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Fair dividends
The balance between dividends and reinvestment
One in five business-owning families say there is conflict over how much profit should be reinvested in the business or paid out in dividends, according to the 2007/8 PricewaterhouseCoopers Family Business Survey. What is the nature of this conflict and what are the possible solutions?
To explore the nature of the conflict, let's look at the different views of three stakeholders in a family business:
1. The widow
Ellen is the widow of Frank who built up a family storage business. She has never had any management role but Frank left her 20% of the shares in his will. The dividends from those shares are her main source of income. She says, 'Each dollar in dividend is a way of fulfilling Frank's desire to provide for me. If the family care about me at all, they'll make sure that my dividends are as high as possible - it's what Frank would have wanted. I expect at least $5 a share paid out in dividends.'
2. The son
Jonas is Frank's son and is the CEO of the family business, which desperately needs capital for investment projects. He says, 'Each dollar in dividend is one dollar less to finance growth. If I pay out too much now, the business will be less able to pay for my retirement and children. I need to balance the needs of today with the opportunities of tomorrow. $4 a share seems reasonable.'
3. The non-family manager
Karen is Operations Director and has been with the business for two years. She says, 'Each dollar in dividend is one less dollar to raise the salaries of the managers who do all the hard work. The founder's family are sucking the lifeblood out of this business. When I ask for funding for a project or a raise in my salary, I'm always told that there's not enough money. I'm going to quit if the family keep taking out more money than the business can afford, which I calculate is a maximum of $2.50 a share.'
One in five families report conflict over dividends 
What are the solutions?
There is, of course, no single magic solution to the conflict over dividends compared to reinvestment of profits. There is always the potential for different perspectives between those who are owners but not managers (who may prefer a short-term return), and those who are both owners and managers (who are happier to reinvest in their business). Nevertheless here are three strategies that family businesses are using to help cope with the issue:
1. Set out a formal dividend policy
Some family businesses have written down a dividend policy that pays out according to profitability. This has the benefit of tackling the issue head on, rather than letting it fester and cause on-going resentment. In the example above, if Frank had written down a dividend policy, his widow would have had less leverage when arguing for higher dividends. She couldn't claim 'it's what Frank would have wanted' if Frank had set out a dividend policy that ensured a reasonable reinvestment of profits.
In the USA, more than one in three family businesses (35.6%) have a formal dividend policy, according to the 2007 Laird Norton Tyee Family Business Survey (FBS).
2. Encourage owners to diversify their income sources
Frank's widow relies almost completely on dividends from her late husband's business. This puts enormous pressure on the question of dividends - but this pressure could be removed at a stroke if she sold some or all of her share in the business. She could then reinvest the money wherever she chose, making it easier to achieve the income that she wanted. She would no longer feel angry about the 'low' (in her view) dividends authorised by her son.
Business owning families are often highly reliant on the business for their income. The FBS suggests that for over 90% of American business-owning families, there is little or no income diversification.
3. Provide a process for liquidating ownership value
Putting the idea of diversification into practice, it is helpful to have a clear process by which owners can take money out of the business. Half of American family businesses (50.3%) have a process that allows family members to liquidate their ownership value and leave the business.
The overall aim is for the family, the owners and the business to feel that their interests are recognised and at least partially met. In this way, each dollar in dividend no longer becomes a source of conflict, but a well-justified reward to those who wish to remain as owners.
In this issue
Yin and Yang
How siblings with opposite personalities can work together
Catch them young?
Involving children in the family business
Success factors
What helps family businesses to succeed?
Father-son rivalry
The story of GROHE AG