THE FINANCIAL DIRECTOR INTERVIEW - Celebrating promotion with a few

According to a recent survey by brand consultancy Interbrands, only three of the top 60 marques in the world originated in the UK, and the list is dominated by the usual US heavyweights: Coke, Microsoft, IBM, Ford and Disney. But that’s only half the picture. In the list of the most valuable portfolios of brands – where the “holding” company has little brand equity, but manages a number of well-known marques – two British companies make it into the top six: Unilever and Diageo. The latter has total brand values of $13.7bn, which by Interbrands’ thinking represents about 41% of its $33.8bn market cap. Branded revenue last year was a massive $20bn. In fact, five of the top sixty brands are wholly or partly owned by Diageo: Burger King, Moet & Chandon (the only wine), Smirnoff and Johnny Walker (the only two spirits brands), and, of course, Guinness. “Diageo will live or die by whether we can get a wonderful portfolio of brands growing organically,” says incoming FD Nick Rose. “That’ll be the acid test as to whether Diageo is successful. But the number of finance people who have an insight and an understanding as to what makes brands grow, what a global brand is, how to measure brand equity or marketing effectiveness, is still small. You must step back and ask what kind of skills finance executives need to support marketing.” This comment seems, at first glance, to be rather paradoxical for Rose. Before being FD at UDV, Diageo’s spirits division, he was group treasurer at Grand Met, which merged with Guinness in 1997 to form the new company. A colleague from the Grand Met days told FD that he was “persuasive and intellectual – a smart treasurer, that’s for sure,” and during our interview, Rose certainly lives up to his no-nonsense reputation, emphasising his words with firm hand chops to the table. Treasury management, for Rose, contains the right mix of discipline and expertise to prepare a financial manager for anything. “When you’re treasurer within a large multinational, you’re an expert within your field,” he says. “There are very few people within your company who will be able to challenge the direction you want to take treasury in.” But when a more slightly more general management position beckons, things do start to change. “When you move over to a line finance role, you will find that everyone has an opinion,” Rose points out. “You are no longer that primary centre of expertise.” Hence the comments about brands – it’s Rose’s way of saying he’s alive to strategic matters that are beyond the realm of the treasury department. Nevertheless, he’s keen to point out that he feels treasury skills are rarely wasted in the FD’s role. “A good test of a treasurer is whether they can explain negative convexity to the main board, who have probably never heard of it in their lives,” he explains. (We hadn’t either – apparently it means “a bond characteristic such that the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points” – go figure.) “That’s a good skill to take with you to any FD’s role.” But there are other changes, Rose adds. “Treasurers are used to instant pain or instant joy – you know the minute the market moves whether you did the right thing. You have to dump that mentality completely when you go into an FD role – it’s not about the next 1/32 on the bond.” Now, shareholder value creation for the long-term is his mantra. Rose has had time at UDV to get out of treasury mode and into a more strategic mindset. (In fact, while he was at UDV, Rose also took on the role of MD for the Pacific division, a position he claims allowed him to take a much broader look at the running of the business.) More importantly, the announcement in May that he would be taking over the group FD job – along with other board announcements – came at an ideal time. “World class companies plan in advance and without surprises,” says Rose of the succession announcements. “The particular advantage for me is that we have just been through our full five-year strategic planning cycles. I have come in at the beginning of those reviews and really got a grasp of what’s going on in all the businesses.” This process has also changed: where once the five year strategic plan was complementary to a separate – and sometimes contradictory – annual plan, now the year’s strategy is drawn direct from the long-term document. Diageo’s – and Rose’s – attitude to the finance function has increased the importance of this strategic role. “Any world-class FD nowadays has to have a reasonably strong strategic content in their kit-bag of skills,” Rose insists. “To be extreme about it, it isn’t good enough to manage the debits and credits anymore. Does that mean you can forget the basic provision of quality, reliable, timely data? Of course not. And maybe we all like to talk about the strategic end of the business, but that shouldn’t imply that in any way we forget about getting the basics right. “As a team member with the CEO, you have to have a strong grounding and basis in the strategic direction of the company,” he continues. “Particularly in a company like Diageo, where our guiding light is managing-for-value and economic profit, strategy and finance form an almost perfect interface: the finance department has the discipline to analyse your business along economic profit lines. When it comes to making decisions based on that economic profit dissection, finance and strategy almost become one.” Rose is talking about analysing products and projects on a cost-of-capital principle – it’s essentially the Economic Value Added (EVA) model marketed by Stern Stewart. This suggests that projects that don’t earn returns greater than a weighted cost of the capital employed should be dropped (or at least re-examined). At UDV – and IDV, the Grand Met half of the spirits business before the merger – economic profit calculation has been used for some time. UDV still maintains a matrix of all its products and how well they perform on an economic profit basis in every market they compete in – that’s over 7,000 product/market combinations. And Diageo has not been shy about off-loading what it perceives to be under-performing brands. “To have the fundamental economic profit data is useful because it shines the light on areas you need to look at,” explains Rose. “So at our Canadian whisky business, it said we weren’t getting the fundamental returns that we wanted, and projecting five years out we couldn’t see a clear way of getting the growth to where we needed it. So then you ask why that is. And when you put that information together, you can start to go down the path of, ‘well there must be somebody out there who can make more out of these brands than us’.” So all that remains is, as Rose puts it, to take the ultimate step and sell up, realising better shareholder value from those interests. That’s not to say that using economic profit as a measure is all plain sailing. Rose admits that one of the bigger changes moving up from a subsidiary to the main board has been coming to terms with the shareholding community.”The bulk of UK investors or UK analysts are not as comfortable with the whole value discussion or value measurement system as they probably still are with trading profit or eps,” Rose complains. “When we go to the US and talk about our economic profit, our returns on invested capital, that is a second language to the US institutions and analysts.” That said, Diageo does expense its spend on marketing, rather than capitalise it, which would probably be a harsher and more accurate way to calculate economic profit under the Stern Stewart methodology – “reasonable men can differ on that,” Rose suggests. But the numbers aren’t to be sniffed at. Last year Diageo spent £2bn on marketing worldwide. “(Calculating the financial effectiveness of marketing spend) is a question that FMCG companies will continue to struggle with for many years,” Rose says. “At Diageo, we have to get back to the fundamental reasons why people buy our products – and as importantly, why don’t they buy our products.” One might expect an ex-treasurer to take a more precise approach, but Rose is realistic about the difficulties of pinning down the drivers of demand. “Can you write down an analytical equation which says, ‘if I do X, the effectiveness will be Y’? My own view is no,” he concedes, “there are just too many variables in that equation. But can you, in a controlled fashion, try something out and see what the result is? I believe you can and we haven’t done enough of that in the past.” But it was less than two years ago that Diageo’s finance function didn’t even exist – it was still Guinness and Grand Met with their own departments. Indeed, within both of those companies (as in Diageo now), there were also several smaller divisional finance departments, and getting these together in their respective merged business units during the merger was no mean feat. Having become FD at Grand Met’s IDV in 1996, Rose was instrumental in the creation of a finance function to serve UDV when his company merged with Guinness-owned United Distillers. “When I joined IDV, I came with a different perspective from my predecessor, as everyone does, but I would say the merger unlocked the opportunity to take a fresh look,” recalls Rose. “That’s one of the great things about doing a merger: if you grasp that opportunity, you can throw everything up in the air, and re-examine all of your structures, and the capability and quality of the people you’ve got.” This principle applied to the integration of the two companies’ systems and technology. “Everybody obviously does come with baggage, but on the other hand we also found that people came with a tremendous willingness to change,” Rose says. “People saw very clearly that doing things in the old way was not going to get us there.” Post-merger, maintaining a unified vision within all the financial centres around the world has also been a key part of the plan. With a single metric – economic profit – it is essential that every outpost sings from the same hymn book. “Phil Yea (who has just left the FD’s seat), through the Finance Leadership Group, has made sure that there is a shared understanding, a shared agenda, a shared set of objectives for finance going forward,” Rose says. (The Finance Leadership Group comprises the CFOs of the key businesses and the central finance team.) It also means the best people in finance can be given a wider range of experience. “When we recruit people into finance, we tell them that they are joining Diageo,” Rose declares. “The fact that they happen to come into UDV or Burger King or whatever is immaterial – during their career here they should expect to move across the businesses.” The real task for finance is to provide strategic help. “We developed a team called the Business Support Group,” Rose says. “Their function is not to provide data or analysis, it’s to become a business partner and to be involved in solving business problems.” So Rose is in for the long haul as FD. “I’m going to steal a phrase from my current boss Jack Keenan,” he admits. “He says, ‘daunting, but do-able,’ and that’s how it feels to me. The group is of such size and it’s at an interesting point in its life cycle, that it can feel daunting. On the other hand, I feel that my seven years in the company make it do-able. I don’t underestimate how difficult it will be to achieve a top five position in our peer group of 20 of the world’s best companies. On the other hand I come to it with passion and enthusiasm and excitement.” CURRICULUM VITAE Name: Nick Rose FCT, FRSA Age: 42 Career: 1981-92 – Various positions at Ford Finance. 1992-95 – Group treasurer, Grand Metropolitan plc. 1995-96 – Group controller, Grand Met. 1996-99 – Finance director, IDV/UDV. 1999 – Finance director, Diageo plc. Rose on the abolition of Duty Free: “Duty Free has been a growing and profitable part of the business and it’s sad to see it go. But ultimately, with the euro and harmonisation we would all probably say that it was unsustainable for the long term and it was just a question of when it would go.” Rose on Diageo’s non-execs: “One of the things I particularly like about the Diageo board is the strength of the non-executive directors. If you look down the list you’ll see some real captains of industry. And I’m going to be very interested to hear their perspective on our strategic plan.” Rose on being a non-exec himself: “It’s something I’ve avoided to date, and will probably avoid for a little longer, because I want to get to grips with my current job. It is also something, though, that can be extremely valuable in broadening your perspective.” Rose on non-financial management: “(Being MD of UDV Pacific) gave me another set of insights into what’s required when you make decisions with the full gamut of inputs as a CEO. So, can I understand why people say all they want to do is become a general manager or a CEO? Can I understand why Phil Yea (former Diageo FD) said he wants to be a CEO? Absolutely. Am I looking beyond this job? Absolutely not – there’s too bloody much to do!”

 DIAGEO plc                           1998             1997 Turnover              £12.00bn         £12.28bn Operating profit       £1.94bn          £1.98bn Pre-tax profit         £1.68bn          £1.40bn

OTHERS WE’VE KNOWN AT UNITED DISTILLERS Eight years ago, we interviewed a man whom you might describe as Rose’s “step-predecessor”, Keith Hamill. In October 1991, he was FD of United Distillers, the hugely profitable spirits arm of Guinness. (Rose became FD at Grand Met’s spirits business, IDV, in 1996.) Back then, Guinness was a name that was as likely to evoke thoughts of City scandal as pints of “pure genius”, and Hamill, as a Price Waterhouse partner, was involved in spotting and unravelling the share deals that led to Ernest Saunders’ conviction over the purchase of Distillers. So impressive was Hamill that Guinness snapped him up to be director of financial control, then promoted him to the UD job – a route very familiar to Nick Rose, who has now gone one better as group FD of the merged drinks giant.