Dividend Policy and the Meaning of Life
(Or, At Least, Your Business)
Our multi-generation family business clients ask us about dividend policy more often than any other topic. This isn’t surprising, since returns to family business shareholders come in only two forms: current income from dividends and capital appreciation. For many shareholders, capital appreciation is what makes them wealthy, but current income is what makes them feel wealthy.
In other words, dividends are the most transparent expression of what the family business means to the family economically. Knowing what the business “means” to the family is essential for promoting positive shareholder engagement, family harmony, and sustainability.
The business may “mean” different things to the family at different times (or, to different members of the family at the same time). In our experience, there are four broad “meanings” that a family business can have.
These “meanings” are not mutually exclusive, but one will usually predominate at a given time. Importantly, the “meaning” of the business has implications for dividend policy.
- Meaning #1 - The family business is an economic growth engine for future generations. For some families, the business is perceived as a vehicle for increasing per capita family wealth over time. For these families, dividends are likely to take a backseat to reinvestment in the business needed to fuel the growth required to keep pace with the biological growth of the family.
- Meaning #2 - The family business is a store of value for the family. For other families, the business is perceived as a means of capital preservation.
