Tap corporate cash piles to get the economy growing again

There are many things we could no doubt learn from South Korea. How to create an electronics industry that can take on Apple, for example. How to sustain a manufacturing economy even as wages reach developed-world levels, and keep it going without relying on mass immigration for cheap labour. And perhaps now, how to unlock corporate cash piles – and help boost the stock market at the same time.

In the last month, the South Koreans have pushed through tax incentives for companies to start raising their dividends. Now the need for such measures is especially strong in Korea, where companies are notoriously mean with their money, paying out less cash to the actual owners of the business than even the Japanese.

Nonetheless, when you look at the UK, Europe and America, you’ll also see too many big corporations sitting on vast piles of cash that they are reluctant to invest. If these corporations could be encouraged to hand the cash back to their shareholders, then it could start to circulate through the economy again.

In the past, it has probably been easier to get Nigel Farage to open up his back garden to a group of Romanian gypsies than to get one of South Korea’s giant manufacturing conglomerates to pay out any cash to its shareholders.

Big Korean companies, including the likes of Samsung, paid out just 21% of net income in dividends last year. That compares with 30% for Japan, 34% for America, and a global average of 40%. The net result has been an index with one of the lowest yields in the world. Korea’s benchmark Kospi index yields just 1.1%, compared to 3.83% for the FTSE.

There are plenty of aggressive, expanding companies in Korea, but as a shareholder there has always been a question mark over whether any of the money they made would make its way back to you.

Now that may be about to change. From next year, Korea’s recently installed finance minister, Choi Kyung-hwan, plans to offer tax breaks for companies that dip in to their cash piles to increase either wages or dividends, as well as introducing a special levy on newly stockpiled cash if it is not used after three years.

The plan has triggered a big rise in the stock market, sending the Kospi to a three-year high, on expectations that companies will pay out more to their shareholders.

It remains to be seen whether it works, of course. Korean companies might simply hang on to their money, and pay a bit extra in tax. But if it does work, and if the economy improves as a result, then Kyung-hwan may have created a policy that deserves to be imitated around the world.

After all, it is not just in Korea that companies are hoarding cash. In the UK, non-financial companies have built up £671bn in reserves compared to £240bn in 2002. In America, non-financial companies are sitting on a massive $1.6trn, again a record high. That was up 12% in the past year alone, a rate of growth far faster than the economy as a whole.

In many cases there may well be good reasons for hoarding cash. Chief executives may simply be deciding that the global economy remains too weak to invest aggressively. They can’t be confident that the demand will be there if they ramp up production.

Or they might justifiably be worried that the banks are no longer willing to support them, or won’t be able to support them if there is another crisis, so they would prefer to have their own money on deposit in case they need it later on.

Or they may simply be waiting for the right moment to start spending – storing up some cash to launch a takeover bid, for example.

Yet, while there may be good reasons for any individual company to store cash, in aggregate this is going to hurt the economy. Most of that money is just sitting in the bank. If that was paid out to shareholders, then they would spend it, or else invest it in smaller, more ambitious companies that need it to expand. Either way, it would do more for the economy than it would sitting on deposit.

Of course, it would be better if shareholders pressured company boards to do precisely that. If a company is sitting on a few hundred million, and does not appear to know what to do with it, the shareholders could always force a vote at the annual general meeting to push through a special dividend. Or, at a more extreme level, they can support a corporate raider who promises to pay out the cash to shareholders.

And yet, as we all know, in the real world that is not going to happen. Shareholders have proved very bad at disciplining companies, whether it is on executive pay, on takeovers, or, indeed, on cash piles.

A mixture of tax breaks and penalties, as the Koreans are trying, may prove the most effective way to get that money back in to circulation again. It would boost spending, and it would boost the stock market as well, which in turn would increase confidence. If it works in Korea, it would certainly be worth trying in other countries as well.


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