Controversy over large dividends for shareholders following pay cuts

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In February 2002, a Finnish shipping company, Viking Line, decided to distribute large dividends to its shareholders, pointing to its improved results as justification. A central factor underlying these increased profits is a new, cheaper collective agreement, aimed at averting the 'outflagging' of Finnish vessels. Furthermore, the government has granted subsidies to merchant shipping from the beginning of 2002. Viking Line employees and the Finnish Seafarers' Union have expressed outrage at the company's actions.

The long-standing problems in the Finnish merchant shipping sector show no signs of abating in 2002. In February, controversy was again whipped up by the decision of Viking Line (registered in the Åland Islands between Finland and Sweden) to distribute large dividends to its shareholders.

After ship-owners and the Finnish Seafarers' Union (Suomen Merimies-Unioni, SM-U) had for years been calling for subsidies for merchant shipping, the government decided in May 2001 to grant them (FI0106188N). In accordance with the decision, shipping companies were subsidised from the beginning of 2002 to the tune of FIM 166 million, by cutting their taxes and social security contributions. After the government decision, a 'truce' was achieved whereby the shipowners promised that their ships would stay on the Finnish register and not be 'outflagged' (ie transferred to the register of some other country).

In addition to this subsidy package, the SM-U union signed a collective agreement which came into force on 1 March 2001 with the aim of avoiding outflagging of Finnish ships. Under this agreement, every SM-U member took a 10% pay cut, which was regarded as 'savings' in their employer's company. Due to the agreement, the personnel costs incurred by Viking Line in 2001 decreased by about EUR 5 million compared with the previous year. After the company's results had improved, it decided in February 2002 to distribute part of the surplus in the form of dividends to its shareholders. The company states in its annual report that the improved results were caused mainly by the decreased personnel costs, and lower repair and maintenance costs. Profits increased by 62% in 2001 compared with the previous year, when the dividends distributed by the company were less than half the amount decided in 2002.

Major dividends

Based on a proposal by the Viking Line board, its shareholders' meeting decided to pay dividends of EUR 16 million on the company's profits of EUR 24 million. This means that 67% of the profits are to be distributed as dividends. In Finland, dividends are tax-free income. The company's return on equity was over 18% in 2001, which is considered very high. In the previous year, the corresponding figure was under 11%.

According to employees, the large size of the dividends means a draining of their 'savings' into the shareholders' pockets. According to Viking Line's managing director, Nils-Erik Eklund - who also sits on the board and is one of the company's largest shareholders - the competitiveness of Finnish merchant shipping is still weak compared with that of Sweden, for example, where the so-called net pay system is in use (a form of subsidy for shipping companies, whereby they do not pay the state any taxes or social security contributions on seafarers' wages - FI0105187F).

The decision by Viking Line to pay such large dividends enraged SM-U and members of parliament. The apparent distribution of the employees' 'savings' to the shareholders instead of using them to safeguard jobs has caused a general commotion, and the employees and the government feel that they have been betrayed.

Until now SM-U, ship-owners and politicians have formed a united front in defending the jobs of Finnish seafarers. Now, the unions and members of parliament are losing confidence in the ship-owners. Parliament is due to discuss new 'tonnage taxation' in spring 2002, a scheme whereby ship-owners would be taxed on the basis of tonnage instead of company profits, thus cutting their taxes. According to members of parliament, the approval of the new legislation has now been jeopardised.

EU subsidy policies

The government, in which the largest party is the Social Democratic Party (Suomen Sosiaalidemokraattinen Puolue, SDP), was persuaded in September 2001 to grant the subsidies to merchant shipping, fearing job losses and the costs they would cause. The government did not have many other alternatives, because other EU Member States are now granting subsidies after the adoption in 1997 of Community guidelines on state aid to maritime transport, allowing national governments to grant various fiscal and social state subsidies for merchant shipping, aimed at improving competitiveness. The last of the countries to begin granting subsidies was Sweden, which introduced the net pay system (SE9811124N).

The Finnish ship-owners saw it as inevitable that the registration of their ships would have been transferred, at least to Sweden, if the subsidy package had not been granted. The citizens of the Åland Islands, whose merchant shipping has already been subsidised through a special treaty concerning tax-free sales, had feared a death-blow to a vital source of their livelihood if ship-owners began to outflag. Furthermore, if this happened, foreign personnel could displace Finnish seafarers from their jobs.

Shop stewards' opposition

Shop stewards belonging to SM-U issued the following statement in the union's magazine Merimies at the end of February 2002: 'We disapprove of the personnel policy practised by Viking Line management, and especially the giving of information on the economic status of the company. The Seafarers' Union has concluded savings agreements which have decreased wages, the government is subsidising passenger ships from the beginning of this year – and the company is distributing all assets thus gathered in the form of dividends to the shareholders. At the same time, the personnel is threatened by outflagging and the ship-owners' associations are demanding - with the support of the ships' officers' unions - the right to use cheap foreign labour in the name of profitability. However, the accounts of the company show that Viking Line is a very profitable ship-owner. The continued uncertainty about the continuation of the employment relationship has had the effect of lowering the personnel's work motivation at the same time as the bottom has fallen out of the company management's credibility. In the view of the shop stewards, this cannot go on.'

The use of foreign labour on Finnish ships became possible at the beginning of 2000, following a reform of Finland's Maritime Act to allow the transfer of Finnish ships to another EU or European Free Trade Area (EFTA) country's flag without the ownership being transferred from Finland (FI0005149F). The labour laws of the country where the ship is registered are applied. For example, ships registered in Germany have the possibility of using cheap labour from any country whatsoever. According to the chair of the Seafarers' Union, Simo Zitting, the possibility of using cheap foreign labour on Finnish ships and the possibility of disregarding the Finnish Maritime Employment Act should be removed from the legislation: 'the future of the Finnish shipping business cannot be based on the use of cheap foreign labour.' In Mr Zitting's view, the participation of his union in the next central incomes policy agreement will be jeopardised if the legislation is not revised.

Commentary

Finnish merchant shipping has been undergoing radical changes since the EU approved subsidies in the sector. The recent case of a Finnish ship-owner's inclination to channel subsidies granted by the government and the personnel's savings for the benefit of the shareholders is an example of the failure of the European subsidy policy and its damaging effect on industrial relations. Viking Line is not yet satisfied with the level of subsidies - it demands a move to a net pay system on the Swedish model. However, the Finnish government has no motivation directly to support an increase in the wealth of the owners of a private company.

The dividend policy of Viking Line can be compared with the distribution of dividends at other Finnish companies. Nokia, for instance, which operates completely under market conditions and has been able to make huge profits, proposes to distribute 57% of its profits in dividends in 2002. Viking Line will be distributing to its shareholders 10 percentage points more than this. The company naturally has the right to decide on how it distributes its profits, but the distribution of such large dividends after the government has decided to grant subsidies can be interpreted as questionable behaviour. (Juha Hietanen, Ministry of Labour)