Comment: Much ado about nothing

The prime duty of a company’s board is to further the legal interests of those who own the business – the shareholders.

Union officials have a similar duty to their members and local councillors to their electorate. Once these obligations are understood, the furore over Diageo’s plans to restructure part of its whisky production and packaging operations in Ayrshire and Glasgow, with the net loss of about 500 jobs, is explicable.

Investment and modernisation are the lifeblood of a business. They provide the competitive efficiencies to produce and market products that people around the world want and will buy at a price that allows the company to pay its staff fairly and generate profits to pay dividends to its shareholders. General Motors and Chrysler were once thought to be the epitome of efficiency, but they both collapsed into bankruptcy earlier this year because they failed to adapt to changing circumstances.

Nobody suggests Diageo is anything but efficient; that is why it is the world’s largest wine and spirits company and by far the biggest player in the Scotch business. The restructuring plan signals its intention to play its part in further expanding the global market for Scotch.

Diageo will invest £86 million in upgrading alternative facilities at Cameronbridge and transfer 400 jobs to Leven in Fife. In addition, it is building an £80 million production plant at Roseisle – facts conveniently downplayed by those opposed to the planned changes. Nor could the company have briefed them in advance. To have done so would have broken Stock Exchange rules about the release of price-sensitive information. Those affected were then told immediately.

The plans’ opponents are playing the heritage card – Johnnie Walker was founded in Kilmarnock – and Scotch relies heavily on heritage in its marketing. But heritage has nothing to do with efficiency; if it did, Scotch would still be a cottage industry and there would be no world market for it.
 
Diageo now has a duty of care to those employees set to be made redundant, to convince them of the business case for the changes. After explaining that, Diageo must ensure that they are fairly compensated and work with local agencies to ensure they are given every assistance in looking for alternative employment – a difficult task given that Kilmarnock already has one of the highest unemployment rates in the UK. That is not simply altruistic, it reflects the prime duty towards shareholders.

Ensuring that the impact of necessary change is minimised reduces the potential for negative publicity and lessens any potential backlash among customers worldwide. That is why Diageo’s big guns are in Scotland.

Feel free to email your views on the subject to debate@thedrinksbusiness.com 

Finance on Friday, 10.07.2009