Fri, May 25, 2001 page17

• Dividend payouts spur controversy

  SHARING THE WEALTH By paying employees with stocks, some companies are said to be robbing other shareholders by diluting the value of their holdings

  • By Dan Nystedt / STAFF REPORTER
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  For years, Taiwanese companies have paid employee bonuses through stock dividends in Taiwan, but a growing number of investors are beginning to question the practice -- most recently at an shareholder meeting held by Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), one of Taiwan's leading chip firms.

  Some investors argue that since this bonus is paid out through simply printing new stock shares, the employee bonus is paid for by the shareholders and not by the company.

  Most companies in Taiwan pay stock dividends instead of cash, putting all cash profits back into growing the company. In essence, the company splits the stock, printing new shares and giving them out to existing shareholders based on how many they already own.

  Issuing new shares of stock is common worldwide, and many analysts liken it to cutting up a pizza. No matter how many pieces the pizza is sliced into, it's still the same size -- except in Taiwan.

  Here, the size actually changes. The employee bonus shares paid out at the time of the split dilute the price of each share.

  Take Winbond Electronics Corp (華邦電子) for example. The company's board of directors decided on a 19.5 percent stock dividend, and doled out 100 million bonus shares valued at NT$2.8 billion to its employees. Since the company is really just issuing new stock certificates -- slicing the same pizza up into smaller pieces -- the employee bonus is essentially paid for by diluting the shares of every stockholder.

  On May 14, the day before the 19.5 percent stock dividend was paid out, Winbond shares closed at NT$34.7. When the market opened the next day, the price reflected the fact a new chunk of Winbond shares existed.

  Without the employee bonus shares, the new price would have been NT$28.95, but instead, it was NT$28.3 per share to reflect the bonus. The result: NT$0.65 was shaved off each share to pay for Winbond's employee stock bonus.

  On average, each employee took home NT$819,283 from the split, but averages never show that company directors take home a larger chunk than the general staff.

  Winbond, Taiwan's top maker of DRAM memory chips, is not the only company doing this with their employee stock bonuses. The practice is common in Taiwan.

  Companies here argue the practice is necessary since government regulations do not allow firms to issue stock options. Without stock options, engineers and other high-tech firm employees would look for work elsewhere, since salaries in Taiwan tend to be low compared to those in the West and Japan.

  Mom-and-pop stock investors don't complain about the bonus share practice either, since share prices generally revert to their pre-dividend level. In a bull market, it usually does, but in today's bear market, this is not a sure thing. Winbond has already climbed back near its pre-stock dividend price, to NT$32.4 per share, yesterday's closing price.

  For the first time this year, however, foreign investors at TSMC's investor meeting did raise the issue, pointing out the company's proposed 40 percent stock dividend would pay employees 467.4 million bonus shares valued at NT$29.4 billion at investor's expense. Using a reference price of NT$90.5 per share for TSMC, the stock share bonus paid to employees would shave the value of each new share of outstanding TSMC stock by NT$1.795 per share, after it is adjusted for the stock split. The date of the TSMC stock dividend has not yet been decided.

  The government never raises the issue because, according to statements issued by the regulatory Securities and Futures Commission (證期會), all investors have the opportunity to vote and oppose stock bonuses during open shareholder meetings.

  While all stock-related decisions must be filed with the commission, since the actions are made with shareholder consent, they are technically legal.

  But international trade groups balk at the fact Taiwanese firms don't have to list the employee bonus as an expense.

  Questionable accounting practices in this area are one of the reasons that the International Trade Commission sometimes claims Taiwan dumps products -- selling them below cost in order to clear up inventories.

  Since employee bonus shares never show up as expenses, Taiwan's cost structure is often deceptively low. This can trigger complaints from foreign competitors when they feel that imports are being sold below market value. The result of such complaints can lead to trade sanctions against Taiwan.
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