XI

BONUS SHARES

July, 1918

A Deluge of Bonus Shares—­The Effect on the Market—­A Problem in
Financial Psychology—­The Capitalisation of Reserves—­The Stock
Exchange View—­The Issue of Bonus-carrying Shares—­The Case of the
A.B.C.—­A Wiser Variation from Canada—­Bonus Shares on Flotation—­An
American Device—­Midwife or Doctor?—­The Good and Bad Points of Both
Systems.

Of the many kinds of Bonus shares, the one which has lately been most prominent in the public eye is that which is produced by the capitalisation of a reserve fund.  There has lately been a perfect epidemic of this kind of Bonus share, which is almost as plentiful as the caterpillars in the oak trees and the green fly on the allotments.  The reason for this outburst is apparently the anxiety which the directors of many prosperous industrial companies feel lest the high dividends which good management and sound finance in the past have enabled them to pay should lay them open to misunderstanding and attack by well-meaning people who think that it is a crime for a company to earn more than a certain percentage on its capital.

This explanation was very frankly given by the directors of Brunner, Mond and Company, when they lately capitalised part of their reserves.  The company, they stated, has for many years paid a dividend on its Ordinary shares of 27-1/2 per cent., and “the directors feel that there is a widespread impression that this is the rate of profit earned on the total of the capital invested, and consequently that the company is making an unfair profit out of its customers and the labour it employs.  This is by no means the case.”  It is a lamentable proof of the backward state of the economic education of this country that it should be necessary for well-financed and prosperous concerns to take steps to make it quite clear to the public that they are not earning more than they appear to be.  In a well-educated community it would be perceived at once that it is the well-financed and prosperous companies which improve production in the interests of their shareholders, their workmen, and the public; that the price which the public pays for a commodity is ultimately the price at which the worst financed and worst managed companies can just manage to keep alive; that the higher profits earned by the better companies are not wrung out of the pockets of the community, or their workmen, but are the result of good management and good finance; and that the more the good companies are encouraged to go ahead and drive the bad ones out of existence, the better will the community be served, and the better will be the chance of the workmen to get good wages.  These platitudes are of course, only true in a state of free competition.  If there is anything like monopoly the public and the workers are fully justified in being suspicious and examining the source from which high dividends are produced.