The multinational's chief financial officer tells Jamie Smyth why the firm is paying dividends to shareholders and what its post-antitrust settlement plans are

Mr John Connors is envied by almost every firm in the global technology sector and beyond. Despite a savage three-year dip in technology spending, Microsoft's personable chief financial officer, and senior vice-president of finance and administration, doesn't have to deal with much red ink on his balance sheet.

"We've got $43 billion [€40 billion\] in cash and a further $12 billion in short-term investments," he says matter of factly on a recent visit to Microsoft's European Operations Centre in Dublin. "It is a nice amount of money."

This must be one of the biggest understatements in corporate history and perhaps reflects Mr Connors's down-to-earth background, with roots in a small town in the midwest US state of Montana.

The sheer scale of Microsoft's cash hoard has raised eyebrows among its shareholders and even attracted the attention of vocal US consumer champion Mr Ralph Nader. Last year, he led a high-profile campaign to force the group to pay dividends.

Like many of its cash-rich peers in the tech sector (Oracle, Cisco Systems and Sun Microsystems), Microsoft historically never paid a dividend.

Instead, the US firm relied on increases in the value of its shares to reward investors. Since 1986, when Microsoft made its stock market debut, this policy has rewarded investors with each share rising in value from $21 to $7,000 in real terms. But the bursting of the technology bubble in early 2000 put an end to the rapid advance in share price and, for the past three years, the shares have tread water.

"There is a business cycle that the bubble of 1997 to 2000 is now correcting and it is very unlikely that we will see equity returns in the near term reach anything like the levels seen in the period 1982 to 2000," admits Mr Connors.

This was one of the key factors that led Microsoft to break with tradition and pay its first dividend - 16 US cents per share - to shareholders earlier this month.

The decision represented a U-turn for Microsoft and Mr Connors, who said just last November: "It would not be appropriate to commit to a long-term programme like a dividend."

So what changed his mind?

"With our company we are always going to have a need for cash reserves due to the litigious nature of industry," says Mr Connors.

Other factors that require the firm to have easy access to cash include acquiring software firms that sell to the small and medium-sized business sector and a major stock buyback campaign, which costs Microsoft $8 billion every year, he continues.

The settlement of its antitrust battle with the US Department of Justice and several US states last year was significant as it set specific financial penalties. "Management felt there was enough visibility to decide on a dividend for the first time," says Mr Connors.

But the decision also highlighted a broad shift in Microsoft's investor relations strategy.

"With the payment of a dividend, we have attracted a new class of investor such as pension funds, who only invest in firms that pay dividends. . . This will ensure our stock is more widely held and increases liquidity."

Similarly, Microsoft's one-for-two stock split in January should open up its shares to a range of small investors who tend to be loyal holders of stock. This will help reduce volatility in Microsoft's share price, he says.

The dividend policy shift will pressure Microsoft rivals to revisit investor relations policies.

The shake-up of Microsoft's investor relations strategy is one of Mr Connors's major contributions to the firm's strategy since taking the top finance job in December 1999. But he has also been instrumental in carving Microsoft's centralised structure into seven separate operating divisions that each report results.

"This reflects Microsoft's pretty broad diversification over the last few years. . . the divisional structure allows us to better align what we build, market and sell. One of the biggest changes is that it has made our research and development people think like business leaders," he says.

The introduction of the divisional structure in July 2002 has separated Microsoft's younger and unprofitable business divisions such as gaming, MSN (Microsoft Network) and mobile devices from its cash generative Windows and Office software unit.

This move to greater accountability also exposed for the first time in November Microsoft's 86 per cent profit margin on its Windows operating system, which is on 90 per cent of all desktops.

"This gives investors greater transparency on our operations," says Mr Connors, who has had to deal with what he says are some of the most sweeping reforms in the regulations governing firms.

"These will cost us money but that is the price that has to be paid for the \ issues that were highlighted," he says.

"A large percentage of the public lost confidence in equities due to fraud. The new rules are onerous but I think over time they will restore investor confidence."

This process will take at least a couple of years for the middle-class investor, says Mr Connors.

But will the new philosophy of embracing openness and accountability extend to the European Commission's ongoing investigations into Microsoft's dominance of the desktop software market?

"We've been working closely with the EU. . . and we are focused on being a good EU citizen. After all, we employ thousands of employees and contribute enormously to the economy. We will comply with any settlement. We are fully committed to a legal settlement," he says.