How to Craft the Right Dividend Policy?

By: Prof. Enrique Soriano

IT IS the first working week of the year and one of the most important aspects of any business continuity planning is to have pre-agreed rules on to how to deal with predictable issues, particularly control and ownership of the business, before they come up.  In many firms, the lack of a dividend policy is a serious omission at best, and a recipe for shareholder relations disaster. For family owning businesses, any failed dividend policy can strain relationships.

Conflict in a business stems from how best to recognize and reward shareholders for their efforts.  In a typical second or third generation family enterprise, not every family member will work in the family business. Some have higher financial needs than others. For some, their personal lives are too dependent on some form of family business rewards.

In a Business Spectator article write by Dominic Pelligana, he remarked that “All too often families seek to aggregate remuneration and keep it equal, particularly in the second generation.  The next generation wants certainty of amount and level of financial independence. The senior generation does not want to create expectations or create incentives to the next generation’s ‘entitled lifestyle’.”

A suggested solution is to have a form of pre-determined compensation model. Others refer to the model as a pre-agreed dividend policy.  For a family owned business, paying dividends will discourage family members from trying to join the family business for the wrong reasons.  Policies should define criteria for dividend distributions, such as linking them to profitability levels, to keep potential competition among family factions from harming the business.

Rather than being a source of conflict, a reasonable dividend policy can reinforce the enterprise growth and set up the business for more successes throughout the year! Pelligana further opines that “the reality is that individuals are equal as family members but may not be equal in terms of position in the company. So in order to promote transparency and fair process, best practice suggests that we separate these roles as well as the remuneration.”

All too often, senior generation leaders mixed and matched payouts and in the process confuse family members.  The article further cites clear examples on classifying the different forms of remuneration. Below is a handy reference guide for family business leaders:

• Managers – Market value remuneration and, where appropriate, bonuses for exceeding goals
• Directors – A set amount per meeting and effort
• Shareholders – An annual dividend based on ownership interests

 

By doing it this way shareholders are clear on what they are being remunerated for.

 

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Prof Enrique Soriano is a World Bank/IFC Governance Consultant, Senior Advisor of Post and Powell Singapore and the Executive Director of Wong + Bernstein, a research and consulting firm in Asia that serves family businesses and family foundations. He was formerly Chair of the Marketing Cluster at the ATENEO Graduate School of Business in Manila, and is currently a visiting Senior Fellow of the IPMI International School, Jakarta. 

He is an associate member of the Singapore Institute of Directors (SID) and an advisor to business families worldwide, a sought after governance speaker at conferences, and book author, more than 200 articles and publications, including two best-selling Family Business books (Ensuring Your Family Business Legacy 2013 and 2015). You can read Prof Soriano’s business articles for free at www.Faminbusiness.com