Author attacks Diageo on taxes

Diageo, the drinks giant whose plans to axe 900 jobs at its Kilmarnock plant and Port Dundas whisky distillery have triggered protest and condemnation, has been branded as socially irresponsible over tax and pay by a leading business thinker.

William Hopper, author of The Puritan Gift: Reclaiming the American Dream Amidst Global Financial Chaos, said: “Diageo is a company run brilliantly by bean-counters, and the chief financial engineer is its chief executive, Paul Walsh.

“Unsurprisingly, there are some distasteful aspects to its activities, not least that it earns most of its profits in the UK but pays most of its taxes overseas; this is scarcely the behaviour of a good corporate citizen.”

After some manoeuvring between 2000 and 2006, the company transferred brands worth billions of pounds — including big-selling whiskies Johnnie Walker and J&B — to Diageo Brands BV, a Netherlands-based subsidiary, where profits are accrued virtually tax-free, due to tax advantages.

Average UK tax paid by Diageo over past decade: £43m

Despite average pre-tax profits of £2 billion a year over the past 10 years, an investigation published by the Guardian in February found that the company paid an average of £43m a year in UK corporation tax in that period. That is just over 2 per cent of its profits, when UK corporate tax is 28 per cent of profits.

Glasgow-born Hopper, a former director of merchant bank Morgan Grenfell, said Walsh’s £3.6m pay package is more than 100 times the average pay of Diageo’s 23,000 employees. Hopper said that the multiple for a comparable Japanese company is just over 10. “Is British senior management 10 times better than its Japanese equivalent?” he asked.

In The Puritan Gift, which Hopper co-authored with his elder brother Kenneth, the Hopper brothers call or a return to the form of capitalism prevalent in US in the 1950s and 1960s, in which shareholders’ interests were better aligned with those of staff, customers, suppliers and society at large.

Hopper added: “Mr Walsh likes to shoot antelope on his estate in South Africa. As he does so, I wonder if he thinks about the 700 long-standing employees whom he is firing in Kilmarnock? It is not as if the company was in trouble and obliged to undertake major surgery in order to survive; it is in fact highly profitable.”

Last week Diageo announced profits for the year to June 30 were £2.01 billion.

Hopper added: “The ex-army officers who ran Distillers, as Diageo used to be called, may have had many weaknesses but they looked after their employees, as they had once looked after their men.”

He also pointed out Diageo promotes alcopops and cheap beer, which he said “lie at the root of most binge drinking.”

“My guess is that Diageo will continue to prosper because it is an oligopolist that skilfully exploits the human addiction to alcohol, a drug which kills hundreds of thousands of people every year.

Harry Donaldson, Scottish regional secretary of the GMB union, last week called for Walsh and other Diageo directors to take pay cuts. He said: “I think some restraint by senior executives in tough times may well be an approach that would be welcomed by people who are likely to be affected by these proposals.”

A Diageo spokesman declined to comment on the issues of tax and executive pay.

He added: “The Diageo proposals to restructure our Scottish operations are necessary to ensure the long-term sustainability of our Scottish business. We employ 4,500 people across 50 sites in Scotland. We are sorry the proposals will mean the loss of jobs.

“The proposals include a further £100m investment in Scotland, which will deliver 400 new jobs through the expansion of our packaging plant in Fife.”

An edited version of this article was published in The Sunday Times on 30 August 2009