FINANCE AND INVESTMENT
By NICHOLAS DAVENPORT JUST as bad news of labour unrest will depress the Stock Exchange, so good news from the Stock Exchange will depress Transport House. The reaction is so quick that one suspects a private telephone line between the two sancta. I was told this week—and I am quite prepared to believe it—that the unrest behind the current demands for higher wages stems not from resentment at the rise in the cost of living, for wage rates have followed pretty closely behind it, but from resentment at the rise in Stock Exchange prices, particularly when the rise has been induced by a bonus share issue. The suspected spending of a capital gain by a Stock Exchange bull seems to be a red rag to the T.U.C. bull. Ignorance is the cause of many a foolish action, but can the T.U.C. be so ignorant as to demand simultaneously an increase in industrial investment and • the imposition of all the devices which would work against that vestment, such as an increase in stamp uties on capital issues and transfers, a tatutory limitation of dividends and a tax n bonus issues ? Yet this is what it pro- oses to the Chancellor in its memorandum f unsolicited advice on the coming Budget. t has convinced itself that " companies have been making bonus issues as a device 'for increasing the amount of profits distri- buted while reducing the percentage rate of dividends." It refuses to believe that although bonus issues may have had that effect—if profits go on rising, but not otherwise—this is not their raison d'être. Bonus issues are made, I must repeat, to bring the issued share capital into line with the real capital employed. It is bad account- ing not to do so. And the reason why so many are being made today is that for o many years under Labour rule bad ecounting was enforced by the ban on bonus issues. So (with the ban removed) we have seen Imperial Chemical Industries capitalising £70/ millions, Courtaulds £24 millions, British American Tobacco nearly £12 millions, Ford Motor £9 millions, Associated Electrical Industries nearly £9 millions, Marks and Spencer £4+ millions, Associated Portland Cement £4 millions, English Electric over £3 / millions, Deben- hams £3 millions, and so on.
What Bonuses Do Not Do
The issue of these bonuses did not add, d could not have added, to the value of ese companies' assets or to their earning wer. It did not give the shareholders ything which they did not possess before.
n the contrary, it deprived them of some- ing—it deprived them of the future right have the reserves (representing past distributed profits) ever distributed in sh. By capitalising these undistributed rofits it netted or bagged them for all time or the company's business—and that is in e best interests of the employees as well as of the equity holders. No doubt these bonus issues induced a rise in the company's shares. That was either because they were in- trinsically undervalued in the market before, or because the market decided to discount an increase in the total cash distribution in the next accounting year. But if that increase comes about, it will not be on account of the capitalisation of the reserves ; it will
follow because the trading profits have increased. If the profits were to decline, it is more than likely that the cash distribu- tion would be•reduced. Are these simple facts really too complex for the T.U.C. to under- stand ?
The Ownership of the Reserves A correspondent who is more enlightened than the T.U.C. is willing to accept these facts but still feels uncertain about the ethics of the ownership of ploughed-back profits. Assuming, he says, that a company has always paid fair wages and salaries, has always met all other charges including the depreciation of its assets at replacement Cost, and at the same time has always paid an adequate return or risk premium on the equity capital, and yet has a substantial amount of profits undistributed and put to reserve, why should the ownership of these
reserves accrue wholly to the equity share- holders who have been adequately rewarded for the use of their risk capital ? Why should not part be distributed to the employees'! When Mr. Hugh Dalton was Chancellor of the Exchequer he thought that part should accrue to the State—no doubt for the privi- leges conferred by the State on joint stock enterprise by the Companies Act. So he imposed a 10 per cent. tax on bonus issues. That was understandable but did not work out as he expected because companies rather peevishly refrained from making bonus issues while the tax was in force. (Cripps removed it.). But apart from State claims, there is nothing to prevent a company passing a resolution at the shareholders' general meeting, if it wishes, to capitalise and distribute its unwanted reserves to its managers, workers and equity holders in any proportion it thinks fit. It is a matter of discretion—the initiative in which lies with the board of directors. But the legal ownership of the reserves by the holders of the equity stock cannot at law be questioned.
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