Executive Summary

Company: Philip Morris International

Philip Morris International inc is an American global cigarette and tobacco company listed on NYSE. Philip Morris International (PMI) manufactures and sells cigarettes under brand names like Marlboro, Red & White, Longbeach, L&M among many others. Philip Morris has had a very controversial history due to various ethical shortfalls. A study by Swiss research company Covalence in 2010 listed the most unethical companies in the world and Philip Morris ranked 5th in the list. It has been reported that in the past the company has targeted children and exploited their vulnerability to cigarette addiction. The company employed underage girls to handout free Marlboro cigarettes to children at clubs and concerts. In 2010, Philip Morris was also forced to admit that at least 72 children were working on tobacco farms that sold to Philip Morris, some of whom were as young as ten years old. While the company has a list of guiding principles that would ensure that the company would operate in a socially responsible manner, the guiding principles are extremely vague and are not backed-up by any significant results. This report analyzed the current code of conduct at PMI to establish the need for a more comprehensive CSR program, and thereby provided recommendations for the vision and design of the said program. It is expected that with the implementation of the proposed CSR program as per the given recommendations, PMI will be able to embark on the path of long-term sustainability and profitability, thereby increasing value for its shareholders.

Contents
1 2 Philip Morris International The Company ............................................................. 1 Current Ethical Issues ............................................................................................. 2 2.1 Human Rights & Labor Practices ................................................................... 2 2.2 Tobacco Advertising & Marketing .................................................................. 3 Need for CSR Restructuring.................................................................................... 4 PMI Code of Conduct .............................................................................................. 5 4.1 Health Effects of Smoking.............................................................................. 5 4.2 Tobacco Regulations ..................................................................................... 6 4.3 Youth Smoking Prevention Programs ............................................................ 6 4.4 Illicit Trade of Cigarettes ................................................................................ 6 4.5 Impact on Environment .................................................................................. 6 4.6 Charitable Giving ........................................................................................... 6 Vision for a New CSR Program ............................................................................... 7 Building Support and Leadership ............................................................................ 7 Design of New CSR Program .................................................................................. 8 7.1 Key Stakeholders ........................................................................................... 9 7.1.1 Consumers ........................................................................................ 9 7.1.2 Employees ......................................................................................... 9 7.1.3 Dealers and Retailers ...................................................................... 10 7.1.4 Suppliers .......................................................................................... 10 7.1.5 Investors .......................................................................................... 10 7.1.6 Governments & NGOs ..................................................................... 10 7.1.7 Society ............................................................................................. 11 7.2 Key Issues and Drivers ................................................................................ 11 7.3 Strategic Alliances ....................................................................................... 11 7.4 Setting Goals ............................................................................................... 12 7.5 Standards and Benchmarks......................................................................... 12 7.6 Managing Risks & Problems ........................................................................ 13 7.7 Communications .......................................................................................... 13 7.8 Monitoring .................................................................................................... 14 7.9 Sustainability Reporting ............................................................................... 14 7.10 Feedback and Learning ............................................................................... 14 Conclusion ............................................................................................................ 15 References ............................................................................................................ 16 Appendices ........................................................................................................... 18

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1 Philip Morris International The Company

Philip Morris International Inc. (PMI) is a leading international tobacco company with a vast brand portfolio led by Marlboro and L&M, the worlds 1 st and 3rd most popular cigarette brands. Its products are sold in 180 countries and it holds an estimated 16.0% of the international cigarette market share outside of the United States. The company can trace its roots back to its founder Philip Morris, a tobacconist and importer of fine cigars who started the business with a single shop in Londons bond street in 1847. By 1854, Philip Morris started manufacturing its own cigarettes and first went public in 1881 as Philip Morris & Co., Ltd. The firm was incorporated in New York, United States in 1902 and began US manufacturing operations in Richmond, VA in 1929, soon after launching its Marlboro brand, which would become the worlds number one selling cigarette by 1972. In the following years, the company would grow steadily both domestically and overseas. The establishment of overseas division, started in 1955, led to the incorporation of a separate subsidiary, Philip Morris International, in 1965. The domestic division catering to the US market was simultaneously incorporated as Philip Morris USA. By 1990, the company had grown into a huge conglomerate of tobacco and cigarette companies (Philip Morris and John Middleton), breweries and wine companies (Miller Brewing and Ste. Michelle) as well as packaged food products (Kraft Foods and General Foods). The 1990s and early 2000s saw increasing pressure on the company due to ethical and regulatory issues mainly related to its tobacco units which are discussed in the next section. These issues and resulting controversies would harm the reputation of the company, and especially its packaged food company Kraft General Foods. This led the parent company to spin-off Kraft Foods as well as its most controversial unit Philip Morris International (PMI) in 2008. Since 2008, PMI has manufactured and distributed the Marlboro brand in all countries except the United States where Philip Morris USA, a separate company manufactures and distributes their cigarettes using the same brand name. The company has a market capitalization of US$ 145.1 Billion as of 20th November 2012 with annual revenues of US $ 76.3 Billion (2011). The company has over the past few years attracted major negative press and scrutiny from NGOs over unethical practices within the company as well as by its suppliers. In 2009, Human Rights Watch documented the abuse and exploitation of migrant workers through forced labor in farms in Kazakhstan that supplied tobacco to PMI. In 2010, the American TV magazine ABCs 20/20 accused the company of unethical marketing strategies by targeting children and exploiting their vulnerability to addictive habits. Furthermore, the Swiss research company Covalence, in their annual review of multinational corporations ranked PMI 5th among the worlds most unethical companies.

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These aforementioned ethical breeches will be looked into in detail in the next section

2 Current Ethical Issues

The two areas that the code of conduct of PMI fails to address are human rights and labor practices, and tobacco advertising and marketing. The companies stand on these two areas and ground realities are described below.

2.1 Human Rights & Labor Practices

In June 2010, the international non-governmental organization Human Rights Watch (HRW) published a report called Hellish Work that revealed 72 cases of children as young as 10 years old working 12-hour days in Kazakhstans tobacco fields for PMI. The report detailed how some employers confiscated migrant tobacco workers passports, failed to provide them with written contracts, provide below sustenance level wages and in some cases, no wages at all. There were also concerns raised about workers exposed to fertilizers and pesticides, lack of accessible drinking water and the level of nicotine that is absorbed through the skin in tobacco workers, especially children. The report also detailed HRWs multiple correspondences with PMI on the issue that they first brought to PMIs notice in October 2009. PMI had responded stating that the company and its affiliates do not engage in or condone child labor or forced labor and its employees would work with others to eliminate the abuses in the labor market related to their supply chain. In its defense, PMI referred to its Good Agricultural Practices (GAP) policy that it had put in place to as a part of its commitment to social responsibility. The GAP stated that PMI had a company policy regarding child and forced labor and it communicates this policy to tobacco leaf suppliers. Furthermore, it stated that it had agronomists among its employees whose responsibility was to conduct both routine (2-3 times per month) and unannounced audits of tobacco farms. The company said that in 2009, its agronomists had conducted 171 unannounced audits in Kazakhstans tobacco farms. Despite PMIs defense of its efforts, HRW reached the conclusion that the measures put in place by PMI were not sufficient to prevent and remedy the range of abuses and exploitation, including child labor and forced labor in Kazakhstan. The report also stated that PMI did not have adequate procedures in place to assess its human rights risks, examine the scope of its problems and effectively mitigate those human rights problems. Nor did the company have any mechanism to provide remedy to those children and adults whose rights were violated. HRW made its recommendations to PMI that included a thorough revision of the Good Agricultural Practices (GAP) policy and establishment of a monitoring department within PMI to prevent and remedy the human rights issues plaguing the company and its supply chain.

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2.2 Tobacco Advertising & Marketing

In 2010, a YouTube video of an Indonesian two-year old child, dubbed The smoking baby, puffing a cigarette in the presence of his family went viral garnering over 13 million views and provoking outrage. Many more similar videos of children smoking heavily began showing up on YouTube soon after. Following this, 20/20 started an investigation into the issue of children smoking in Indonesia. In September 2011, after a year-long investigation, the American news magazine program ABCs 20/20 reported on the widespread prevalence of children as young as 2 years old smoking up to 40 cigarettes a day in Indonesia, calling the country to be in the throes of an uncontrolled tobacco epidemic. While the absence of any age regulation on sales of tobacco in Indonesia was noted, the blame was put squarely on PMI, which is the countrys largest tobacco manufacturer and marketer with a 30 percent market share. ABC News obtained internal documents of the company from 2005 that plotted a strategy to market to young people. This included making its brand Sampoerna young, cool and trendy and the voice of a new generation of Indonesians. The documents also show evidence of trying to build another PMI brand, A-Mild as a destination brand for aspirational young adult smokers. Even the famous Marlboro man advertisements which had been pulled off air in the United States after intense public pressure in the 1960s were shown to be prominently displayed across the country on billboards. When 20/20 asked teenagers about the Marlboro advertisements, they responded reverently to the ads with boys saying they wanted to be cowboys like the Marlboro man and girls saying they found him attractive. The program also alleged that PMI routinely sponsors outdoor rock concerts and the Indonesian version of American Idol as well as running TV ads featuring attractive young people; things it would never be able to do back in the United States or Europe where Tobacco advertisements on TV has been banned for over 40 years. Furthermore, the investigation revealed that the company had also employed a small army of attractive young women to go out and hawker its cigarettes to young and susceptible men. Even though the company insisted it did not target kids, ABC reported of kiosks that were sponsored by PMI and featured Marlboro billboards just steps away from a school where the students would come and buy individual cigarettes. The company declined to be interviewed by ABC and instead said they had repeatedly urged the government to impose the ban on selling cigarettes to minors. In July 2012, another ABC News program, Nightline, took up the issue with PMI again after an ABC News journalist confronted PMIs CEO Louis Camilleri at the companys annual shareholder meeting in New York City. Camilleri defended the companys practices saying that in Indonesia, there are marketing freedoms that we dont have in a number of other places, and we need to compete.

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Although PMIs code of conduct does not include any guidelines on responsible marketing and advertising, the company has separately established three fundamental principles to guide its marketing efforts: Do not market to children or use any images or content that might appeal to minors. Put health warnings on all marketing materials and packing. Respect global standards of decency as well as local cultures and practices.

As part of its policy, the company claims to not use youth-oriented celebrities, models under-25, advertising on front and back cover of general publications, product placement in movies or televisions or brand name or logo placement on promotional items likely to be used by minors. However, as can be seen from the insurmountable evidence of its marketing efforts in Indonesia, PMI seems to do little to follow its own principles on advertising to children.

3 Need for CSR Restructuring

The ethical issues that PMI currently faces shows that its existing code of conduct may have failed in guiding the companys actions. As such depending on the depth of the problem, a complete restructuring of the CSR program may be required at PMI. To establish this, a framework, originally designed by the Business for Social Responsibility (BSR), a global non-profit organization involved in providing advisory services in corporate social responsibility, is used. An adapted version of the framework is presented below. Analysis of Current CSR System

Designing a New CSR Structure

Establishing Vision for a New CSR Program

Building Support and Leadership

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4 PMI Code of Conduct

PMI has a basic code of conduct or set of principles in place, which guides their operations and the way they do business and interact with the world. They also have a social responsibility program, although its focus is limited to charitable giving. They have not yet adopted a triple-bottom-line approach towards corporate social responsibility nor do they have a sustainability program in place. The code of conduct put forth by PMI includes: Communicating on the health effects of smoking Advocating comprehensive tobacco regulation on harm reduction. Enforcement of laws on minimum age for tobacco purchase and implementing youth smoking prevention programs Combat illicit trade in counterfeit cigarettes Reduce impact on environment Promote sustainable tobacco farming Support local communities through charitable giving

As can be seen, the code of conduct is very basic and not comprehensive. While it covers some of the most important aspects related to the tobacco industry, it does not cover important areas like responsible advertising and marketing as well as human rights, two issues that have plagued the company in the past. This short list can be contrasted to the code of conduct of the Imperial Tobacco Group of UK which has published a 65 page long document detailing the groups stands on a much more comprehensive list of issues including business and trade integrity, responsible commercial practice and code of conduct in the workplace. The Imperial Tobacco group also includes what the company expects its employees and other stakeholders to do and not do, something which is missing in the code of conduct of Philip Morris. Philip Morris also lacks a system for administering the code of conduct is followed throughout the company as well as outside it by its suppliers and customers. There is no system for recording or reporting code breeches. For the areas that are included in the code of conduct of PMI, the following sections provide a description to the extent they truly guide the actions of the company.

4.1 Health Effects of Smoking

The company recognizes the ill-effects of smoking on both smokers and non-smokers, and especially on pregnant women. It also recognizes that smoking is addictive. The company claims to focus a significant part of its R&D efforts on developing products with the potential to reduce the risks of smoking-related diseases, understanding the underlying mechanisms of diseases caused by smoking and developing methods to assess whether a product can reduce the risk of smoking-related diseases. Page | 5

The company however publishes no further information about their research activities making it difficult to analyze the extent of their efforts of how they are progressing on achieving these objectives.

4.2 Tobacco Regulations

PMI claims to support comprehensive regulation of tobacco products based on the principle of harm reduction. This means PMI will support any government activity that seeks to reduce the harm caused by smoking but not to reduce the prevalence of smoking itself. It does not support efforts to prevent people from beginning to use tobacco products or encouraging people to quit using tobacco products.

4.3 Youth Smoking Prevention Programs

The company supports regulations to prevent youth smoking like age bans on the purchase of cigarettes and claims to train retailers to refuse to sell cigarettes to minors. It also financially supports educational programs aimed at preventing youth smoking.

4.4 Illicit Trade of Cigarettes

Counterfeit and contraband products affect the business of PMI negatively, and it takes a strong stand against the illicit trading of cigarettes through record-keeping, licensing, monitoring and tracking movement of cigarettes through product marking. The company has also signed a cooperation agreement with the European Commission to fight illegal trade of cigarettes.

4.5 Impact on Environment

The company has done significantly better in this area as compared to implementation of other areas in their code of conduct. It has developed a Good Agricultural Practices (GAP) program for its suppliers that outlines expected standards for agricultural labor practices, crop management, water resource protection, maintenance of forests and other ecological sustainability programs. It has started publishing an annual report on its agricultural labor practices which will be further elaborated on in the next sections, but has limited reporting on other areas.

4.6 Charitable Giving

PMI has a well-established charitable giving program that focuses on reducing hunger and extreme poverty, education, improving living conditions, prevention of domestic violence and disaster relief. The benefits of its charitable program reached 58 countries in 2011 as detailed in its annual publication of charitable contributions. Its charitable contribution amounted to US$ 34 million in 2011, representing a mere 0.05% of its net revenues and 0.4% of its net income.

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5 Vision for a New CSR Program

As evident from the discussion in the previous section, the code of conduct at PMI is not comprehensive enough and does not cover all the areas that would be expected of it. For example, there is no mention of expected practices in marketing to be found in the code of conduct. This might have resulted in the unethical practices that were both practiced and tolerated by the company in its operations in Indonesia as discussed earlier in the project. The limited principles that PMI has since adopted for its marketing efforts are disjointed from the remaining codes of conduct and also do not seem to be enforced well. Furthermore, while there is comprehensive reporting in certain areas like Agricultural Labor practices, other areas lack any reporting at all. This leaves the company vulnerable to scrutiny and criticism as stakeholders are largely unaware of the companys stands on various issues and its efforts like reducing impact on environment and preventing youth smoking. The envisioned CSR and sustainability program that is proposed over the next sections will lead to not only ethical practices within the company and among its stakeholders, but it will also lead to increased profitability. The World Business Council for Sustainable Development defines CSR as the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large. As such the proposed CSR program detailed below aims to contribute to not just social development, but also contribute to economic development. It will move the companys position from being simply law-abiding to adhering to high international codes of conduct that exceed traditional obligations set out by regulations while keeping the companys bottom-line in perspective.

6 Building Support and Leadership

Having established the need for an overhaul of the CSR program at PMI as well as the vision for the new CSR program, the next step involves influencing and educating the various internal stakeholders with the goal of creating a broad base of support for the new program. The first step is gaining buy-in from the board of directors and executive level management of the company. This is especially challenging because CSR is often seen as a cost for many organizations and expanding the CSR program in a way that might not just increase costs for the company but reduce profits may be a difficult proposition. However, it is also true that the bad press that PMI receives due to the ethical controversies doesnt help in maximize shareholder value. In fact, it reduces shareholder value due to the cost of lost reputation of the firm, management time spent in dealing with the controversies as well as legal costs that may arise from time to time. Furthermore, while the aforementioned costs are already being incurred by the firm, the future potential costs that will arise inevitably if PMI continues in this path are going to be immense, especially as word about controversial practices by the company and its Page | 7

ethical breaches spread, causing irreparable damage to the firm and its brands reputation. It is therefore, in the interest of the company and all its management to adopt a comprehensive CSR program that can effectively guide the companys actions and create shareholder value while being ethical in its practices. A sustainability report that brings together the companys achievements in these areas as well as set goals for the future will further help in this regard. This should not be viewed as a cost, but rather an attempt towards maintaining the long-term sustainability of the company. Lastly, PMIs competitors like British American Tobacco (BAT) and Imperial Tobacco have already implemented such programs and shown that it is possible to be ethical while being profitable, and that is the path forward for companies that want to be sustainable over the long term. Hence, it is prudent upon the management and the board of directors of PMI to adopt the proposed new CSR program and establish it firmwide.

7 Design of New CSR Program

There is no single framework for developing a CSR program for a company as each company faces unique challenges based on its business environment as well as the stage of development of its existing CSR programs, and the frameworks should reflect those unique challenges. The following framework is developed for PMIs implementation of its new CSR program. Analysis of Key Stakeholders Identification of Key Issues

Strategic Alliances

Setting Goals & Targets

Standards & Benchmarks

Managing Risks & Problems

Ownership & Communication

Preventive Policies & Procedures Roles & Responsibilities

Corrective Rewards & Punishments

Monitoring

Reporting

Learning

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The above framework has been specifically developed as part of this study based on the Socially Anchored Competency Model (Dan OBrien, 2001) and the CSR frameworks used by companies like Imperial Tobacco. The implementation of the proposed CSR program would be based on the following steps according to the above framework.

7.1 Key Stakeholders

The first step involves identification of key stakeholders, i.e. consumers, employees, dealers & retailers, suppliers, investors, governments & NGOs, as well as society and general public. The sections below provide an analysis of PMIs key stakeholders. 7.1.1 Consumers Consumers are the key stakeholders to the company who are the drivers for the companys revenues. It is important to not just meet consumer needs, but also meet their expectations in terms of ethical and responsible behavior. As such, the company should put the consumer at the center of not just its strategies and operations, but also its day-to-day conduct. PMIs code of conduct does put significant importance on the consumer. For example, the code of conduct states that the company will communicate the negative health effects of smoking to consumers and is putting efforts into researching ways to reduce or eliminate the health repercussions of smoking. However, the company can do more in terms of communicating with consumers about how their research is progressing as well as the different products PMI and its competitors carry and the varying harm level of each product. It should communicate to consumers about the limited effects of low-toxicant smokeless tobacco among its product range by publishing such information that can help consumers make an informed choice. 7.1.2 Employees PMIs code of conduct says very little about the expected behavior from employees both inside the company as well as when dealing with outside stakeholders like suppliers and customers. Since PMI is an international company with operations in many developing and underdeveloped countries, it is even more important to do so. This is because these countries often lack clear rules and laws regarding ethical behavior but as an international company, PMI needs to have transparent and high standards which employees would be expected to follow irrespective of which country they work in. Furthermore, employees do not like to work in companies that are perceived as unethical and therefore it makes it difficult for such companies to attract and retain good employees.

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7.1.3 Dealers and Retailers Dealers and retailers are the main point of contact with the end-consumers and therefore they often are the ones who shape consumers perceptions about the brand and company. As such it is important that they follow the same standards of conduct that PMI expects of its employees. Their participation is especially important if PMI is serious about preventing youth smoking as is stated on its code of conduct. However, as was seen in the case of Indonesia, many of the retailers sell cigarettes to even youngsters. PMI needs to therefore strengthen its communication with dealers and retailers and ensure that the values the company stands for are not infringed upon by its supply chain partners. Dealers and retailers are also crucial in helping curb the illicit trade of cigarettes and PMI can achieve a lot of success in this regard by managing their relationship with them well and getting their support for its causes. 7.1.4 Suppliers Suppliers are the other part of the supply chain that not only affects PMIs performance but its reputation as well. In the past, lack of control over farmers, for example, resulted in lots of bad press for the company when forced labor and child labor practices were discovered in those farms in Kazakhstan. The CSR program will bring together all the steps that PMI has already taken to eradicate the problem, as well as ensure that similar occurrences are prevented through comprehensive standards and benchmarks as discussed later. 7.1.5 Investors For a publicly traded company, investors and bond holders are critical in ensuring the viability of the company and if investors lose faith in the company, it will have harder time acquiring finances, and in extreme cases remaining solvent. For PMI which currently enjoys high stock prices, this may not seem like a major concern but every controversial issue damages the companys reputation and results in its stock prices to plummet. As such, having a comprehensive sustainability program is important for the companys primary objective, i.e. maximizing shareholder value. Furthermore, the CSR program will include specific codes of conduct so that shareholder interests are not compromised. This will mean codes of conduct governing accuracy of accounting and financial reporting, transparency with presentation of data, conflicts of interest and prevention of insider trading. 7.1.6 Governments & NGOs The current path of PMI has put it at cross-roads with Government bodies and NGOs in various occasions. Even if PMI wishes not to, they have to deal with NGOs and Governments, and therefore it is important for PMI these relationships well. If PMI is seen as an unethical company, it will constantly suffer from attacks by NGOs making the companys efficient operations impossible. Page | 10

The current Code of Conduct mentions PMIs role vis--vis Governments in terms of Tobacco regulations which it claims to support. However, there is little information that is currently published by PMI regarding these claims because of which it will attract more unwanted attention from NGOs. The proposed CSR program will enable the company to manage these relationships effectively by transparent reporting and working with partners, just like PMI has done with its Agricultural Labor Practices (ALP) reporting (See Appendix). 7.1.7 Society Finally, the biggest stakeholder for PMI is society in-large and like every organization, it has some responsibilities towards society. PMI seems to recognize these responsibilities from its stated efforts towards funding education for children with the aim of preventing youth smoking and its charitable giving program. However, it continues to be plagued by issues like that of youth smoking in Indonesia as well as other weaknesses in its code of conduct show that much more needs to be done by PMI to achieve international standards in ethical practices and sustainability. These issues are addressed through this CSR program through the use of strategic alliances as well as transparent reporting of its activities to the public through a sustainability report.

7.2 Key Issues and Drivers

The second step involves identification of key issues and drivers. These issues include the issues already identified in PMIs Code of Conduct, i.e. health effects on smokers, tobacco regulations, smoking among youth, illicit trade of cigarettes, impact on environment and impact on society. The two additional issues that were discussed earlier and needs to be included in the CSR program are responsible marketing and responsible labor practices. Other issues, specific to each identified stakeholder group can be included in the CSR program. For example, with regards to employees, codes of conduct governing business integrity issues like money laundering and bribery and employee treatment issues like discrimination and harassment can be included. Similarly, with regards to investors, the concerning issues to be included would be accuracy of accounting and financial record keeping as well as prevention of conflicts of interest and insider trading.

7.3 Strategic Alliances

The third step involves finding partners and forming strategic alliances for each of the issues identified above. For example, PMI has already formed an alliance with Verite consulting to manage the issue of responsible labor practices. Alliances of this nature, either with third-party consulting firms or NGOs specialized in the specific area lends credibility as well as expertise. For example, to address the issue of youth smoking, PMI can partner with organizations like the Center for Disease Control and Prevention or World Health Organization. Page | 11

PMI can also seek to achieve certifications like the ISO 26000, a CSR Standard or Business in the Community Corporate Responsibility Index for its overall CSR program instead of individual areas.

7.4 Setting Goals

The next step involves setting standards based on benchmarks and short-term goals for reaching the benchmark levels. The goals should be based on SMART principles, i.e. specific, measurable, achievable, realistic and timely. Each goal should come with a deadline for achievement that is either less than one year or should be broken down into distinct segments that can be achieved within a year. The reason for such criteria is that in the reporting stage, the level of attainment of goals can be stated in annual reports. For example, with regards to reducing the harmful effects of smoking, PMI can set specific goals about the research that will be conducted the each area and the number of research papers that will be published or presented in various conferences and seminars.

7.5 Standards and Benchmarks

Even as goals are set to reach certain standards, there will be other areas which do not require goals, but rather set standards for employees or other stakeholders to follow. These standards will be part of the code of conduct expected of employees and stakeholders and will require effective monitoring and reporting, as well as rewards and punishments. For example, with regards to a policy of not marketing cigarettes to youth, strict standards should be set for both the internal marketing department and the external retailers. These standards should state that the company will not advertise its products near places frequented by youth, for instance. In such a case, the code of conduct will prevent the marketing department from putting up a billboard with PMIs brands in the vicinity of a school, or allow kiosks and shopkeepers catering primarily to youth from selling cigarettes to the under-aged. However, it should also be noted that the standards should not be too prescriptive or too specific thereby leaving loopholes that can be exploited. Rather these standards should be more general and be used as guiding principles. There should however be rules and procedures regarding how employees should proceed when in doubt over whether an activity breaches any standards. An example that can be provided is policies regarding acceptance of gifts. The code of conduct can specify an amount up to which a corporate gift can be accepted by an employee and above which will require permission and reporting to the department head.

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7.6 Managing Risks & Problems

Even though goals and standards are set, the company may still find itself facing a controversial issue or an ethical breach. This is because not all activities relating to the company are under the direct control of its management. For example, the case of unethical labor practices in Kazakhstan may not have been known to the company management at the outset. It is also important to recognize that is not possible to include every kind of ethical breach that may happen within the company code of conduct. However, whenever such breaches occur, the company should have the set policies and procedures to deal with them effectively with minimal damage to the company. The CSR program should therefore state policies regarding who should be responsible to tackle any unforeseeable issue that may arise, as well as procedures to deal with such situations immediately. This may for example, be done either through the establishment of an independent CSR department or by creating an executive CSR committee with employees from different departments.

7.7 Communications
Once the goals and standards are set and roles and responsibilities are meted out to employees and management to oversee these issues, they need to be communicated firm-wide. Effective communication is critical in both getting buy-in from employees and external stakeholders as well as enforcing the CSR program. In fact, this is the most crucial part in implementation of the CSR program as without effective communication, the entire program will fall apart. Communications regarding the CSR program is presented in two parts Preventive measures and corrective measures. Preventive measures basically refer to communicating the goals and standards that are set for each stakeholder beforehand. This involves communicating with the concerned groups, the companys stands on particular issues, the policies and procedures adopted for implementation as well as whose role will be to implement each goal and who will be responsible for monitoring and reporting. For example, in the case of responsible marketing, managers would be responsible for communicating with their teams the acceptable policies and the employees would be accountable for their adoption. The procedures for reporting any discrepancies from the set standards by those responsible for monitoring would also have to be communicated to the concerned parties. Corrective measures refer to communicating about the rewards for achievement of the set goals or punishments that might be given out for failing to abide by given standards. For example, in the case of responsible labor practices, contracts with farmers may be cancelled as punishment if they are found to have employed child laborers in spite of earlier preventive measures to educate them about company policies against child labor. Page | 13

7.8 Monitoring
Even after communicating the companys CSR policy, they will not be implemented unless they are effectively monitored. As such, responsibilities for monitoring the enforcement of standards and policies have to be given to appropriate parties. This responsibility may fall on either the CSR department or executive committee or it may be given out to individual department and team managers. Furthermore, special roles may be created or responsibilities given to some employees to monitor enforcement of standards and goals by stakeholders like suppliers and retailers. PMI already does so in the case of farmers through agronomists who conduct regular and random checks on farmers to ensure their adherence to the companys standards. Similar responsibilities can be provided to personnel in the distribution or marketing teams to ensure that retailers too adhere to the standards. Lastly, the strategic alliances can help here as well with partner NGOs and other organizations keeping a check on external stakeholders.

7.9 Sustainability Reporting

While the setting of goals and standards, their communication with stakeholders and effective monitoring are the most critical parts in the implementation of the CSR program, it is also important to maintain records and report the achievements of the CSR program. The reporting stage is where most of the short-term benefits of the CSR program can be realized by the company. An annual sustainability report is recommended for reporting the companys achievements in CSR to both internal and external stakeholders of the company. The report will be the essential tool for communicating the vision for the companys CSR program as well as reporting on goals achieved in the previous year and new goals set for the next year. Furthermore, the sustainability report will give confidence to investors and the public that PMI is serious about being an ethical company and its managers are working towards the long-term sustainability of the company like its competitors British American Tobacco and Imperial Tobacco have done.

7.10 Feedback and Learning

Lastly, it will be a major lost opportunity if PMI does not close the loop in its CSR program by creating feedback channels that will allow the CSR program to evolve with changing needs of time. Feedback will also allow the CSR program to improve by including issues and areas that were not anticipated in the initial designing phase, thereby ensuring that PMI can pre-emptively respond to issues before they can be damaging for the company.

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8 Conclusion
The report has provided an in-depth analysis of the existing codes of conduct at PMI in light of the various controversies that engulfed the company in the recent past. It was found that the existing codes of conduct were not comprehensive enough and therefore insufficient in shaping the actions of the company in an ethical manner. As such this report provided a new vision for a restructured CSR program for PMI and included recommendations on how the new CSR program can be designed and implemented to provide a comprehensive guiding path for the companys stakeholders. It is expected that with the implementation of the proposed CSR program as per the given recommendations, PMI will be able to embark on the path of long-term sustainability and profitability, thereby increasing value for its shareholders.

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9 References
Philip Morris International (September 2012). Agricultural Labor Practices (ALP) Program Progress Report. OBrien, D. (2012). Integrating Corporate Social Responsibility with Competitive Strategy. The Center for Corporate Citizenship at Boston College Imperial Tobacco (August 2010). Code of Conduct. British American Tobacco (March 2012). Sustainability Report 2011. Philip Morris International (March 2012). Annual Report 2011. Philip Morris International (nd). PMI Corporate Website: www.pmi.com. Last accessed 26 November 2012. Bilson, J. (2010). Framework for Corporate Social Responsibility. Suite101: http://suite101.com/article/framework-for-corporate-social-responsibility-a211771. Last accessed 26 November 2012 Business for Social Responsibility (2002). Designing a CSR Structure. Thomas, Carolyn (2010) How 10-year old children are helping Philip Morris earn billions in cigarette sales each year. Marketing Ethics True Confessions. Human Rights Watch (May 2011). Kazakhstan: Philip Morris International Overhauls Labor Protections Human Rights Watch (July 2010). Hellish Work Exploitation of Migrant Tobacco Workers in Kazakhstan Action for Our Planet (nd) Unethical Companies Top 10. AFOP: http://www.actionforourplanet.com/#/top-10-unethical-companies/4545796858. Last accessed 26 November 2012

Business Pundit (May 2012). 5 Giant Companies who use Slave Labor. Business Pundit: http://www.businesspundit.com/5-giant-companies-who-use-slave-labor/. Last accessed 26 November 2012 Andre, C. & Velasquez, M. (1988). The Morality of Marketing the Marlboro Man. Markula Center for Applied Ethics - Issues in Ethics, 1(4). Walker, S. (2010) Tobacco giant Philip Morris sold cigarettes made using child labor. The Independent Thursday 15 July 2010.

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Harris, D. & Kilmer, C. (2012). Is Big Tobacco in US Targeting Youth in Indonesia? ABC News 10 July, 2012: http://abcnews.go.com/International/big-tobacco-targetingyouth-indonesia/story?id=16712181#.ULP_sNdeHIt. Last accessed 26 November 2012 Kilmer, C. (2011). The Smoking Baby: Where is he Today? ABC News 7 September, 2011: http://abcnews.go.com/International/big-tobacco-targeting-youthindonesia/story?id=16712181#.ULP_sNdeHIt. Last accessed 26 November 2012 Meyersohn, J. & Harris, D. (2011). From Age 2 to 7: Why are Children Smoking in Indonesia? ABC News 9 September, 2011: http://abcnews.go.com/Health/agechildren-smoking-indonesia/story?id=14464140#.ULP_ttdeHIt. Last accessed 26 November 2012

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Appendices
PMIs Response to the HRW Report on Labor Practices in Kazakhstan After the report of forced labor and child labor in Kazakhstans tobacco farms that supplied to PMI emerged, PMI adopted its Agricultural Labor Practices (ALP) Program in May 2011 and published its first progress report in September 2012. The ALP code, which PMI made compulsory for its more than 500,000 farmers over 30 countries, establishes the principles and standards expected of PMI and its affiliates suppliers in areas of Child Labor, Income and work hours, Fair treatment, Forced labor, Safe work environment, Freedom of association and Compliance with law. As part of its ALP program, the company has trained field technicians who have subsequently reached out to farmers to provide information about the ALP code. The company has so far reached out to 335,000 farmers and expects to reach over 500,000 contracted farmers by the year end. The company has also partnered with the non-government organization Verit to develop a multi-layered internal and external monitoring system to assess the principles and standards under the ALP code which will be implemented in 2013. It has also joined the Eliminating Child Labor in Tobacco (ECLT) foundation as well as local initiatives like the National Roundtable on Labor Conditions of Workers Engaged in Agriculture in Kazakhstan.

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