Distributive Justice: Divided on dividend!

The context was a proposal before a board to increase the dividend distribution. 

The company has delivered outstanding results for FY 2022 almost doubling profits. The proposal was to double the dividend amount or at least to announce a big increase over the previous year.

The company’s principal shareholders, 75 per cent held by the state government and a foreign collaborator. Public holding is the minimum 25 per cent. The higher distribution will benefit all including the public. The amount as a share of profit was not very substantial, roughly around 25 per cent only.

The Chairman (a senior IAS officer, representing the state government) made the item look like a foregone conclusion and a no brainer. In less than a minute the room was swept and everyone had nodded assent.

Quickly munching handful of cashews stuffed in my mouth I submitted some aspects should be factored before approval.

1. My interventions:
   – Proposed higher dividend is certainly beneficial to all shareholders
   – While profits are at an all time record, the net cash flow from operations was actually lower than
   previous year due to huge increase in working capital.
   – The company has to borrow to pay dividend.
   – There were also some windfall elements to the profits due to the nature of the business and some
   peculiar international factors.
   – The company has many operational problems which the management constantly battles.
   – There is little predictability to the operations/profitability…
   – Is the management and board confident of repeating the great performance and not slipping back at
   least for a couple of years?
   – It will be bad to step up sharply this year and slip back next year if the going is not good.
2. Chairman’s response:
   (i) the state government has an expectation that dividends will be higher this year;(ii) anyway borrowing for operation is common and why not borrow and distribute?
3. My response:
   – Absolutely no restriction legally and even the basic amount needs to be borrowed and borrowing additionally is no constraint- but yet is it a wise decision?
   Chairman asked the rest of the directors at this juncture if they have any reservations after knowing these details or still hold that higher dividend is fine? Two immediately said the inputs are relevant to revisit the initial thinking.
4. Chairman’s response:
   Dividend is an annual decision- when going is good take more money as government needs more money as well. Look at central PSUs: they give money whenever budget shortfall warrants.In a lighter vein I said, it is absolutely right the point on PSUs but I am not on any of the PSU board and will never join, as such healthy discussion as done in this company will never happen in any PSU board as they run under the diktat of some minister or an IAS officer!

   Back to the discussion – what is the overall board’ view? Now 4 directors including me were sceptics.

   Chairman: are you saying no increase? I said, no that is too rigid and with such super profits some gesture is essential and some extra is fair.

   Chairman: I see all have changed the mind- But I will lose face having committed to someone at the top (may be CM?)

   My response: Let us go with the minimal increase but if management in the next two quarters brings working capital under control we can look at an interim dividend.
   
   Chairman: So working capital monitoring becomes my priority now!