A Minority Perspective of the Dividends Policy

The enterprise to which I once entrusted my property privatization certificate recently paid me twenty-two hryvnias, my four years of dividends. When I broke this news to some of my acquaintances, they sincerely, albeit jokingly, congratulated me. For the majority of them, small-scale shareholders like me, have even stopped dreaming about coveted dividends over the 10-12 years since the days of mass privatization. The current economic growth has not brought about any changes in their mood, either.

Out of the 74 public joint-stock companies in Chernihiv oblast that declared profits at the end of 2003, only 7 chose to pay off dividends. Oddly enough, the same occurs in private companies: out of 83 profit-making ones, only nine paid last year’s dividends. (This seems to be a different case, though, connected mostly to the tax-collection situation).

Also noteworthy is the fact that the number of joint-stock companies whose general meetings resolve to share profits with their shareholders is on the decline. There were 18 of them in 1997, 15 in 1998, and 8 in 2002.

An analysis of the financial reports of joint-stock companies for 2003, submitted to the Chernihiv oblast branch of the State Securities and Stock Market Commission, shows that out of the 234 public companies in question, two-thirds — 160, to be exact — incurred losses. With due account of previous years’ results, there are 184 loss-making public companies, at least among those that submit financial reports. According to Volodymyr Shynkariov, chief of the commission’s territorial branch, one of the factors that lead to losses is lack of investments and management experts capable of helping an enterprise to stand on its two feet in a market economy and find its proper niche in the field in which it was working before privatization. “Quite a few businesses in the oblast failed to make headway after being privatized or have already gone bankrupt,” Mr. Shynkariov says. “A number of others are still in dire straits because they dragged their feet over privatization and were too late in jumping on the market bandwagon. Even worse is the fate of those who remained in state ownership, the Makoshynsky Farm Machinery Plant being a memorable example of this. Potential investors are not exactly rushing to contribute to an enterprise like this. It is also difficult now to sell a hundred-percent block of this business’s shares.” But what worries Mr. Shynkariov the most is that managers of the majority of loss-making businesses do not strive to guide them out of this situation. This conclusion is based on, among other things, their apparent unwillingness to use the services of the International Financial Corporation, which is implementing a corporate development project in Ukraine.

Only two enterprises — the Nizhyn-based Nifar Ltd. and Chernihivavtoservis — have sought this kind of help in the past year.

But let us get back to dividends. Seventy-four profit-making public companies were in a position to assess these, at least symbolically, but failed to do so. Instead, they decided to earmark the profits gained for replenishing current assets, purchasing new equipment, and introducing state-of-the-art technology. It is quite easy to understand this approach if one recalls that most of Ukraine’s businesses in fact need considerable investments in modernization, which is indispensable to continued growth. Against this backdrop, dividends of 2-5- hryvnias per shareholder look like funds that have gone down the drain. Mr. Shynkariov believes, however, that even this is good: the annual assessment of at least small dividend amounts creates a positive image for the enterprise and makes it investment-friendly. “A potential investor will not contribute a single kopeck if he is not satisfied with the joint-stock company’s financial results,” he says, “but what scares him off is not so much loss-making as lack of corporate culture and transparent information about the company’s performance. There can be no question of investment attractiveness if general meetings have not been convened for years, if there are corporate conflicts with, for example, minority shareholders who are complaining of non-payment of dividends! Unfortunately, this is the situation in almost one-half of our oblast’s joint-stock companies.”

It should be noted that 111 out of the 345 public companies registered in the oblast did not report on their economic results to the territorial branch in 2003. Moreover, shareholders did not receive any reports, either. Accordingly, they were stripped of the right to receive dividends as well as information on the enterprise’s economic situation.

Mr.Shynkariov believes that this kind of dividends policy stems from the fact that holders of small share blocks have too little clout at companies’ general meetings and that such shareholders almost never attend meetings. After all, the former implies the latter. So Mr. Shynkariov advises that small blocks of shares should be sold if there is an opportunity (of course, if they are to be bought in a lawful manner).

All this brings us to the conclusion that selling small blocks of shares is beneficial not only for the individual shareholder but also the state as a whole. In concentrating shares in the hands of one or several owners, small shareholders like us will be contributing to the creation of conditions for the dynamic development of a given enterprise and the economy as a whole. This will result in additional jobs, and the state will be collecting more taxes and be able to channel more funds into social programs.