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Investment Association calls on companies to improve the transparency of their approach to paying dividends

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28 May 2019

The Investment Association (IA) is calling on companies to improve the transparency of their approach to paying dividends.

The call comes after research into dividend payments carried out by the IA in response to a request by the Secretary of State for the Department for Business, Energy and Industrial Strategy (BEIS) to investigate a concern that an increasing number of companies are bit seeking shareholder approval for dividend distributions at their AGMs.

Findings of the research indicate that:

  • 22% of listed companies paying ordinary dividends did not seek an annual shareholder vote on those distributions.
  • this practice is particularly prevalent within the largest twenty companies in the FTSE ALL-Share and also amongst Investment Companies.
  • Over half of these Investment companies put forward a resolution on a ‘dividend policy’ typically detailing the format that dividend distributions would take throughout the year but not seeking approval for the total dividend amount.

Engagement was sought with FTSE 100 companies who did not seek shareholder approval for their dividend payments and with the Association of Investment Companies (AIC) to understand the reasons why a shareholder vote was not sought. Two main drivers behind this behaviour were identified:

  1. Companies either argued that company-specific operational features make paying dividends without shareholder approval appropriate, due to regulatory requirements, legal or tax structures.
  2. Companies argued this was in response to growing investor demand for dividends to be paid quarterly to provide a regular income stream, with the timing of the AGM vote inconvenient in relation to the timing of quarterly payments.

The IA indicates that by not seeking a shareholder vote on dividend distributions “an essential mechanism for accountability to shareholders is being undermined”. It continues:

A shareholder vote is one mechanism by which transparency and accountability to shareholders can be exercised – the majority of companies do employ this. There may be some legitimate reasons for not providing this opportunity, in which case transparency and accountability to shareholders should, as a matter of principle, be achieved by other means.

In response to the findings the IA recommends:

all listed companies, including those that put a dividend resolution to shareholders, should as a minimum, articulate a ‘distribution policy’. This policy would include their long-term approach to making decisions on the amount and timing of returns to shareholders, including dividends, share buybacks and other capital distributions within the context of any relevant legal or financial constraints.

The IA has indicated that it will develop best practice guidance on a ‘distribution policy’ in Autumn 2019. It will also make recommendations to the Government as to whether a shareholder vote on the distribution policy and/or yearly distributions should be mandatory.

A press release and the report is available on the IA website.

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