Participation
Mr. Stewart Lockhart reported on the situation In UK and Dr. StUtzer
reported on the co-determination position in Germany.
Item N (II). Employee Relations
Mr. Widdup spoke on the causes of. and measures to combat, unemploy-
ment. . He said there were a number of factors which cause unemployment,
including an increase in the number of women working and the rate of
unemployment benefits. However, there is a level of structural
unemployment which will always exist -and employers should not over-react.
It it is necessary to reduce numbers, this should be done sooner rather than
later and the unemployment factor should notlessen the drive for
technological advance and productivity improvement.
Dr. StUtzer spoke on the relationship between Trade Union demands in
Germany and the standpoint taken by employers on major issues. These
issues included unemployment, holiday entitlement, wage Increases,
working hours and retiring age. The recent strikes in Germany were the
result of employers-refusing to move from their standpoint on working hours.
Item 0. Corporate Relations
The Chairman reported on the reorganisation and strengthening of Group
Public Relations Department following the move to Windsor House. The
Centre Is having a new look at its approach to Corporate Relations.
Including the appropriate type and cost of external consulting services.
It is felt that the company' a image in not as good as it should be and some
recent press articles were not very favourable. A statement of intent on
ways of achieving improvements will be prepared within the next three
months.
Mr. Sheehy reported that the Public Relations function in Tobacco Division
had also been strengthened. Its role would be' pro-active rather than
reactive and It would support and advise the smaller companies so that
they can establish and develop their own skills.
Mr. Symons reported on the developing role of the Audit Committee whereby,
as a sub-committee of the Board, it is designed to enable real delegation to
be practiced without the abdication of any proper Board responsibilities.
Mr. Bruell spoke on action to offset the vulnerability of multi-national
companies to social and political pressures and to economic sanctions. C:)
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previously been seen as national were beginning to be seen as part of the
B.A.T Group. After discussion It was agreed that no real problems had
arisen from this development and none were foreseen, provided companies
continue to be good corporate citizens in their own countries and that
Corporate Relations policies are effectively coordinated on a global basis.
The Chairman urged that, wherever appropriate, company representatives
at top level should be in touch with members of national governments who
can influence International organisations such as the 'U.N., E. E. C. and
0. E. C. D., so as to get across the Group's views.
item P. Summary of Future Plans
Mr. Edens, Mr. Pare, Mr. Widdup, Mr. Bruell and Dr. StUtzer
presented summaries of future plans for each of their companies.
Mr. Stewart Lockhart gave a similar presentation for B. A. T (UK & E)
and Mr. Best for the Paper Division.
In general, the main themes high-lighted in the presentations were
organisational changes needed in order to manage the different
circumstances of the 19801s; -ways of achieving productivity and profit
improvement and growth; and rationalisation of businesses.
Item Q. Coterminous Year Ends
Mr. Symons reported that most companies. including B.A.T Industries
and B.A.T. Co.. are now working to a December year end.
Special Item 1. Tobacco Insurance Company
Mr. Symons reported on a recommendation which had been made for the
possible development of the Group's insurance business. This would
entail expansion of the existing business and the capability of the Centre
to advise smaller companies on risk management. Detailed proposals
will be sent to companies in due course.
Special Item 11. Taxation
Mr. Symons reported on the position regarding state cross-boundary or
unitary tax In the US and outlined possible implications for the Group
world-wide. Group Headquarters will write to those companies whose
countries may be involved to see what steps might best be taken to combot
tire spread of thin form of taxation.
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Item R. Productivity
Mr. Sheehy gave a presentation on People Productivity and Asset
Utilization in the Tobacco Division. Progress towards significant
improvement had been good and action is being taken to ensure that this
continues. Administration rather than Production productivity is the main
area to be tackled, the impact of Increases in net turnover on trading profit
should not be under-estimated and it is necessary that prices should be
maintained in real terms.
Mr. Best spoke on People Productivity in the Paper Division. In making
the point that the choice lay between growth and unemployment, he
described some of the effects of rapid labour shedding, such as the equally
rapid growth of white collar unionisation. He also illustrated the effect of
differing government policies on levels ofproductivity by comparing the
historie'and current situations in two similar mills in Belgium and South
Wales.
Chairman's Summing Up
The Chairman said that it had been an interesting and useful Conference.
The programme had been challenging and comprehensive. The new-
arrangement of starting with present activities on the first morning and
leaving summaries of future plans until the last day had worked well and
would be continued next year.
From the presentations and discussions it was evidejit that the "cut and
run's policy with regard to unsuccessful/unprofitable businesses which he
mentioned in his opening address was being applied in practice. However,
there is no room for complacency. An appropriate return on assets must
be achieved in all businesses. If poor performances cannot be corrected.
that activity or investment must be eliminated, even more rigorously than
previously.
All had affreed'the details of future CAC's up to and including 1982 as out-
lined In the Chairman's opening address ipage I of the Conference Notes)
and so CAC V would be held in Canada In July, 1990, followed by UK in
1981 and Australia in 1982. The core companies would continue to be
represented as at present and consideration would be given to Inviting a
different other company to be represented each year and to inviting the
successor to attend when a core company representative will be retiring
before the next CAC.
The Chairman completed his summing up by t6nking delegates for an the
work they had done in preparing #ieir presentations and In having
contributed so constructively to the discussions.
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