Dividends, the owner’s strategy and the entrepreneur in family businesses
familyandtrends believes that one of the serious shortcomings that academia should address is the need to define a sound theory of family business ownership. This is particularly important when an entrepreneurial family has already taken significant steps: it has established good governance, initiated or completed a generational handover, and finds itself with a growing number of shareholders. At this stage, however, a gap may emerge: ownership grows and becomes organised, but does not always develop a genuine owner strategy. The same occurs when the business has highly structured three- or five-year plans, but lacks a clear and tangible long-term vision and an explicit level of ambition for the future of the business.
There comes a time every year when, whether or not it has been formally defined, the management’s strategy must be put into practice: this time of year is drawing to a close: it is the season of general meetings, where the boards of directors put forward proposals and the shareholders’ meetings approve – or reject – them.
The dividend is the cornerstone of the owner’s strategy, as it determines how much is to be reinvested in the business and how much is to be distributed as liquid wealth to the owners. The dividend is the portion of profit distributed amongst the owners; as it is a function of profit, it is, like the latter, subject to business risk and varies over time. In family-owned businesses, as generations pass, it is good practice to use the holding company to provide stability through moderate growth in the dividend flow, so that shareholders can plan their lives relying on a more stable flow of liquid wealth that is less exposed to the annual fluctuations in the company’s results.
A dividend is fungible wealth in that it is distributed to shareholders in the form of cash and can be used to meet any need or desire; the portion of retained earnings is also wealth for the owner, but it is used for the development and growth of the business and cannot be used for anything else.
In this context, why is the decision on dividends the cornerstone of the owner’s strategy? Because if I decide to distribute 10% of the profit, I am stating that I see opportunities for growth for the company and want 90% of this year’s profit to become capital to be invested next year; if I decide to distribute 90%, it means I see little prospect for future growth.
