Yahoo Finance Investors Threaten Revolt Over Dividend Cuts
Company directors who preside over sharp dividend cuts after the appointment of a new chief executive face losing support for their re-election, according to a warning from the City's most influential investor group.
Sky News has obtained a letter sent on Friday by the Investment Association (IA (KOSDAQ: 038880.KQ - news) ) to the chairs of all FTSE-350 companies which urges directors to be more vigilant in assessing the ongoing profitability of their businesses.
The letter follows growing concern among City institutions - highlighted by Sky News last July - about the practice of 'kitchen-sinking', where a new boss cuts profit expectations and dividends soon after their arrival.
Companies including Barclays (LSE: BARC.L - news) , Centrica (LSE: CNA.L - news) and Tesco (Xetra: 852647 - news) have all slashed payouts to shareholders under new chief executives since 2014, with directors' pay plans often recalibrated to make future earnings targets more easily attainable.
In the case of Barclays, Jes Staley, the bank's new boss, told shareholders that its dividend would be halved in 2016 and 2017 despite an earlier pledge from the chairman, John McFarlane, that no such reduction would take place.
"In the last year, we have seen numerous examples of companies where new management have been appointed and within months the value of the assets being written down and future profit expectations being scaled back significantly," Andrew Ninian, the IA director who oversees corporate governance, wrote in the letter to chairmen.
"In many cases these impairments have impacted on the capital strength of the balance sheet and have led to a cut in the dividend.
"Often the reasons for rebasing expectations have been evident for some time, but previous management had chosen to ignore them and even increase the dividend in the face of these long-term challenges."
Mr Ninian said this highlighted "insufficient oversight on the part of independent directors and the audit committee" and warned that the IA's voting advisory service would urge investors to evaluate whether non-executive board members at relevant companies should be re-elected.
"We consider that the directors should be assessing the likely future profitability of the business and the valuation of its assets on an ongoing basis.
"If the prospects of the business are presented as being fundamentally different following the appointment of new management, leading to the revaluation of assets and a cut in the dividend, then it raises questions about the board’s oversight of the previous management and why these issues have not been addressed earlier," Mr Ninian wrote.
He said the IA's new policy would come into effect for AGMs in August, meaning that it would not be applied to the majority of this year's FTSE-350 shareholder votes.
The IA's warning comes amid a fractious AGM season, during which blue-chip firms including BP, Ladbrokes (LSE: LAD.L - news) , Shire (Xetra: S7E.DE - news) and Weir Group (Other OTC: WEIGY - news) have seen huge revolts over executive pay.
The IA's members manage trillions of pounds of assets and the voting advice of its IVIS service carries substantial weight among institutional investors.
Mr Ninian's letter did not single out specific companies, but sources pointed to Centrica, the owner of British Gas, Rolls Royce (LSE: RR.L - news) and Serco among the other blue-chip companies which had 'kitchen-sinked' their numbers in the last two years, angering investors (Other OTC: UBGXF - news) .
