Manifest Research Impact: Illegal dividends, FRC & ICSA act to ensure compliance

Following Manifest’s analysis of the extent of illegal dividends paid by UK listed companies [22-Jan-16] the Institute of Chartered Secretaries & Administrators (ICSA) the Financial Reporting Council have issued bulletins to remind companies of their legal responsibilities.

Jennifer Walmsley, the FRC’s director of investor engagement, writing on Linked-In, drew attention to the Reporting Lab’s report “Disclosure of dividends – policy and practice“, published in November 2015. While a number of investors have called for a separate disclosure of a figure for distributable profits, Walmsley notes that although such information can be useful, the Department for Business Innovation and Skills (BIS) has confirmed that the Companies Act 2006 does not require a separate disclosure.

Speaking for the company secretary community, Peter Swabey, ICSA’s director of policy and research, urged company secretaries to ensure that the necessary filings had been undertaken before proceeding to payment. Commenting on the Manifest findings , Swabey noted that: “a breach of the Companies Act deserves to be taken with appropriate seriousness as the consequences, if not ratified by shareholders, could be significant.”

From a stewardship perspective, a number of investors have indicated to Manifest that they will be increasing their scrutiny of dividend payments as part of their 2016 AGM voting and engagement practices.

Dividend compliance issues don’t stop at the technical compliance level. As the FRC’s report highlighted, current disclosure practices are often unhelpful. As Manifest’s analysts would attest, information is currently scattered throughout a range of company documents making it difficult to get a complete picture. This disconnection may be attributable to the number of preparers from different departments involved in writing the annual report. Manifest would certainly welcome an increased focus on accessibility in annual reports rather than the current unseemly haste to get into print (electronic or otherwise).

As the illegal dividend meetings episode demonstrates,  disconnect and haste comes with a price. Now might be the time for companies to move their AGMs away from the bunched frenzy that is “peak season”. With the extra month they could re-thinking their annual reports from the users’ perspective; 4,000 annual reports a year with broken tables across double-paged spreads and multi-column PDFs certainly do not endear themselves to hard-working analysts!

Wherever human beings work in pressured environments and grapple with complex issues, the opportunity for mistakes always exists. Where the pressure is self-imposed and the mistakes are potentially far-reaching we have to wonder what is behind the reluctance to try a different approach.  If it is a question of investor demand for early dividend payments we see no conflict; companies can always pay an interim dividend with a subsequent ratification of the final dividend at a later date and so stay within both investor guidelines and the law [HMRC Guidance].

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