Why has the company selected the dividend policy?
What will the policy mean in practice?
What are the risks and constraints associated with the policy?
What was done in practice to deliver under the policy?
Investors said that they also want disclosure of the circumstances in which companies expect to pay special dividends or buy back shares, and whether they are in the best interests of shareholders.
All investors consider that the disclosure of dividend resources, i.e. cash and the amount of the company’s reserves legally available for distribution under company law (distributable profits), is helpful in circumstances where the ability of the company to pay dividends is, or might be, insufficient relative to the level of dividends indicated by the policy. Some investors believe that distributable profits are always required to be disclosed. The FRC understands that the Companies Act 2006 does not require companies to identify separately distributable profits on their balance sheet.
Investors find that the dispersal of disclosures across annual reports and other communications results in repetition, and makes it hard for them to find the information they need. They said it would be helpful to group together similar or related disclosures on dividends, or to draw links between the disclosure elements.
Melanie McLaren, Executive Director of Codes and Standards at the FRC said: “Companies, investors and the FRC consider that disclosure of dividend policy and resources, including distributable profits, may be helpful. In addition to demonstrating the board’s stewardship of the company, they provide key information used by investors in evaluating the extent to which returns may be provided in the form of dividends in future. In the report, we highlight examples of good and proportionate disclosure practice. Investors said that terms such as ‘progressive’ and ‘payout ratio’ in respect of a company’s dividend policy or approach need to be clarified. They also told us that they recognise that the unexpected can and does happen and by providing disclosures, companies are not painting themselves into a corner.”
Notes to editors:
1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
2. The Financial Reporting Lab was set up, and is funded by, the FRC as a hub, bringing together companies and investors to support improvement and innovation in reporting. More information about the Lab’s work can be found at: frc.org.uk/Lab.