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Businesses battle political misconception over surplus from income
By Park Hyong-ki
Politicians and businesspeople are locking horns yet again over an issue concerning retained earnings.
Retained earnings under shareholders' equity on balance sheets are the surplus from a company's net income after paying dividends to investors.
Lawmakers of the ruling Democratic Party of Korea (DPK) recently claimed that companies are hoarding too much of their retained earnings without investing them to create jobs.
DPK floor leader Rep. Hong Young-pyo said chaebol should release their money into the market to create a virtuous capital cycle and help revamp the economy.
Kim Jin-pyo, a former finance minister, also said in interviews that conglomerates are just sitting on their earnings surpluses worth over 800 trillion won, and do not know what to do with their amassed fortunes.
Retained earnings of the top 30 conglomerates stood at 838 trillion won in 2017, up 9.2 percent from a year earlier, according to CEO Score, a local corporate data analyst.
He suggested relaxing rules to enable them to reinvest their retained earnings in startups. Kim is currently running for the chief of the ruling party at the end of this month.
Experts say there still seems to be a knowledge gap between politics and business over the concept of retained earnings.
Most companies' retained earnings are already being reinvested in both tangible and intangible assets ― approximately 80 percent of these on average.
"They reinvest from retained earnings to expand their facilities or buy equipment for further growth," said Han In-goo, an accounting professor at the KAIST School of Business. Han is former president of the Korean Academy of Business Administration.
Not only do they reinvest in their core businesses, but also they can use retained earnings to pay down their debt.
Creating a "no rule" environment enabling companies to reinvest their surpluses in startups would be "marvelous" for the private sector.
"However, ultimately, that is up to their boards and shareholders to decide," Han said, adding that it is inaccurate to say companies do not know where to reinvest their retained earnings.
Bae Gil-soo, a professor at Korea University Business School, concurred.
"Retained earnings absolutely do not mean cash is piling up in companies' coffers," Bae said.
They can be in the form of assets such as facilities and machines still recorded under retained earnings on their balance sheets after reinvestment, he explained.
Companies are under no legal pressure to disclose what they are going to do with their retained earnings, Bae noted.
"When politicians say companies can't find investment opportunities with their surpluses, it is an unfounded claim," he said.
"Companies run their businesses to make a profit for their shareholders. What if they say they have no idea where to reinvest and what to do with their retained earnings? Those companies would be in pretty bad shape."
When a company has an enormous potential to grow, it would reinvest most of its earned surplus into expansion, while paying either no or very little in dividends to shareholders, the professors noted.
Apple, for instance, when Steve Jobs was its chief executive, did this. The company's blockbuster and innovative products such as the iPod and iPhone spurred its profits, and that boosted its share price. This, in turn, made its shareholders very happy. Apple's market value surpassed $1 trillion recently.
"In this sense, reinvestment can be seen as dividends for shareholders of growing companies," Bae said.
On the other hand, when a company faces a growth limit, it would increase dividend payouts from retained earnings.
Obviously, not all retained earnings are spent on reinvesting in core businesses and paying dividends. Some portion left as cash will be recorded under cash and cash equivalents on the balance sheets.
In 2014, then-Finance Minister Choi Kyoung-hwan suggested imposing taxes on retained earnings to force companies to unleash the stockpiled cash in their coffers. Some lawmakers then also "wrongly" believed retained earnings meant cash.
"There's never been a case globally where governments imposed taxes on retained earnings or cash holdings," Han said.
Companies accumulate cash for a number of reasons. One of the top reasons is to save for a rainy day such as a financial crisis when credit markets freeze.
When compared with Apple holding over $100 billion in cash, Samsung Electronics' $30 billion is small, Han noted, adding local companies are "not accumulating enough cash" compared to their global peers.
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