Shareholders call for greater transparency on dividends
The Investment Association (IA) is calling for companies provide more information about their approach to paying dividends by publishing a ‘distribution policy’ setting out how they pay dividends to shareholders to curb the use of unapproved interim dividend payments
30 May 2019
This new approach must set out the company’s dividends policy as well as details about the other ways it returns capital to shareholders, in order to promote a more transparent, long-term approach.
It follows growing concerns that dividends are being paid to shareholders without consideration of wider financial issues, including pension deficits and company liquidity, as in the case of Carillion, which collapsed in 2018 and the earlier failure of high street retailer BHS which went into administration with a massive pension deficit.
Interim dividends are normally declared and paid at the discretion of the directors of the compan,y and unlike final dividends, do not require a shareholder vote at the company’s annual general meeting.
At the same time there are signs that more companies are paying interim dividends which are not subject to a shareholder vote, according to research by the Investment Association into dividend payments conducted on behalf of the Department of Business, Energy and Industrial Strategy (BEIS). More than one in five (22%) of FTSE listed companies that pay dividends are not holding annual votes on the payment of the final dividend or are paying only interim dividends, with the largest listed entities and investment companies most likely to pay out in this manner.
Among the top 20 FTSE companies, 12 had paid dividends without holding a shareholder vote. Across the FTSE All-Share Index, 121 companies did not seek a shareholder vote, with the majority (74%) being investment companies.
However, it also found that there are often legitimate reasons for that decision, such as meeting a demand from investors to receive a regular income stream in the form of quarterly payments, and therefore the report recommends a distribution policy that gives shareholders transparency on how dividends will be paid.
Chris Cummings, chief executive of the Investment Association, said: ‘Dividends are a core part of how a company returns capital to its shareholders. But if companies are not seeking a shareholder vote on any dividend payments they risk depriving shareholders of the opportunity to have a say on a matter that is pivotal to the organisation’s long term attractiveness to investors.
‘A distribution policy will provide shareholders with an opportunity to engage on companies' approaches to paying dividends and structure of returns to shareholders, including how the dividend payments fit within with the wider capital allocation decisions the company takes. We want to ensure that they are being decided in a way that delivers long-term, sustainable returns. It will also allow companies to explain their logic behind not holding annual votes where they have a legitimate business reason.’
The government is also concerned that there is a lack of governance in the event of company insolvencies, particularly where companies pay out substantial dividends prior to a collapse. As yet no legislative action has been taken to address this issue, which would require an amendment to Companies Act 2006.
Business minister Kelly Tolhurst said: ‘The government welcomes the further work being undertaken to encourage companies, as a minimum, to set out a distribution policy for shareholders.
‘This type of policy makes sure shareholders have a clear basis for engaging with companies on their approach to dividends, investment and other uses of cash.
‘We are committed to ensuring the UK’s largest companies become even more transparent and accountable, which is why we have implemented reforms to upgrade our corporate governance and continue to seek further ways to ensure the UK remains the best place in the world to work, invest and do business.’
The Investment Association has 250 members managing £7.7 trillion of assets and the asset management industry supports 100,000 jobs across the UK.
Investment Association report, Shareholder votes on dividend distributions in UK listed companies - the case for a distribution policy