Mix Walsh with scotch, add a Spanish twist and get ice from Scots

Business Profile: Diageo's Paul Walsh won't retreat over Cardhu, the group's controversial mixing of malts

Paul Walsh is playing "show and tell". The boss of the world's biggest drinks company leaps up from the red leather sofa he has been chatting to me from and yanks out bottle after bottle from a handily placed goodie bag. In a flash, the coffee table is transformed into an impromptu cocktail bar, as the former comprehensive lad shows me how Diageo has moved on from the days when innovation meant seeing what wacky flavoured tipple it could come up with next.

Baileys miniatures, Raspberry Twist Smirnoff and Ciroc, a five-times distilled vodka so smooth that it almost rivals Mr Walsh's own silver tongue, are the future for louche cocktail lounges everywhere, apparently. "Ready-to-drink has been a disappointment," he says, using the industry jargon for cocktails in a bottle to explain why Diageo has stopped experimenting with products such as Morgan Gold, the cola flavoured rum drink that flopped so spectacularly last year. Massive tax increases have stifled growth after the Chancellor slapped an extra 64 per cent duty on a bottle of Smirnoff Ice compared with an equal strength bottled lager. "I see that as quite unfair," he adds, sounding for one second more like a schoolboy than the head of a £22bn company.

The focus instead is on "premiumisation", one of the yucky corporate-speak terms that Mr Walsh has coined to describe how he is trying to get more people around the world to trade up to the group's high margin brands. The current obsession with Sex and the City, which Diageo sponsors, has helped of course. "Do you want to have a cocktail glass in your hand or do you want to have a pint glass in your hand?" he asks rhetorically in his hybrid US-Lancastrian accent. (He spent 12 years working Stateside as head of Pillsbury, the baking business since sold to General Mills.)

Talking of unfair, one of the products Mr Walsh fished out from his mobile drinks cabinet has managed to upset most of his rivals north of the border. The culprit is Cardhu, Diageo's most successful single malt. The scotch industry is apoplectic that the drinks behemoth has managed to blur the all-crucial boundary in the whisky lexicon by meddling with the 12-year-old single malt and turning it into a "pure" malt - a mixture of different malts from different distilleries. It needed to because supplies of Cardhu could not keep up with marketing-induced demand in big export markets such as Spain. It could, because it had the technological know how, and the stocks. Mr Walsh is unrepentant. Ignoring all manner of threats, he says Diageo has "no intention" of abandoning the move, which he claims is going down well with consumers. "There is nothing new with a pure malt," he says, grabbing another one of the bottles that are dotted around his office-cum-gin palace. Johnnie Walker, the world's best selling scotch, is a blend of different whiskies. "The industry would have had a point had they not seen what we have done," he says defiantly.

Elsewhere in the world of drink, relations are more raspberry twist cordial than frosty margarita. Growing public disapproval over the glamourising of alcohol, and the threat of tobacco-style litigation, has induced the industry to try to prove it is concerned about alcohol abuse and to emphasise moderation. Mr Walsh says he has competitors clamouring to use the company's socially responsible marketing code. He lets them, and also gives them access to Diageo's trainers.

The gesture is typical of the "can do" attitude that he says characterised his time in the United States. The experience has come in more than handy since then; the US has contributed 40 per cent of the group's profits since it swallowed Seagrams' drinks arm in a joint deal with Pernod Ricard.

But there is an ulterior motive behind his offer to share the group's advertising guidelines. The more drinks companies that use it the better, because at present he says the company's efforts to make sure consumers don't abuse his products - efforts to stave off litigation - are "being hindered" by certain unnamed rivals. Pictures of Vinnie Jones, ex-footballer and glamorous hardcase, shimmying on down as he parties away in Bacardi's Latin Quarter, spring to mind, although Mr Walsh couldn't possibly comment. "We've got to work with those companies to try to persuade them that our approach is the right approach," is as far as he will diplomatically go.

However, despite running ads asking drinkers not to consume too much Smirnoff, or any of Diageo's other top eight spirits brands, Mr Walsh knows he has a battle on his hands when it comes to convincing us sceptical Brits that his company could possibly have their best interests at heart. "The consumer here is far more cynical, far more saying, 'Hang on. You don't tell me what to do. You're a drinks company.' Whereas in many other markets we seem to have that permission from the consumer to enter that space, it's less so in the UK."

The challenge is all the greater in Britain, where binge drinking kills 20,000 people a year, according to a recent government report. Mr Walsh, who admits to enjoying the company's products - in moderation - draws a contrast between the British and Spanish markets. "It's very uncool to be seen drunk in Spain. They drink a lot but you do not want to be seen out of control." Try telling that to the drunken hordes that tip out of pubs at closing time night after night - long before most Spaniards would even think about going out.

I venture to suggest that he must see his own share of drunkenness, what with the company's own answer to the Met Bar replacing spit-and-sawdust work canteens as the main gathering point for staff. He also has a 22-year-old son. He chuckles deeply, his tanned face breaking into a wide grin: "I hope our people never have hangovers." As for his son, aside from confessing that yes, he had a splendid 21st birthday party, with 1981 vintage champagne on tap for the lucky guests (oh, to have had an invite), he is tight-lipped about Walsh Jnr's drinking habits. "It's a bit different with 21- and 22-year-olds now than it was..." He trails off as he throws me a quick glance to try to gauge my age. He continues: "We've had a house full of young people and we've not seen any abuse." I cough, doubtingly. "We haven't seen it," he insists.

An accounting and economics graduate from Manchester polytechnic, Mr Walsh's humble origins certainly haven't held him back. He is proud of Royton and Crompton comprehensive, which he says recently scored its first Oxbridge success. A gift from his now 84-year-old maths teacher, a picture of a Second World War fighter plane flying over the Norwegian fjords, has pride of place on his office wall, a reminder both of his roots and his thwarted ambition to be an RAF pilot. As for his decision to join the drinks industry instead, he hasn't looked back. "I tell you, it's a fun business. It's a global business. If you can't enjoy yourself in this industry, I don't know an industry that you can enjoy yourself in."

PAUL WALSH CAREER IN COCKTAILS

Age: 48

Salary: £1.9m, including all bonuses, share options and benefits.

Career history: Read accounting and economics at Manchester Polytechnic. First taste of the industry was at Eaton, a soft drinks company. Has been with Diageo ever since in one of its former guises. Worked his way up to finance director of Grand Metropolitan's Watney, Mann and Truman brewers before moving to Inter-Continental and then Pillsbury. Beat more obvious rivals to the post of Diageo chief executive in 2000.

Interests: Anything to do with the great outdoors, from shooting to fishing to photo safaris.