Stronger policies needed to push dividend payouts

Last Wednesday, the China Securities Regulator Commission (CSRC) unveiled new regulations aimed at encouraging listed companies to pay cash dividends to their shareholders by requiring these companies to create dividend payment plans and disclose how much they hand over in dividends to investors as part of their periodic financial reports.

For decades, critics have been blasting China's listed companies for their frequent refusal to issue dividends. According to statistics from the CSRC, 854 listed companies, or 39 percent of the firms trading on the mainland market, did not pay dividends in 2011; while 422 companies did not pay any dividends at all to shareholders from 2006 to 2010.

I think the CSRC's new regulations may not do much to change this situation, however, as these policies fail to take power away from executives and major stakeholders of listed companies, who ultimately decide whether to pay dividends or not to investors.

Currently, according to China's corporate and securities laws, executives and board members have the right to issue or withhold dividend payments based on the performance and development plans of their enterprises. Under current laws, the CSRC has no power to force listed companies to share profits with their investors; and as long as a publicly traded firm can deliver a reasonable explanation for why it elects not to pay dividends, it faces no penalties or censure from regulators.

But, as one might expect, decision makers at listed companies usually have little motivation to hand over a cut of their profits to shareholders.

In most cases, executives' salaries and annual bonuses typically hinge on the revenue and profits of their company, and most would rather reinvest their earnings in hopes of achieving higher returns in the future rather than paying dividends. Furthermore, rather than footing China's 20 percent tax on dividend payments, large stakeholders may find it more desirable to see corporate profits channeled back into the company as a way to bolster the value of their shares.

With incentives high and the law behind them, the heads of listed companies can always find some excuse to avoid paying dividends to smaller investors. They could easily claim, for example, that they intend to use their profits into a long-term expansion project which may take several years to complete. Whether this is true or not, investors and regulators would be hard pressed to determine.

To solve this problem, the government should amend its corporate laws to make it mandatory for companies with high profit margins or monopolistic positions to hand out dividends to all shareholders. Also, regulators should work to give small and individual investors more legal power to influence listed firms by, perhaps, introducing online voting to ensure they have a voice in the decision making processes of publicly traded firms.