While the remuneration of managers and employees is often a point for discussion, both in political and economic spheres, shareholder remuneration is talked about much less frequently.
However, as a responsible investor, it is important for BNP Paribas to delve further into this subject: an excessive dividend policy can call into question the company’s ability for long-term development (jeopardising the means to invest in expansion or innovation) and also undermine the necessary cohesion between the different stakeholders (shareholders and employees, in particular). A good balance in the distribution of the added value seems necessary so as not to compromise the company’s long-term strategy.
Dividend policy and the distribution of added value
Issues of dividend policy and the distribution of added value require the definition of the governance model to be followed. Founded on agency theory 1 , this assumes that the company’s primary objective is to maximise value for its shareholders. In practice, this is the predominant model: although shareholders have the possibility to speak out about dividend distribution 2 , they generally approve it to a large extent, with approval rates even exceeding 99% 3 in extreme cases. Shareholders can also propose resolutions asking for a different distribution rate. But generally speaking, the purpose is to claim an increase in the dividend in the context of shareholder activism practices 4 , which favour the short term maximisation of shareholder returns.
We believe that the most suitable approach should be closer to the so-called double convergence 5 model: that of a company with multiple objectives and which seeks the
maximisation of shareholder profit, while also acting in the interests of the other stakeholders (employees, but also customers, suppliers, governments, creditors 6 , etc.) and thereby aiming to find a form of sustainable balance. We consider that this equilibrium involves seeking a balanced distribution of added value between shareholders, managers and employees. As an investor, we have a critical role to play in such a policy.
The BNP Paribas Investment Partners approach to dividend policy
Our approach calling for a reasonable distribution policy firstly translates into a detailed voting policy in terms of the circumstances which may lead to a resolution being supported or rejected. We do not, therefore, support a dividend which calls into question the company’s investment capabilities or which is made at the expense of the remuneration of the other stakeholders. One of the indicators used is that of the distribution rate, which must be reasonable.
Through shareholder engagement with the issuers, BNP Paribas Investment Partners also seeks to improve the long-term performance of our shareholdings by encouraging the best governance practices. The communication of our voting policy and the dialogue on the dividend policy demonstrate our willingness to influence corporate practices in terms of distribution levels.
However, the importance of the asset manager’s role as a responsible investor also lies in the investment solutions it offers to clients.
The responsible dividend
BNP Paribas Investment Partners has a long-standing experience in strategies which promote investing in high-dividend stocks, so we wanted to offer clients this approach, while Partners integrating the ‘responsible dividend’ concept.
To define the universe of eligible companies for the responsible high-dividend theme, we have made sure that we address the following questions:
Is the company the subject of serious and repeated controversies? Is it concerned about environmental, social and governance issues?
Under our responsible investment policy, we ensure that we invest in companies that respect the 10 principles of the United Nations Global Compact. In parallel, we apply sector policies to control our investments in sensitive sectors. By building on the results of the extra-financial analysis of an issuer’s ESG practices, we make sure we exclude from our investment universe any issuers with the worst ESG practices in their sector
Does the company’s business have a negative social impact?
We believe it is important to look at the company’s main business activity. Indeed, sectors
such as tobacco have a particularly high average of distribution rates. Yet it is crucial that we do not ignore the social cost of these activities. For this reason, a responsible dividend must not be paid to the detriment of the community as a whole. We therefore strive to exclude companies generating distributable income through activities with a negative social impact.
Does the dividend policy jeopardise the future development of the company, particularly its capacity to invest or innovate?
Regarding long-term management, shareholders want to invest in companies that are able to develop successfully over the long term and in particular having the means to invest to expand or innovate. For this reason, we feel it is important to ensure that the dividend policy does not weaken the company’s future prospects. If that were the case, excessive dividends would run against the interests of stakeholders such as the employees, but also those of long-term investors.
And so within our strategy which aims to invest in equities offering a responsible dividend, we exclude from our investments any companies which adopt a generous dividend policy even though they have recorded a loss for two consecutive years. Similarly, a company which decides to distribute income to shareholders beyond the amount of the annual profit does not, in our view, follow a responsible dividend policy.
Lastly, isn’t a high distribution rate for shareholders decided on to the detriment of other stakeholders of the company, particularly the employees?
As a responsible investor, we think it is important to analyse the distribution of the added value generated within a company. In this way, we believe that if the profit distribution rate increases considerably faster than the remuneration of employees, this may call into question the cohesion which is essential for the proper functioning of the company. The investor must ensure that all those involved in the success of the company, and therefore the success of the investment, are mobilised, particularly though a responsible dividend policy.
Conclusion
Investors committed to offering their clients responsible, long-term management should address the subject of shareholder remuneration, just as they do executive remuneration. At BNP Paribas Investment Partners, this is reflected in our new European equity strategy, which wholeheartedly follows the ‘responsible dividend’ approach. This concept has been integrated into our voting policy and the discussions we hold with equity issuers for quite some time. We consider that greater emphasis should be placed in the future on the more general subject of the fair distribution of added value within the company. This is not only in the interest of stakeholders such as employees, but also shareholders who are eagerly searching for yield in the long term.
