In an environment of increased volatility and significant government involvement in the economy, a company's dividend policy becomes an indicator of corporate governance and a reflection of the company's strategic priorities.
The Paradox of Regulation and Discretion
Despite the procedural strictness of Russian legislation, it leaves a significant degree of freedom (discretion) for joint-stock companies (JSCs) regarding the very nature of dividend payments.
This legal structure creates a paradox:
The practice of recent years, formed primarily by state-controlled companies, clearly illustrates why investors are forced to perceive dividend policies as indicative intentions rather than a binding quasi-contract. For example,
At the same time, recent news in the energy sector indicates that the development vector of state-owned companies is not toward the waiver/cancellation of dividend policies, but rather toward the use of dividends due to the state shareholder for investment purposes.
Ambiguous Investor Perceptions
Russian investors take dividend policy very seriously, often considering it a key factor in investment decisions. However, this perception is ambivalent:
Investors certainly seek stability and use advanced tools such as the Dividend Stability Index (DSI) to assess attractiveness. However, the actual reliability of dividend policies in Russia, especially in sectors with a high fiscal burden, is significantly reduced. This is due to the fact that the policy can easily be overturned in favor of a company's strategic capital expenditures or as a result of a sharp change in the tax burden, as there are no strict requirements for the adoption and content of dividend policies.
Organizations are recommended to approve a dividend policy in accordance with Section 30 of the Corporate Governance Code (CGC). Any change to a dividend policy must be accompanied by a detailed explanation to shareholders of the reasons and prerequisites for such a change. A change in dividend policy that is not justified by the needs of the company's development or the overall economic situation, such as a transfer of corporate control, cannot be considered good corporate practice.
Based on paragraph 31 of the Tax Code of Ukraine, in order to ensure transparency in the mechanism for determining the amount of dividends and their payment, the Regulation recommends defining rules governing the procedure for determining the portion of net profit allocated for dividend payments, the conditions under which dividends are declared, the procedure for calculating the amount of dividends on shares for which the amount of dividends is not specified in the company's charter, and the minimum amount of dividends on the company's shares of different categories (types).
For example, the Moscow Exchange's Methodological Recommendations for the Preparation and Implementation of Dividend Policies by Public Companies indicate that an indication of the company's intention to pay dividends at a certain frequency is a necessary element of the dividend policy (paragraph 3). It is recommended that the dividend policy include the company's obligation to provide shareholders with detailed explanations of the reasons and prerequisites for changes to the dividend policy (in the event of significant changes) (paragraph 10.2).
Therefore, when a dividend policy is vaguely formulated (for example, containing phrases such as "strive for...," "depending on circumstances," or "up to 30% of net profit"), it cannot be considered a firm commitment by the company. Such vagueness provides management (only to whom, strictly speaking, such a policy applies) and controlling shareholders with significant operational freedom and flexibility in making profit distribution decisions, allowing them to adapt to changing market conditions or investment needs.
Investors aware of such vagueness initially assume increased risk, understanding that dividend payments are within the discretion of management.
A completely different situation arises when a dividend policy is clearly formulated and disclosed (for example, "the company undertakes to pay out 50% of net profit under IFRS, provided that..."). In this case, the policy takes on the character of a quasi-commitment from management to shareholders and the market.
It is also important to consider that in some legal systems, and to some extent in Russian practice (especially in the context of good faith and reasonableness of actions), a controlling shareholder (unlike a typical minority shareholder) also has fiduciary duties to minority shareholders and the company itself. Having a clear, publicly disclosed dividend policy significantly strengthens these duties. Unjustified failure to adhere to such a policy, especially in the absence of objective economic reasons, may be considered an abuse of rights, violating good faith and the principle of fair play in relation to minority shareholders.
However, the above-described approach to the significance of dividend policy and liability for failure to comply with its provisions cannot be the same for public and non-public companies.
Thus, for a public joint-stock company, a clearly formulated dividend policy is a serious public promise, the violation of which should potentially entail liability for misrepresentation under both public and private regulation. For a non-public joint-stock company, although the principle of good faith also applies, the consequences of violating the policy generally should not extend beyond civil liability.
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It seems that a document such as a dividend policy should serve as a guarantee; otherwise, what is its purpose? Establishing uniform approaches to the formation and implementation of a dividend policy by company management, primarily for public companies, will make profit distribution procedures more transparent and systematically improve the level of corporate governance.
Moreover, a draft law prepared by the Russian Government amending the Federal Law "On Joint-Stock Companies" stipulates that public companies must approve a dividend policy and, in the event of deviation from it, the public company is obligated to explain to the general meeting of shareholders the reasons for allocating a portion of its net profit for other purposes.
A document officially adopted and published by a company cannot be easily amended or unilaterally revoked, otherwise it loses its primary economic function – reducing information asymmetry and managing investor expectations.
Under current conditions, dividend policy is seen as little more than a declaration of intent, valid only until the first strategic or fiscal conflict of interest arises. This creates a systemic trust problem:
As long as dividend policy remains a purely discretionary tool, the market will develop incorrect expectations among investors who rely on it at the time of purchase. The destruction of trust in the financial market can lead to complex systemic problems. Everyone must understand that dividend policy is one of the factors upon which less protected minority shareholders make investment decisions.
The Paradox of Regulation and Discretion
Despite the procedural strictness of Russian legislation, it leaves a significant degree of freedom (discretion) for joint-stock companies (JSCs) regarding the very nature of dividend payments.
This legal structure creates a paradox:
- The payment procedure (deadlines, regulations) is protected and regulated by law, ensuring the timely transfer of funds after the announcement;
- The essence (the guarantee of the fact and amount of the announced payment) remains entirely discretionary. It depends on the will of management/controlling shareholders or the current strategic needs of the company.
The practice of recent years, formed primarily by state-controlled companies, clearly illustrates why investors are forced to perceive dividend policies as indicative intentions rather than a binding quasi-contract. For example,
- Rosseti: The Russian President's order (2023) stipulates the waiver of dividend payments for the 2022–2026 period to support the company;
- RusHydro: Approval of support measures, including the allocation of dividends for investment.
At the same time, recent news in the energy sector indicates that the development vector of state-owned companies is not toward the waiver/cancellation of dividend policies, but rather toward the use of dividends due to the state shareholder for investment purposes.
Ambiguous Investor Perceptions
Russian investors take dividend policy very seriously, often considering it a key factor in investment decisions. However, this perception is ambivalent:
- On the one hand, there is high trust and strong expectations for stable payouts.
- On the other hand, investors regularly face disappointment due to frequent cancellations of promised payouts.
Investors certainly seek stability and use advanced tools such as the Dividend Stability Index (DSI) to assess attractiveness. However, the actual reliability of dividend policies in Russia, especially in sectors with a high fiscal burden, is significantly reduced. This is due to the fact that the policy can easily be overturned in favor of a company's strategic capital expenditures or as a result of a sharp change in the tax burden, as there are no strict requirements for the adoption and content of dividend policies.
Organizations are recommended to approve a dividend policy in accordance with Section 30 of the Corporate Governance Code (CGC). Any change to a dividend policy must be accompanied by a detailed explanation to shareholders of the reasons and prerequisites for such a change. A change in dividend policy that is not justified by the needs of the company's development or the overall economic situation, such as a transfer of corporate control, cannot be considered good corporate practice.
Based on paragraph 31 of the Tax Code of Ukraine, in order to ensure transparency in the mechanism for determining the amount of dividends and their payment, the Regulation recommends defining rules governing the procedure for determining the portion of net profit allocated for dividend payments, the conditions under which dividends are declared, the procedure for calculating the amount of dividends on shares for which the amount of dividends is not specified in the company's charter, and the minimum amount of dividends on the company's shares of different categories (types).
For example, the Moscow Exchange's Methodological Recommendations for the Preparation and Implementation of Dividend Policies by Public Companies indicate that an indication of the company's intention to pay dividends at a certain frequency is a necessary element of the dividend policy (paragraph 3). It is recommended that the dividend policy include the company's obligation to provide shareholders with detailed explanations of the reasons and prerequisites for changes to the dividend policy (in the event of significant changes) (paragraph 10.2).
Therefore, when a dividend policy is vaguely formulated (for example, containing phrases such as "strive for...," "depending on circumstances," or "up to 30% of net profit"), it cannot be considered a firm commitment by the company. Such vagueness provides management (only to whom, strictly speaking, such a policy applies) and controlling shareholders with significant operational freedom and flexibility in making profit distribution decisions, allowing them to adapt to changing market conditions or investment needs.
Investors aware of such vagueness initially assume increased risk, understanding that dividend payments are within the discretion of management.
A completely different situation arises when a dividend policy is clearly formulated and disclosed (for example, "the company undertakes to pay out 50% of net profit under IFRS, provided that..."). In this case, the policy takes on the character of a quasi-commitment from management to shareholders and the market.
It is also important to consider that in some legal systems, and to some extent in Russian practice (especially in the context of good faith and reasonableness of actions), a controlling shareholder (unlike a typical minority shareholder) also has fiduciary duties to minority shareholders and the company itself. Having a clear, publicly disclosed dividend policy significantly strengthens these duties. Unjustified failure to adhere to such a policy, especially in the absence of objective economic reasons, may be considered an abuse of rights, violating good faith and the principle of fair play in relation to minority shareholders.
- Basis for investment decision: A clear policy becomes a fundamental factor upon which market participants base their decisions to purchase shares, forming their expectations regarding future cash flows and the company's value.
- Potential tortious liability: If a major shareholder or management, despite such a clear policy, intentionally or in bad faith decides not to pay dividends, misleading investors about the company's financial position or intentions, this may be classified as a tort. Furthermore, depending on the circumstances, such actions may fall under provisions on market manipulation or breach of trust, and may also be considered as misleading under the Russian Criminal Code (for example, the act may be classified under Article 159 of the Russian Criminal Code upon proof of the intent to enrich or cause harm).
However, the above-described approach to the significance of dividend policy and liability for failure to comply with its provisions cannot be the same for public and non-public companies.
Thus, for a public joint-stock company, a clearly formulated dividend policy is a serious public promise, the violation of which should potentially entail liability for misrepresentation under both public and private regulation. For a non-public joint-stock company, although the principle of good faith also applies, the consequences of violating the policy generally should not extend beyond civil liability.
***
It seems that a document such as a dividend policy should serve as a guarantee; otherwise, what is its purpose? Establishing uniform approaches to the formation and implementation of a dividend policy by company management, primarily for public companies, will make profit distribution procedures more transparent and systematically improve the level of corporate governance.
Moreover, a draft law prepared by the Russian Government amending the Federal Law "On Joint-Stock Companies" stipulates that public companies must approve a dividend policy and, in the event of deviation from it, the public company is obligated to explain to the general meeting of shareholders the reasons for allocating a portion of its net profit for other purposes.
A document officially adopted and published by a company cannot be easily amended or unilaterally revoked, otherwise it loses its primary economic function – reducing information asymmetry and managing investor expectations.
Under current conditions, dividend policy is seen as little more than a declaration of intent, valid only until the first strategic or fiscal conflict of interest arises. This creates a systemic trust problem:
- For the company: the lack of guarantees makes its shares less attractive to long-term, institutional investors who demand predictability of cash flows. The valuation discount caused by this risk becomes permanent.
- For the regulator and the market: if public policy lacks legal force, then investors' use of advanced tools (like DSI) becomes meaningless. In effect, the market is forced to rely not on announced rules, but on political and macroeconomic forecasts.
As long as dividend policy remains a purely discretionary tool, the market will develop incorrect expectations among investors who rely on it at the time of purchase. The destruction of trust in the financial market can lead to complex systemic problems. Everyone must understand that dividend policy is one of the factors upon which less protected minority shareholders make investment decisions.