Big investors and companies fall out

In the last recession of the early 1990s many companies privately thought they could not afford to maintain their dividends. But they did not dare hint to their shareholders that they were thinking about cutting dividends because such a suggestion, coming out of the blue, would risk destroying their relationship with the institutional investors, their reputation and their share price.

Anthony Hilton
Anthony Hilton

The solution, then, was to use a go-between who could gauge the real views of both sides. The reason I know about this was that it was me.

This idea came from a senior financial PR figure who was alarmed that his institutional and corporate clients could no longer communicate with each other.

This privately circulated report served as a guide to companies about what did and did not concern institutional investors. It provided a blueprint on how to frame arguments so as to get the point across with the minimum of bad feeling. Companies learned that although institutions said in public that dividends were sacrosanct, fund managers were quite prepared to accept a cut, provided it was a temporary response to difficult times. Institutions were surprised and alarmed to learn that companies were much more frightened of them than they had realised.

Until then, they had not been aware of the danger that boards might preserve the dividend, even if this could severely weaken the business for fear of upsetting the shareholders. The common ground mapped out between them was a working assumption that dividend payments would be restored as soon as possible once the business got back on an even keel.

On that basis institutions were prepared to share the pain. Something similar is needed now. Companies may not realise it, but institutions are getting more and more fed up with them - over pay, over constant strategy changes and over the arbitrary way in which shareholders' interests are ignored. It may not need another covert report but both sides need to start talking again - but to make sure they are as tuned to receive as they are to transmit.

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