The Tory government has backtracked on another of its promises today. I accept that for most people, the abandonment of a commitment to enhance corporate disclosures is not a big deal, but it matters.
Let me take just one example. One of the commitments to change corporate disclosure that was announced only nine months ago was to require that large companies should disclose the level of distributable profits that they have in their accounts. Right now they only have to disclose the full value of their reserves. The two are not the same thing.
Reserves represent the surpluses a company has generated as a result of its activities. They come in two forms. The first is realised reserves. These are the reserves generated by profitable trading. They will turn into available cash. It is legal to pay dividends out of these reserves because the company has earned the means to do so. Its creditors are not compromised as a result.
The other form of reserves is unrealised reserves. Most of these arise because of the revaluation of property and other assets owned by a group of companies. There are other ways to generate them, but revaluing a building bought for, say £10 million that is now worth, say, £50 million is the easiest way most companies have to boost the size of their balance sheet by £40 million (give or take a deferred tax provision for any tax due if the property was ever sold for that sum).
Unrealised reserves are not wrong: they can be used to provide a useful indicator of the real value of assets that a business owns when undertaking its business. Recognising these gains is one way of mounting a defence against asset-stripping takeovers. However, there is no way on earth that they give rise to profits capable of being paid out to shareholders. They do not generate cash. As a result, if dividends are paid out of them, the companies making those payments have to borrow the cash to do so. The result is that such dividend payments might over-stretch the company, leaving it in excessive debt and ultimately threatening its survival.
That is why paying dividends out of unrealised reserves are illegal. But because companies did not have to disclose the split in their reserves no one knew who was breaking the law, or not.
This confusion also creates the situation where companies manipulate their reserves to make such payments. I have written a paper on this issue. It was submitted to the Department for Business, Energy & Industrial Strategy (as was). I rather hoped it informed the announced requirement that the split between realised and unrealised reserves. In case of any company having doubt about how to work out the difference between the two (which we know some claimed they did not know) Adam Leaver and I wrote a paper on how a company might prudently estimate its realised reserves. That also went to BEIS. It was really not hard to do. However, it would have prevented fraud and the excessive payment of dividends to boost executive rewards.
And now the government has announced it has backtracked on this and other measures, including on green reporting, just nine months after it said changes were going to be legislated. Businesses did not, apparently, like the accountability that such measures demanded of them, so they will not be delivered.
As a result, the abuse will go on. And as a matter of fact, most larger UK companies do pay out more by way of dividends than they can afford. I have researched that, too. In many cases, the overpayments are dramatic. Of course, that is why businesses did not want this.
But, this simple fact also answers the question posed by Martin Wolf in the FT at the weekend, which was why UK pension funds have abandoned investing in UK equities or shares. The answer is simple and threefold.
First, almost all of them are in long-term decline because they are overpaying dividends.
Second, they are doing this to reward their executives and not their shareholders so rational shareholders should abandon them.
Third, because there is insufficient information to be sure where the risk of overpayment is, it is rational to abandon the market as a whole.
The disclosure of realised reserves would have overcome this problem and so would have boosted the fortunes of decent UK companies. But the government did not want that, and so it has abandoned the change.
In that one paragraph, I summarise the whole bankrupt philosophy of this supposedly pro-market but actually pro-exploitation government.
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Back in the 1960s & 1970s, Privaet Eye used to profile the activities of “asset strippers” (e.g. John “Pretty Thing” Bentley) who preyed on companies that were undervalued on the stock market due to incorrect valuation of e.g. property. The problem was known then, the problem is known now. I wonder why it takes Tory1 & Tory2 more than54 years to sort out this problem?.
Guessing, the interest of Tory1 & Tory2 govs is not the well being of UK Inc (& its inhabitants) but asset stripping. Thatcher/Tory1 did it with gov-owned companies, privatised at knock-down prices, B,Liar/war-monger/Tory2 did it with gov services. In all case, there was never a correct valuation of assets. Had laws been in place to correctly value companies, privatisation of companies and services would all become so much more difficult – & we can’t have that – can we? in “UK-serf-land-everything-is-for-sale”.
Of course, company valuation is a complex subject (& not a vote winner) – narratives become somewhat difficult, which is why the right-whinge Tory1 & Tory2 govs have been able to duck & weave on this for so long. The question to be answered is what is the end point? A Uk with no companies of any note? A UK stripped of everything of value? A Uk where there are serfs and the rich? That’s how it looks to me.
Side note: back in the 2010s, I had a interesting meeting with a very very senior guy working in the cabinet office. They were quite happy to hive off core service stuff to, for example a French outfit Sopra Steria. I still have the meeting notes – all very interesting. This was when Cam-moron & Gidiot were busy cutting gov services to the bone & beyond. The client (G7 country) regarded it with a mix of amazement and disbelief.
We finaly got round to watching The Hollow Crown this weekend.
These words of Gaunt jumped out at me:
“This land of such dear souls, this dear dear land,
Dear for her reputation through the world,
Is now leased out—I die pronouncing it—
Like to a tenement or pelting farm.”
Not many people know that this is how the more famous part of this passage [“this royal throne of kings, this sceptr’d isle….] ends. Perhaps they should.
Wake Up To Money on Radio BBC5 this morning discussed this with James Ashton, Chief Exec of Quoted Companies Alliance, who suggested cancelling was a good idea, as typical reports from such companies are already around 90,000 words long (he made the comparison to being longer than George Orwell’s 1984 novel), and he suggested most of it was boilerplate, checklist ticking stuff that no one reads anyway.
So what?
If we use it what’s the problem?
And this would have added a few words
Looking in from the outside this all sound totally corrupt to me – even business policy it seems is just there to enable certain individuals to increase their wealth at the expense of businesses themselves.
To say this is FUBAR is an understatement. Exploitative? Damn right.
I don’t think anyone comes out looking good on this.
Execs managing to arbitrary targets for
personal gain. Investors prizing dividend flow over real business performance. Directors unwilling to represent the broader group of stakeholders they are legally obliged to. Regulators and legislators unwilling to tackle anything that upsets their donors/lobbyists.
At the margin, this legislation would have helped – transparency is almost always good. However, it’s not a magic bullet.
It would have helped
It might have changed some behaviour
I hope this is not the same thing, but I am reminded that: “PwC, Wilko’s administrator, is set to question the retailer’s majority shareholder, Lisa Wilkinson, regarding the £77 million in dividends distributed to investors over the decade before the company’s collapse.
Pressure has been mounting for the government to question the Wilkinson family, which owned the discount retailer since its inception in 1930, to address a £56 million shortfall in workers’ pension funds.”
I can’t imagine how anyone could take £56 million from pensions for their own personal gain.
Source: https://www.proactiveinvestors.co.uk/companies/news/1027283/wilko-administrators-to-investigate-owner-payouts-following-pension-shortfall-1027283.html
It is not unrelated.
I believe Robert Maxwell stole something akin to £500m
from the Mirror pension fund.
Was there not legislation put in place to prevent this
ever happening again?
What are you talking about?