Question: You are a member of the board of directors of
You are a member of the board of directors of a large company that has been in business for more than 100 years. The company is proud of the fact that it has paid dividends every year that it has been in business. Because of this stability, many retired people have invested large portions of their savings in the company’s common stock. Unfortunately, the company has struggled for the past few years as it tries to introduce new products and is considering not paying a dividend this year. The president wants to skip the dividend in order to have more cash to invest in product development, saying, “If we don’t invest this money now, we won’t get these products to market in time to save the company. I don’t want to risk thousands of jobs.” One of the most senior board members speaks next: “If we don’t pay the dividend, thousands of retirees will be thrown into financial distress. Even if you don’t care about them, you have to recognize our stock price will crash when they all sell.” The company treasurer proposes this alternative: “Let’s skip the cash dividend and pay a stock dividend. We can still say we’ve had a dividend every year.” The entire board now turns to you for your opinion. What should the company do?
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