It’s lawfully unethical

Unethical businesses can usually be distinguished from ethical businesses in the same industry by how they operate. But is there any way to operate a tobacco company ethically?

The tobacco industry recently lost a class-action lawsuit in Quebec. More than $15 billion was awarded to more than one million smokers and their families, who contended that the industry had hidden the hazards of smoking for many years. Imperial Tobacco, responsible for the largest share of the damages, announced in a press release that it disagreed with the ruling and would appeal it, stating, “Imperial Tobacco Canada has operated under one of the most highly regulated environments in the world. It is astounding to be handed this decision when the federal government has set the standard for the conduct of Imperial Tobacco Canada with which the company has always complied.” In other words, selling tobacco is legal and is regulated by the government, so there is nothing wrong with what it is doing.

TO BAN OR NOT TO BAN

The question of whether a business can operate lawfully and still be unethical is an interesting one. In most cases, unethical businesses are distinguishable from ethical businesses operating in the same industry by how they operate. Some companies pay bribes, whereas their competitors don’t. Some resource companies pay more to mitigate the environmental damages they cause than their competitors do. Some pharmaceutical companies hide adverse drug reactions from food and drug administrations, whereas their competitors don’t. But is there any way to operate a tobacco company ethically?

The lawsuit centred on whether tobacco companies had known and deliberately kept hidden the dangers of smoking. If they had been transparent about the health hazards, presumably the class action would not have succeeded. But I would argue that the industry would still be unethical.

It is not unethical for governments to allow tobacco companies to legally sell their products. While governments are addicted to the tax revenue they get from sales, there are compelling arguments that making all tobacco sales illegal would do more harm than good. Prohibition of “sinful” activities such as drinking, gambling, drug use and prostitution has never stamped out those activities. The approach of many governments around the world to regulate the sale of tobacco and to make it illegal to smoke in public places, combined with education and other measures, has undoubtedly been more successful than an outright ban would have been in curbing smoking.

MAXIMIZING VALUE TO SHAREHOLDERS

Imperial Tobacco is a subsidiary of British American Tobacco, a public company. As a public company, its directors have a duty to maximize value to shareholders. Therein lies the problem. Customers of tobacco companies will over time cease to purchase tobacco, either because they quit or they die. Therefore, the companies must find a strategy to replace those customers or resign themselves to shrinking revenues. There are only two ways to replace those customers — take market share from competitors or induce new customers to smoke.

In Canada, it is almost impossible for tobacco companies to take market share. Packaging is unattractive and indistinguishable. Advertising and sponsorships are prohibited. So how can a company persuade customers to switch brands? Meanwhile, the percentage of Canadians who smoke continues to decline. So the only real growth strategy available is in the largely unregulated Third World. That means going back to the strategies that worked so well for tobacco companies in Canada 50 years ago: use advertising and sponsorships to make smoking, and especially the company’s brands, attractive (manly, sexy, sophisticated, etc.) and play down the health hazards. Lobby against regulation. It works.

This is the reason I believe the tobacco industry is inherently unethical. A public company has an imperative to grow revenue and profit. This can only happen if people take up smoking. Smoking is known to shorten the lives of smokers. Therefore, a tobacco company can only succeed by killing people. There is no ethical business strategy available.

About the Author

Karen Wensley


Karen Wensley, MBA, is a lecturer in professional ethics at the University of Waterloo and a retired partner of EY.

comments powered by Disqus

Highlights

Update your knowledge and strengthen your network at this must-attend conference covering the most important issues and trends affecting audit committee members.

It’s probable that someone you know is deep in debt. If you are observant, you might see one of these seven signs.