Even before a virus devastated the global financial system, questions were being asked about the power of shareholders and the returns they were enjoying. Will there be a place for high dividends in an altered post-Covid world?
‘Stockholders: they can be a nuisance when things are going well, but a positive threat to the company’s existence when things have been going badly.’ That was the 20th-century business sage Robert Townsend, writing in the 1970 international bestseller Up the Organisation. Five decades later, I expect it would be a struggle to find a FTSE 100 or S&P 500 chief executive who disagrees with him – in private at least.
And that was before Covid-19 arrived and forced many companies, along with the societies in which they function, to lock down for the best part of three months – prompting massive cuts in dividends to those shareholders. According to stockbroker AJ Bell, Britain’s 100 biggest listed companies distributed a princely £89 billion to stockholders in 2018.
It had expected FTSE 100 companies to pay a similar amount in dividends in respect of 2019 – a figure since cut to £73 billion. The outlook for 2020 has darkened significantly too: once forecast at £91.5 billion, dividends now look more like £50-£55 billion.
‘The longer the lockdown lasts, the more that will limit companies’ room for manoeuvre,’ says Russ Mould, investment director at AJ Bell. ‘Some companies are going to get an existential fright out of this – the housebuilders did in 2007-09 and they are running hugely net-cash balance sheets and probably will do for a generation of managers to come. So I would think logically that companies would reassess their use of leverage.’
And once companies have escaped the initial impact of Covid-19, they will also have debts to repay. More than £27.5 billion has been loaned to companies through the Bounce Back Loan Scheme or Coronavirus Business Interruption Scheme alone, while around a million companies have taken advantage of the furlough scheme, which paid the wages of 8.7 million workers as of June. And with government money comes government pressure.
‘Another logical outcome is that companies that have taken state assistance will need to look at whether they think it’s appropriate to pay dividends or not,’ says Mould, ‘and the answer is really no, until the books have been squared.’ With the above loans having 12-month repayment window, that means indebted companies will be liable to public pressure until the end of 2021 at least.
‘It will be intriguing to see whether efficient balance-sheet theory – “cash is trash” – is kicked into touch,’ adds Mould. ‘I would like to think it is. Equally, with interest rates at zero and central banks looking to encourage companies to borrow, there will be some push-back on that. But I would think it will be one conversation had at board level for some time and I wouldn’t be shocked over the next 12 months if you saw many more capital raisings as companies do build up those buffers.’
The hit to dividends in the UK is just part of the story, of course: asset manager Janus Henderson predicts that dividends from the world’s 1,200 largest corporations will fall by 15-35 per cent this year – reducing the worldwide shareholder payout to $933 billion at worst, down from $1.425 trillion in 2019, as companies tighten their belts.
Notwithstanding UK firms’ tendency to ‘over-distribute’ over the past decade, it’s a fair bet that the crisis will force them to ask deeper questions, too. ‘It was being reassessed beforehand, with greater emphasis on ESG and corporate purpose – a realisation that companies that have a stronger sense of purpose are actually just better investments,’ says Mould.
More than this, though, are issues of equity in a broader sense: ‘A lot of the people who have kept the show on the road over the last ten weeks have been have been those who are among the lower-paid in society. You would like to think that over time there will be a reassessment of how they are remunerated, and that there will be an uplift, not just a temporary bonus.’ Many would argue that a reassessment was overdue.
Between 1970 and 2014, the share of wealth going to workers declined in Britain by 6 per cent; in the US it fell by more than 10 per cent. Indeed, the share of GDP going to wages in the US has declined from 51.6 per cent in 1970 to 43 per cent in 2018, according the Federal Reserve Bank of St Louis.
This isn’t just an Anglo-Saxon phenomenon either: across the G20 from 1960 to 2011, the proportion of capital going to labour declined from 63 per cent to 57 per cent. And it gets worse: a 2012 study showed that across the OECD ‘the labour share diminished for the bottom 99 per cent of income earners, but increased by 20 per cent for the top 1 per cent… over the last two decades’.
Perhaps it’s easier to understand why Jeremy Corbyn’s Labour Party managed to obtain more than 10 million votes just last December. So might the FTSE 100 start to offer shareholders yields closer to the 3 per cent level offered across the pond? Mould thinks it’s possible, at least in the short term.
Others agree: ‘It will be a bit more like America,’ predicts one banker. ‘And maybe that will be good because we will spend a bit more time reinvesting into the capital of a company rather than dishing it out to shareholders. That’s maybe why you have CocaCola and why none of our companies ever become massive.’
However, over a call with Charlotte Ransom of Netwealth and Iain Barnes, the firm’s head of portfolio management, the idea of a drop in yields is given short shrift. ‘There are significant cultural differences between what investors are seeking in our domestic market and the US but also the nature of the industries that the index is made up of,’ Barnes tells me. ‘Tech is always a strong case in point: you are investing in those companies for their growth rather than the distribution of earnings.’
Nonetheless, while the ‘prospective yield is going to stay tantalisingly high’, he believes this may be because prices are going to remain under pressure. For investors, the writing was already on the wall before coronavirus, insists Ransom. ‘We started to predict that as of 2020 it was very unlikely that investors could expect to have the same level of total returns that they had been enjoying over the last couple of decades,’ says the former Goldman Sachs partner.
‘It’s been a process of gradually slowing growth, starting off in the developed world,’ explains Barnes. ‘But ultimately things get priced off the real return you can get off cash, where interest rates are at.’
With rates at 0.1 per cent in UK, negative in Europe and Japan, and the Fed holding rates at 0.25 per cent, that won’t look very exciting. Might other changes be afoot? Recent months have seen millions of workers furloughed or made redundant as companies of all stripes make dramatic changes to the way they operate – or make big asks of certain employees to stay in business.
‘Now is the time to forgo dividends,’ says Paul Collier, professor of economics and public policy at the Blavatnik School of Government at Oxford. ‘It’s also very obviously the time that chief executives recognise that the firm needs to work basically by collaboration – they’ve got to be able to use the word “we” to the workforce, and you can’t credibly use the word “we” if you’re getting out of a private jet on £5 million a year when your workforce are on £25,000.’
Which isn’t too far from the truth. Bosses of FTSE 100 companies were paid an average of £3.5 million last year – 117 times more than their typical employee on £29,000. That this has come down by 13 per cent year-on-year shows you how high the multiples got. But it also shows you that things had started to change before Covid-19 struck.
Last August, 181 chief executives of some of America’s biggest corporations – including Apple, PepsiCo, Walmart and JP Morgan Chase – issued a statement breaking with four decades of business orthodoxy by rejecting the notion of driving shareholder returns as their priority. Instead stockholders were listed alongside (actually after) four other stakeholders, including staff and customers.
‘The tide was turning,’ says Prof Collier. ‘But now it’s been given a big push – it’s going to be going faster than it otherwise would have been. Hear what people are saying now: there’s a great sense of wanting some degree of togetherness. They’re expecting business to step up, and some will and some won’t. The ones that don’t will pay a high price, I think.’
This goes to the heart of Prof Collier’s new book, co-authored with John Kay – Greed Is Dead: Politics after Individualism. Citing recent evidence from evolutionary biology, the authors reject the viewpoint of ‘economic man’ as espoused by the father of monetarism, Milton Friedman.
Instead of being driven by economic self-interest, the authors claim that people are driven by mutuality. ‘We are hard-wired – other than 3 per cent of the population that is a sociopath – to want to belong both to other people and a place,’ says Prof Collier. ‘That need to belong translates itself as a need to win the good opinion of the people to whom you belong. It’s a desire to be worthy of the affection and respect of others. We are hard-wired for mutuality.’
And businesses are part of society as well as being communities in their own right: ‘Firms are mutual teams of effort around a purpose,’ Prof Collier asserts. ‘Those teams include the workforce, the communities in which it is based. It’s just a mistake to pull out shareholders as in any meaningful sense having a monopoly on ownership and control of the firm. The legitimate interest of shareholders is in a long-term return, and that’s it. They are providing some of the risk bearing, but employees have got much more at stake than the shareholders. So it’s completely artificial that control of the firm should just rest with shareholders. There’s no intellectual or ethical basis for that.’
The scary part of the Collier-Kay critique is that the ‘economic man’ model of capitalism is what’s hampering productivity growth – because by assuming that we are ‘greedy, lazy and selfish’ reduces us to ‘monitored automata’. Sky-high executive pay goes with the notion that it’s the apex of the pyramid that counts. ‘It’s part of this whole business of believing that the top knows best, and the problem of the top is to get these little economic men to work through monitored incentives. That cumulatively strips people of agency and therefore of job satisfaction.’
Instead, Collier and Kay believe that ‘leadership by modesty, self-sacrifice, winning the respect of the group through being pro-social’ will lead to a better outcome, especially in a crisis.
‘That’s why chief executives need now to make deep, personal self-sacrifices. All companies are in emergencies. They need the workforce to collaborate around new strategies. That needs to be done fast. Chief executives need to be able to communicate that credibly. They can’t do that if they’re saying, “We’re all in it together, but I’m putting my pay up by another 5 percent to five and bit million.”’
In the new, communitarian model of capitalism, boards take responsibility for balancing the needs of all stakeholders, including shareholders. ‘A healthy economy is entirely consistent with the communitarian philosophy of many different organisations within society being morally load-bearing. We are hard-wired to bear these mutual obligations,’ insists Prof Collier. ‘We are not greedy, lazy, selfish individuals.’
Over at Lincoln Private Investment Office, CIO Fred Hervey doesn’t think yields on equities will necessary fall, but he agrees that company behaviour will change. ‘We are moving gradually towards a point where capitalism is going to need to be more sensitive to all parties involved in it,’ he says.
Which brings us back to Robert Townsend’s Up the Organisation. ‘True leadership must be for the benefit of the followers,’ he wrote, ‘not the enrichment of the leaders. In combat, officers eat last.
This is the cover story from issue 75 of Spear’s magazine, out soon. Click here to buy and subscribe
Main image: Ben Challenor