Retained earnings is the earnings minus the dividends paid. (The Board can also use retained earnings to pay down debt.) If the earnings are increased, then the board chooses whether to pay all or a portion of this out as dividends (after preferred shareholders get their preferred dividend) or use it as retained earnings to increase the capital.
The idea is that if the board wisely manages the shareholders money, and makes them money (dividends) with it, then they could do even better for shareholders if they had more capital, so shareholders benefit with retained earnings.
Shareholders dont want a board, generally, to pay out so much of the earnings in dividends, so they can not expand the business and grow, with that capital (retained earnings). Most especially, we dont want the board to pay out dividends with money that is needed for new buildings, maintenance of old buildings or equipment. This is not healthy for the long term of our company if the board defers necessary maintenace/new equipment in order to keep up the dividends. Weak, poorly managed, declining companies do that. It will eventually catch up to them and most likely result in a decline in share price, and, ultimately a decline in dividends, too.
If we get our company back, we want to elect board members that, yes, pay out generous dividends again, but do not do so at the cost of depleting necessary capital reserves.
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