With the Enron trial featuring prominently in the news, we’re all reminded of the corporate governance issues that have recently faced the economy. It’s refreshing to see a company take a new approach to how it runs its business. In this case Progressive has changed how it distributes dividends. This new system has the potential to greatly thrill and, in turn, greatly disappoint shareholders. But either way, it’s great for the company.
It’s really not surprising that Progressive would be one of the first companies to make a change in how they do business. They have, for the most part been, well, Progressive. They helped to pioneer online insurance policy sales, and created a one call claims system. Dividends are generally held near and dear to the hearts of shareholders. The fact that they’re changing something about the business that directly effects them, is quite surprising. Most companies and, more importantly, their boards would never consider such a move. In most cases sufficiently angering the shareholders would be tantamount to firing oneself.
By announcing that dividends would be distributed once yearly, and calculated the same way that employee bonuses are calculated, Progressive is risking a shareholder revolt. Why? Because by calculating dividends in this way, in the bad and lean years shareholders will get a dividend somewhere between nothing and miniscule. But with the bad comes the good because in years where the company performs well shareholders stand to gain huge dividends.
Beyond the potential upsides and downsides for shareholders, this decision makes terribly good business sense. Why should anyone profit when the company is losing money? When does a company need money more, than when it’s hit tough times, and less than when the cash is rolling in by the barrel? It is for these reasons that I sincerely hope that the shareholders of Progressive not only give this new system a chance, but I’m sure that in time they will grow to love it, and other companies will follow suit.