The Board of Directors 531Cisco was founded in 1984 and shipped its first product in 1985. The company
grew rapidly. In 2000 it was a world leader in networking for the Internet, with
sales of $18.9 billion and net income of $2.7 billion. The following statement is
included in the company’s 2000 Annual Report. “The Company has never paid
cash dividends on its common stock and has no present plans to do so.” Cisco re-
tained all of its earnings to help finance its growth and used its stock to acquire
other companies, which it integrated into its operations.Cisco’s dividend policy is typical of high-growth technology companies
that need resources to grow but find raising equity in the financial markets ex-
pensive because they have no financial “track record” for new ventures.
Many successful companies have quite different dividend and financing
policies from Cisco’s. Many public utility companies, for example, have long,
unbroken records of stable dividends that are a relatively high percentage of
earnings, ranging from 50% to 90%. Even during the Depression in the 1930s
many of these companies maintained their regular dividends, although divi-
dends exceeded earnings in some periods.
The contrast between Cisco Systems and public utility companies indi-
cates the extent to which dividend policy depends on an individual company’s
circumstances and needs. It also highlights the relationships between dividend
policy, the company’s need for financing, and the methods that it selects in
order to meet its financial requirements.
Pension Funds
The finance committee considers two aspects of pension fund policy: (1) the
amount required to be added to the fund and (2) the investment of the fund.
Size of the Pension Fund
Most corporate pension plans are defined benefit plans. In deciding the size of
the fund required to make benefit payments to retirees, directors tend to rely
heavily on the opinion of an actuary. The actuary calculates the necessary size
of the fund using information about the size and demographic characteristics
of the covered employees, facts about the provisions of the plan, and assump-
tions about the fund’s return on investment and probable wage and salary in-
creases over time. (With available software, the company can make the same
calculation.)
There is no way of knowing, however, how reasonable are two key as-
sumptions: the future return on investment and the future wage and salary
payments on which the pensions are based. Since the actuarial calculations de-
pend on the accuracy of these assumptions, the calculations should not be
taken as gospel. Both of these variables are roughly related to the future rate of
inf lation, and the spread between them should remain roughly constant. That
is, when one variable changes by one percentage point, the other variable also
is likely to change by one percentage point.