Dividend Limitation (Exchange of Letters) (Hansard, 24 February 1949)

§ 24 Sir S. Cripps

Yes. Hon. Members will, I am sure, be glad to read the appended exchange of letters between the Federation of British Industries, the316W Association of British Chambers of Commerce, the National Union of Manufacturers and myself. Treasury Chambers, Great George Street, S.W.1. 28th January, 1949. MY DEAR SIR FREDERICK. You wrote to me on the 12th March, 1948, telling me that you had written to the Chairmen of some 580 of the largest industrial companies in the country asking whether they would give an undertaking that they would decide at once not to recommend their shareholders to declare in the next year a larger dividend than they had declared in the last twelve months, and you told me of the very satisfactory response you had had from the Chairmen. I appreciate the very substantial range over which industrial companies have limited their dividends during the past twelve months in fulfilment of their undertaking. Their cooperation has been most valuable. The policy expressed in the White Paper on Personal Incomes, Costs and Prices remains as vital to our conomic stability as it was at the time the White Paper was issued, and I hope that you will be able to assure me that as regards dividend limitation the co-operation I have had from industry will continue after the expiry of the year to which your letter related.

Yours sincerely,

(signed) R. STAFFORD CRIPPS.

SIR FREDERICK BAIN, M.C.

Federation of British Industries,

21, Tothill Street,

London, S.W.1.

rd February, 1949.

DEAR CHANCELLOR,

On 28th January you addressed a letter to the President of the Federation of British Industries on the subject of dividend policy. On this matter our three organisations have been acting together and we send you accordingly this joint reply.

We appreciate the reference in your letter to the value of the co-operation which industry has given you in the last year on this point.

On receipt of your letter Sir Frederick Bain decided to ascertain, by means of a private and personal letter, the views of the Chairmen of 504 industrial companies.

The replies so far received cover 438 industrial companies including public companies with over £900,000,000 issued capital. Of these, 409 are almost equally divided, both in numbers and in size, between those prepared to give an undertaking in the same terms as last year and those willing to continue for the next 12 months a policy of moderation and restraint, implying by these terms either no increase in fact or at most only a very slight increase in distributed profits. Of the rest 18 lay down conditions which make it difficult to classify them. Only 11 have sent replies of a negative 317W character. Therefore, the overwhelming majority indicate a positive response to your request.

There is thus a genuine appreciation of the need to avoid action which directly or indirectly stimulates inflation and a general intention, in existing circumstances, to continue the policy of moderation and restraint in the distribution of profits. The replies give so clear an indication of the views and intentions of industrial companies that we can give you an assurance of industry's co-operation for one more year in avoiding any general increase in the level of dividends. Our respective Councils are therefore sending copies of this correspondence to all their members, and are recommending that in the matter of distribution of profits a policy of restraint should continue to be observed for one more year. It is, of course, recognised that there will be exceptional cases, but in general it is clear that any increases justified by exceptional cases will not outweigh the cases where some reduction in distribution is made.

In conveying this to you we must point out that there is a strong objection in principle felt by many to the renewal of a rigid formula such as was adopted last year. Rigidity creates anomalies and inequities. There may well be cases where full provision has been made for all foreseeable liabilities and increased productivity and expansion of business amply justify some increase in dividend. To prevent such action, justified by the criteria laid down in the White Paper, would unreasonably undermine the enterprise and improvement in efficiency which are more than ever necessary today, and would create unnecessary hardship for shareholders, many of whom are of limited means and are among those hardest hit by the cost of living. Nevertheless, the general effect will be one of continued stabilisation in the level of distributed profits during the next 12 months.

In giving you the assurance above we must make it abundantly clear that industry feels very strongly on the following points:

(1) That the recommendation which our three bodies made last year was based on the assumption that Government expenditure would be reduced as an essential part of the disinflationary policy; this has not been achieved and it is vital for the reduction of costs, the increase of competitive power and the health of our national economy that it be achieved. To curb inflation cannot be the work of any single element in the State, but the most powerful single factor in reducing inflationary pressure must be the reduction of public expenditure.
(2) That the voluntary limitation of dividends was accepted on the implicit understanding that wages would be generally stabilised; in fact, although large and general increases have been restrained, during the period March to December, 1948, higher wage rates have been granted or awarded to the extent of £1,660,000 per week, affecting nearly 7,000,000 workpeople, and extensive' new claims are now being advanced: the effective observance of a policy of restraint by the Trade Unions must be one of the most important justifications for requesting a similar policy in regard to dividends.
(3) That restraint in the distribution of profits goes hand-in-hand with our representations on corporate taxation, since such alleviation would make more effective the provision by industry from its own resources of reserves to meet the heavy liabilities of replacement costs.
(4) That while Stock Exchange values are not in principle a reasonable basis of compensation for the shareholders of companies whose assets are taken over by the State, the adoption of this basis with the addition of dividend limitation takes an unfair advantage of an entirely unreal factor in the determination of market values of Ordinary Shares.
(5) That the aggregate amount of distributed corporate profits after tax is equivalent to less than 4 per cent. of the National income, so any conceivable changes in its level could have only a very slight direct effect on inflation.
(6) That any kind of artificial restriction which leads to rigidity in dividend policy cannot be justified except possibly as a temporary expedient in exceptional circumstances, and its perpetuation would inevitably act as a disincentive to enterprise, efficiency and the investment of new capital, and would therefore be against the national interests.

Yours sincerely,

(Signed) FREDERICK BAIN,

President, Federation of British Industries.

JOHN MCLEAN,

President, Association of British Chambers of Commerce.

PATRICK HANNON,

President, National Union of Manufacturers.

The Right. Honourable

Sir STAFFORD CRIPPS, K.C., M.P.,

Treasury Chambers, S.W.1.

Treasury Chambers,

Great George Street, S.W.1.

th February, 1949.

MY DEAR SIR FREDERICK,

I thank you for your letter of 23rd February, written on behalf of the Association of British Chambers of Commerce and the National Union of Manufacturers as well as the Federation of British Industries, and I note your joint assurance of Industry's co-operation for one year more in avoiding any general increase in the level of dividends.

I am glad that you have been able to give this assurance, the carrying out of which I shall of course follow with keen interest, in the expectation that it will relieve me from the necessity of presenting any legislation to Parliament on this subject matter, at any rate during the present year.

I note the points raised in the latter part of your letter, to all of which I will, of course, give careful consideration.

Yours very sincerely,

(Signed) R. STAFFORD CRIPPS.

SIR FREDERICK BAIN, M.C.