The dividend curse

Prem Sikka explains how income inequalities have widened during the shareholder bonanza of the last ten years

Class politics in the UK are highly evident. The government has imposed a benefit freeze and wage freeze on public sector workers. Labour has been systematically weakened through anti-trade union laws. Inevitably wages have stagnated and failed to keep pace with inflation. For November 2019, average regular pay before tax and other deductions was £511 per week in nominal terms. The figure in real terms (constant 2015 prices) is £472 per week, which is still £1 (0.2%) lower than the pre-economic downturn peak of £473 per week in March 2008. The equivalent figures in real terms are £503 per week in November 2019 and £525 in February 2008, a 4.1% difference.

Meanwhile, there are virtually no constraints on payment of dividends to shareholders. In 2019, the UK’s largest listed companies paid out a dividend of £110.5bn. This compares to £99.8bn in 2018 and £95.1bn in 2017. This does not include share buybacks totalling between £15bn and £20bn a year.

Rising dividends are part of a shareholder-centric model of corporate governance where maintenance of the share price and returns to short-term shareholders takes priority over the long-term success of the company, employees and the interests of other stakeholders. The vast amount of dividends are neither attracting new investment in productive assets nor fuelling the economy. But company directors are besotted with paying ever increasing dividends. Their bonuses are often linked to share prices. At Carillion, directors engaged in aggressive accounting practices to boost profits and borrowed money to pay dividends. The obsession did not have a happy ending.

With the exception of the recession period after the 2007-08 banking crash, major UK companies have paid dividends at a higher rate than their counterparts in other economies. Andrew Haldane, the Bank of England Chief Economist, noted that in the 1970s major companies typically paid £10 in dividends out of every £100 of profits, but by 2015 the amount had risen to between £60 and £70, often accompanied by a squeeze on labour and investment. After the 2007-08 banking crash, corporate profits have increased, but payments to shareholders in the form of dividends and share buybacks have increased even faster.

Dividends are being paid at the expense of employee wages and investment in productive assets. The UK invests around 16.9% of its gross domestic product in long-term productive assets and languishes near the bottom of the EU member states’ investment table. Low wages and low investment inevitably lead to low productivity.

It isn’t just Carillion which borrowed money to pay dividends. A Bank of England survey showed that only around 25% of finance raised by companies is spent on investment, with the remainder split between purchasing financial assets, distributing to shareholders and keeping as cash.

Neoliberals claim that dividends stimulate the UK economy, increase the tax-take and help pension funds. The reality is quite different. Some 54.9% of the value of the UK stock market is held by individuals and entities outside the UK. So the payment of dividends results in a huge export of capital. Generally dividends are paid out without deduction of income tax at source. Foreign recipients do not pay any UK income tax. Pension funds and unit trusts hold about 2.4% and 9.6% respectively of the value of the UK stock market. Therefore, the benefit from dividends is comparatively small.

High dividends have not enabled UK companies to attract new investment in productive assets. The Bank of England’s Chief Economist noted that among UK companies, share buybacks have consistently exceeded share issuance over the past decade, albeit to a lesser degree more recently. The UK equity market does not appear to have been a source of net new financing to the UK corporate sector. The daily turnover of shares is effectively money exchanged between speculators or what Marx called “fictitious capital”. None of it goes to companies in the form of new investment.

Companies need to be weaned off high dividends and short-term returns and focus on their long-term success. Corporate governance reforms are needed. Employees have a vital interest in the long-term success of companies as their jobs and pensions depend on it, but they have no say in dividend or investment decisions. This needs to be changed by requiring all large companies to have a substantial number of employee-elected directors on their boards.

Employees should also vote on executive pay as they have a better idea of the performance of directors and are in a good position to reward them for promoting the long-term success of the company.

Directors should not be paid in shares or share options as that creates temptations to support share prices through excessive dividends. Executive bonuses should only be paid for extraordinary performance in specified long-term objectives rather than on manipulation of share prices. Approval from 90% of stakeholders should be required. Such developments would help directors to concentrate on the long-term success of companies rather than hyping share prices through excessive dividends.

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