Dividend Policy and Corporate Governance

Dividend Policy

• Retention Rate (RR) is calculated as 1 minus the Payout Rate.
• Firms are reluctant to cut dividends.
• Higher dividends mean less internal cash for investment.
• Dividends are not the only way to distribute cash; stock repurchases are an alternative.
• Stock repurchases are popular due to tax advantages and potential shareholder preferences.
• Dividend payout measures the percentage of earnings paid out as dividends.
• Payout Rate = Dividends / Net Income.
• A dividend cut is often a sign of trouble.
• Tax shield and dividend taxes affect dividend policy.
• Dividend Yield = Dividends / Equity Value; measures return from dividends alone.
• In a perfect market with no taxes, dividend policy is irrelevant.

Corporate Governance

• Corporate Governance is a system of rules, practices, and processes guiding a firm's direction and control.
• Corporate Governance balances interests of shareholders, management, customers, and the community.
• Board of Directors' roles:
  • Selecting, monitoring, evaluating, and compensating senior management.
  • Ensuring adequate management succession planning.
  • Reviewing and approving significant corporate actions, operating plans, budgets, and financial statements.
  • Monitoring corporate performance, financial controls, ethical standards, and legal compliance.
  • Overseeing enterprise risk management and shareholder, employee, and community relations.
• Chairman's role:
  • Presiding officer of the board.
  • May also be the CEO.
  • Chosen by other board members.
  • Ensures shareholder duties are fulfilled.
  • Acts as a link between the board and upper management.
  • Company's leading representative to the outside world.
• Independent Director: a director with no material or pecuniary relationship with the company.
• 62% of US boards are comprised of independent directors.
• NYSE and NASDAQ require more than 50% independent directors on boards.
• Independent oversight from independent directors is not guaranteed.
• CEOs may influence independent directors.
• Executive Committee: authorized to make quick decisions between regular meetings.
• Audit Committee: typically meets seasonally, often tied to the end of the fiscal year.
• Governance Committee: responsible for board recruitment and assessment.
• Finance Committee: handles the annual budget.
• Program Committee: oversees long-range planning.

Factors Affecting Board Structure

• Diversified firms often have larger, more independent boards.
• Firms with higher monitoring costs tend to have larger boards.
• Firms with influential CEOs may have boards with less independence.
• Small firms typically don't separate ownership from control; as size increases, a separation naturally arises, potentially creating problems.

Explore the critical concepts surrounding dividend policy and corporate governance in this quiz. Understand key metrics such as retention rate, payout rate, and dividend yield, alongside the importance of maintaining effective governance in firms. Test your knowledge on the impact of dividends and governance on corporate performance.