For years, financial experts have advised people to save money for a rainy day.
However, recent research suggests that companies in the UK and overseas may not have followed the same principles. Some large companies give back to shareholders more money than they make in profits.
Few could have predicted the cause and severity of the current economic shock left the UK economy 9.2% smallerMost economists will tell you that at some point there will be recessions.
Research conducted by the University of Sheffield 28% of the FTSE 100 companies spent more on dividends and buying their own shares than on net income in the last fiscal year.
In the US it was 37% of the S&P 500 companies and in Europe 29% of the S&P Europe 350.
“The key problem is that companies are paying too much to shareholders, and this has left them with insufficient reserves to deal with this situation or a possible downturn,” said Prof. Adam Leaver, who led the research.
His work also showed that companies were taking on large debts at the same time.
“Shouldn’t be secret”
According to the law, companies are only allowed to pay out from so-called distributable reserves. It’s supposed to be a fairly conservative calculation that rules out expected gains that have not yet been made and expected losses.
The problem is determining what actually needs to be distributed in order to preserve a company’s financial reserves, says Natasha Landell-Mills, director of administration at investment firm Sarasin & Partners, which manages more than £ 12 billion for investors.
She says investors should know what reserves there are and what can and cannot be paid out to shareholders.
However, large companies do not publish all of the information necessary for an accurate elaboration.
“It shouldn’t be a secret,” she said, especially after breakdowns like Wirecard, Thomas Cook, Carillion and Interserve. “If we don’t demand transparency, we’re not doing our job.”
The Financial Reporting Council, which regulates how companies publish their accounts, said the research it conducted indicated that investors want more disclosure about reserves and the affordability of dividends, and that companies must comply with the law to avoid illegal dividends Capital to pay.
However, any new disclosure rules will be left to ministers, it said.
The Ministry of Enterprise, Energy and Industrial Strategy insists that it address the matter, albeit as part of a broader reform proposal.
“The UK corporate governance regime is one of the strongest in the world and we are considering a new disclosure requirement for distributable reserves in our upcoming audit reform consultation,” it said in a statement.
While many companies have cut dividends as part of the coronavirus pandemic, some, including the airline EasyJet, have continued to make payments as the crisis has progressed, particularly the UK’s largest banks had to be ordered by regulators to stop dividends.
Construction and outsourcing company Carillion collapsed after paying out £ 333 million more in dividends than cash between January 2012 and June 2017. according to a parliamentary reportwhich it attributed to “aggressive accounting”.
“It paid dividends and the stop should be corporate law,” said Ms. Landell-Mills. “It didn’t stop because nobody seemed to enforce it.”
“You invest in people’s retirement savings,” she added. “You need to know where to put it is safe.”
Prof. Leaver says rules are being manipulated to increase shareholder payouts and that companies should keep more reserves for rainy days.
Managers act in the short term rather than the long term, he says.
For households, the advice varies depending on the personal situation, with a salary of three to nine months being suggested as a suitable financial buffer
For companies, there are no such guidelines beyond the capital conservation rules.
That’s not necessarily a bad thing, according to Karthik Ramanna, professor of economics and public policy at Oxford University’s Blavatnik School of Government, as different companies will have very different needs.
Companies with longer-term projects may need more money in reserve. For example, shipbuilders, while a grocer who takes vegetables in the morning and sells them hours later may need less.
“The concern I have with the capital reserve solution is that it is a very blunt instrument,” he says, referring to the larger reserves that UK banks had to hold after the financial crisis. UK banks have since been subdued.
Still, companies should make sure they are taking on debt for the right reasons rather than paying dividends. When they borrow to invest, it helps balance resilience with efficiency.
“Excessive debt has played a role in this crisis and debt has been misused,” he said. “But you don’t want the government to tell companies how much debt to bear.”
So far, high street businesses have borne the brunt, and chains like Debenhams, Bright House and Laura Ashley have stepped into administration this year. Employers were supported by the government vacation program and cheap loans.
According to the latest figures from the National Statistics Office41% of UK businesses have cash on hand for less than six months, compared with 34% for more than six months. However, more than a fifth of respondents said they weren’t sure how much they had.
According to Prof. Leaver, the risk of deeper and more costly recessions is when companies don’t have the savings to weather shocks, be it related to the coronavirus pandemic or anything else.