When a group of institutional investors led by officials of the $51 billion New York City Retirement Systems walked out of a special meeting with Philip Morris Cos. Inc. in Manhattan last month, they missed a pretty worthwhile exchange, according to officials of the funds that stayed.
The institutional investors were interested in speaking to the board about why it decided not to spin off its tobacco business and the company's potential legal liability for the health problems of smokers.
While only six pension funds - members of the Council of Institutional Investors, Washington - initially requested the meeting in a June 1 letter to members of the Philip Morris board, the gathering was "kind of a mini-annual shareholders meeting. It was heavily staffed - with cocktails after and goody boxes," said Richard Koppes, general counsel of the California Public Employees' Retirement System, Sacramento, referring to the free packages of cigarette samples and Lite beer.
Another bone of contention was that of seven directors attending, only three weren't corporate managers. And by the definition of some council members, only one - Richard Parsons, chairman and chief executive officer of the Dime Savings Bank of New York - was truly independent.
"There was little discussion with directors except informally before and after," Mr. Koppes said.
Instead of an intimate roundtable discussion, the meeting was held in a large room with a dais in front. Many attendees said it was like a very large classroom or the site of an analysts' meeting.
But Mr. Koppes said the investors that initiated the meeting were partly to blame for inviting too many of their peers. Representatives of 22 to 24 funds were too many to sit around a table.
Not everyone was upset with the format.
"I did not have a problem with the presentations. I didn't think the company would prevent dialogue. Out of seven there was only one (independent) director but that still would accomplish some of the mission," said MaryEllen Andersen, director of investor and corporate relations of the $11 billion State of Connecticut Trust Funds, Hartford.
"We as investors had every opportunity to ask any question we wanted of the directors," she said.
The officials walked out after the first presentation, by R. William Murray, chairman of the board. Among those leaving were: New York City Comptroller Alan Hevesi; New York City Deputy Comptroller for Pensions Jon Lukomnik and Public Advocate Mark Green; Sarah Teslik, executive director of the Council of Institutional Investors; and officials of the Pennsylvania State Employes Retirement System and the Florida State Board of Administration and the International Brotherhood of Teamsters.
"The chairman was absolutely shocked when the institutional investors walked out," Ms. Andersen said.
Mr. Lukomnik said the last straw for the dissidents was when a company official said Philip Morris did not invite outside directors. But Ms. Andersen said after the group walked out, Mr. Murray said outside directors were invited.
Ms. Teslik sent a letter Sept. 27 to outside board members of Philip Morris who weren't at the meeting to express the council's "extreme displeasure with both the 'meeting' and at the events leading up to it" (Pensions & Investments, Oct. 3).
Among those who stayed were officials of the California Public Employees' fund and the California State Teachers' Retirement System; State of Connecticut Trust Funds; Kansas Public Employees' Retirement System; Ohio State Teachers' Retirement System; and TIAA-CREF, as well as representatives of money managers such as Sanford C. Bernstein & Co., Fidelity Investments and Fayez Sarofim & Co.
"We've got here a little split between friends. I respect their right to leave. New York City has a longer history with this company than we do," Mr. Koppes said.
A meeting with Philip Morris originally was set for July 13, but investors declined when the company said it wouldn't invite outside directors.
"It was a good meeting. It's too bad Hevesi and the people who left reacted the way they did. There were three outside board members. Apparently that wasn't enough. Hamish Maxwell (the former chairman) was there. There's still the perception that he runs the show. A lot of institutions wanted to meet with him," said an analyst for a large pension fund who asked not to be identified.
"It looked almost like it was staged by New York City. No matter what happened, they were going to do what they did."
The analyst noted that a few days after the meeting, Philip Morris threatened to move its headquarters out of New York City pending the upcoming City Council vote on what would be the nation's strictest anti-smoking law.
"If you put this in context with the City Council vote, this sort of fits as a piece in a puzzle if they want to drum up some negative publicity on the biggest tobacco company. They did get negative press to fuel their attempt to ban smoking in New York," she said.
"It was kind of a circus."
She said Mr. Hevesi and the New York City officials showed up late and caucused with other investors for about 15 minutes, holding up the meeting.
But the people who left painted a different picture.
"When the council members stood outside to discuss what to do about these set-up like arrangements, they were flabbergasted to discover that the meeting was started without them, making clear, if it already had not been, that their presence was irrelevant to the process," wrote Ms. Teslik in her letter.
The company viewed a possible spinoff of its tobacco business as only one of many possible actions intended to enhance shareholder value. "A sizable dividend increase and share buyback program addresses what we were looking for," said the analyst.
She said TIAA-CREF is not in the camp with funds that believe tobacco is a dead industry.
But Mr. Koppes said company officials "didn't want to recognize things were changing. The whole nature of society's acceptance of (smoking). How do you deal with that?"
Mr. Hevesi held a pre-meeting for 20 investors and one sell-side analyst of Philip Morris between 2 and 4 p.m. at his office. They said they would discuss how the board really works; the responsibilities of management and non-management directors; sources of information to directors and whether they flow through management; and, finally, whether the company's analysis of the split was correct. The Philip Morris meeting began at 4: 30.
"My hope is they would come to the conclusion there was a misunderstanding or staff error and put a conference table together with a bunch of directors, institutional investors and sit down and talk," Mr. Lukomnik said.
Peter Gilbert, chief investment officer of the $13.5 billion Pennsylvania State Employes' Retirement System, Harrisburg, who walked out of the meeting, said: "We certainly will discuss (the possibility of another meeting) with them. We're not walking away. We still own the stock."
Mr. Koppes said it was unfortunate so many investment people left because they would have been able to ask incisive questions. But as a fellow lawyer, he got a lot out of the general counsel's presentation.
"There was a long discussion about the litigation strategy and problems. The general counsel did a good job. Now I understand why they don't think (the smoker liability suits) are a big problem."
Mr. Koppes and others who stayed found the meeting reasonably productive.
"It was so comfortable asking questions, not just one or two. It was not a press conference-type setting," said Ms. Andersen, noting the meeting went on for an hour and a half.
"I felt it was worthwhile. I'm glad we stayed. We do have access to management and the board of directors. The board is being accountable to shareholders. We're banking on the board to monitor management and the strategic plan," Ms. Andersen said.
Philip Morris issued a statement that the meeting was productive and said it regretted "certain invited pension funds, representing approximately 11 million, or just over 1% of our outstanding common shares, chose at the last moment not to engage in any meaningful dialogue with us." It said other shareholders, representing almost 70 million shares, or nearly 8% of the total shares outstanding, elected to remain.