Marks & Spencer has done a grand job of hogging the J Sainsbury bid limelight over the past 36 hours. The still-independent Sainsbury, wisely, has stayed aloof and cool in the face of a mêlée of speculation about the likelihood, or otherwise, that a combination with the name of Marks & Sainsbury could metamorphose from its current status as an alluring idea into a hard reality.

It will not be long, however, before the spotlight turns again to J Sainsbury, and especially its board, which holds such a pivotal role in determining the future of the company.

If Sainsbury were to receive only one cash offer, the decision about whether to give an acceptance recommendation to shareholders would be difficult. It might be easier if two rival cash bidders emerged. The board could then sit back and watch, relatively secure in the knowledge that the ensuing auction would throw up a suitably generous, and therefore acceptable, price.

It would be considerably harder, however, if an auction broke out in which one bidder was offering cash and the other shares.

If KKR, CVC and Blackstone table any sort of terms, they are likely to be in hard cash. If M&S were to enter the fray, however, the chances are that Sainsbury’s owners would be offered shares in the newly enlarged entity rather than cash.

M&S would hesitate, to say the least, before taking on the £10 billion of debt that is required to lay cash on the table. It would also pause before asking its shareholders to stump up in a rights issue.

It would be possible to put a pence figure on any all-share offer, of course. But it would not be directly comparable with any cash offer laid. One difficulty would come because the board of Sainsbury’s would have to balance the merits of offers made in different currencies. But the challenge of offering a recommendation would be infinitiely greater because tricky issues of timing would intervene.

Share-for-share terms – if they were fair to M&S investors – would have to reflect the present value of Sainsbury’s. If it were any other way M&S shareholders would find the value of their investments diluted. Yet a cash offer, if it is fair to Sainsbury shareholders, would have to anticipate the value of the supermarket at some unspecified time in the future. Sainsbury’s shareholders, after all, would be surrendering rights to all the future profits generated.

It is a vexed position for the board of any company to find itself in, and that is before taking into account fears that some members may be conflicted. Thankfully, boards including Sainsbury’s divide so that anyone who stands to gain from a deal, one way or another, is excluded from the decision-making process.

The danger here is that the difficulty of the recommendation decision may make Sainsbury – or M&S – shy away entirely. In this case it might leave Marks and Sainsbury bereft of useful cost savings, buying benefits and top-quality retailing skills.

Perhaps it is the apparent need for bidders to have a recommendation that is at the core of the problem. If shareholders were given freedom to make up their own minds, the best decisions might come more easily.

A strategy that pays dividends

Congratulations to two of Britain’s biggest, most successful and hitherto most acquisitive companies. From their very different perspectives, the boards of Royal Bank of Scotland and British American Tobacco have come to a sensible common conclusion. As a result they have raised their already-healthy annual dividends by 25 per cent and 19 per cent respectively.

If you want to reassure your shareholders that you are not going to waste their money and that financial returns remain foremost in the corporate mind, your local global investment bank will recommend a share buyback (conducted profitably by themselves). Often it is the best way to deal with a temporary windfall, as ably demonstrated by Britain’s minerals companies, or the sale of an arm of the business. In effect, a buyback redistributes the windfall forward over time by reducing the capital and thereby boosting future earnings per share.

Too often, however, buybacks are a form of protection money. They are dangeld to buy off voracious corporate raiders or disappointed investors for a few more months or years. Marks & Spencer bought time this way for Stuart Rose to turn the business round.

Buybacks can even become part of a vicious circle. Shares straggle at low valuations because their dividends have little appeal. So money that might have been distributed to the shareholders to make them happy has to be diverted to emergency measures to stop them rebelling.

By raising dividends substantially, the boards of RBS, BAT and several other big names are sending a more positive message. At RBS, Sir Fred Goodwin and his predecessor built up a great profit-making machine. Its virtues should not be obscured by suspicions about Sir Fred pursuing ever more ambitious deals. It is time to say: here we are, this is what we have built.

BAT is telling a similar story, although there is less fear of Paul Adams, its chief executive, trying to conquer the entire known world. From a position that would now look shaky in retrospect, BAT has built probably the world’s strongest tobacco group by a process of consolidation in a clearly mature industry. It is signalling that it understands what the markets feel, that the best value deals yielding the best returns have mostly been done.

In each case, the board has concluded that the great cashflow machines should be applied to their ultimate purpose of providing a large and rising income to shareholders, often pension funds whose liabilities match this dividend flow. Deservedly, both shares rose strongly yesterday.

Another rollercoaster day in stock markets and on the foreign exchanges offers more evidence that the nervous twitches are about assessment of risk and not economic realities. Early indicators of activity in February are buoyant, to the extent that the main UK worry is inflation. The problem is that pricing of risk got to a pitch where investors could not afford much to go wrong. Adjustment should not, however, drag the world’s blue chips into the mire.

Secret’s out

There is a flavour of Sir Humphrey about the private equity industry’s response yesterday to the spate of trade union attacks in recent weeks. Wheel out a City grandee, establish a working group, promise a code of practice, offer to consult widely . . . you can almost see the wily Permanent Secretary enumerating his campaign to see off criticism while keeping real reform to a minimum.

That may be no bad thing. One of the advantages of private equity is that its practitioners are not caught up in time-consuming disclosure and red tape and the kind of corporate governance rules that drive listed company directors potty.

But the days of total secrecy are coming to an end. Private equity is just too big, too important, as are the companies now being targeted as prospective buyouts.

The most interesting development yesterday may not be in public disclosure at all, but in the promise that inconsistency in the way fees and performance are reported to investors will be addressed.

Less smoke and fewer mirrors would be welcomed.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive