We believe that Diageo (DGE) is well managed and we hold its management team in high regard. The recent deal to buy Mey Icki at less than 10 times EV/EBITDA shows Diageo's disciplined approach to acquisitions. Additionally, management's willingness to walk away from the Cuervo deal shows that they are exemplary stewards of shareholder capital and consistently seek to generate excess economic returns.
Management & Board Setting a Clear Path
Paul Walsh, a veteran who started at Grand Metropolitan in 1982 and spent a decade running Pillsbury, stepped into the CEO role in 2000. Walsh has been the driving force behind Diageo's strategy to shed noncore businesses, including Burger King and Pillsbury, in order to focus on spirits.
Franz Humer, a director since 2005, was appointed board chairman in July 2008 following the retirement of James Blyth, who presided as chairman for eight years.
We applaud the separation of the chairman and CEO roles and the fact that Diageo's 11-member board has nine independent members. We don't see any red flags in corporate governance.
Reasonable Compensation Levels at Diageo
Compensation levels seem consistent with those at comparable companies, and the CEO's and CFO's salaries were flat in 2009 to reflect the company's performance. About 70% of compensation is variable, based on both annual and longer-term performance, which we believe aligns the interests of management and shareholders.
The only gripe we have is that directors do not stand for elections annually; we think the company could strengthen its governance policy by removing staggered board elections.
To read the full Morningstar analyst research on Diageo, Premium subscribers can click here. Not a Premium member? Sign up for a free trial here.