Can You Improve Shareholder Behavior? (Part Two)

As a preamble to Part One of this series of articles we defined “improving behavior” as having shareholders engage in the following activities:

  1. Buy more stock in the company
  2. Not sell stock in the company (unless an “odd-lot” holder – see below)
  3. Understand and support the company’s proxy proposals by voting with management
  4. Opt for electronic delivery (“eDelivery”) of proxy and other company communications, to simplify the distribution and response process and lower its cost
  5. Utilize Interactive Voice Response and other electronic media when contacting the transfer agent with a question because, all things being equal, speaking with a live person is more expensive to the company
  6. Have a good attitude when speaking to a customer service representative on the phone, to speed up resolution of the inquiry and be less inclined to complain
  7. Opt for electronic payment of dividends directly into the shareholder’s bank account, to save cost to the company and avoid the possibility of the shareholder losing or never receiving a check
  8. Report address changes promptly
  9. Participate in a program geared to reduce those “odd-lot” holders who have no intention to grow their investment
  10. Become an “investomer” — that is, buy more company products and services as a stakeholder who is already an investor, or buy more stock in the company as a stakeholder who already uses its products and services

In Part One we addressed items 1 and 2 above, and they can still be accessed in Resources on this web site.   Here, in Part Two, we will discuss numbers 3 through 5.   Treatment of 6 through 10 will follow as regular updates to the site.

Vote With Management

There are several steps a company can and should take to maximize individual investor votes for management in a shareholder meeting:

1) The company should have enough retail investors in the first place.  If institutions own more than 80% of the stock, that is arguably too much.   Institutions are great and have deep pockets, but there is no gun to their head to prevent their selling huge positions in your stock overnight; or, voting counter to management’s wishes.   Retail investors, on the other hand (moms and pops like you and me), represent a disparate group of little people who a) won’t sell as quickly as an institution if the going at the company gets rough; b) won’t sell “all at once” if they do sell, because of their dispersion; and c) will tend to vote with management because it is frankly easiest to do so, they naturally assume management knows what it’s doing, and they aren’t typically listening to institutional proxy advisors ISS and Glass Lewis who often recommend a vote against management.

How can you get to at least 20% retail investment if you are not there now?   Some ways include…

  • Establish a Direct Stock Purchase Plan, with fees that are mutually attractive to retail investors and the company footing the bill for the plan’s existence.   This latter situation can easily be achieved – see an article on DSPPs elsewhere on this web site.   If you have a DSPP and it is not generating much activity, look at its components closely (including the potential for marketing it), perhaps with the assistance of an expert like Shareholder Service Solutions®.
  • Become a corporate supporter and member of the National Association of Investors Corporation (NAIC), like dozens of blue chip companies such as Bank of America, Edison International, Genentech, Kellogg, Southern Company and Wells Fargo.   Put yourself on the radar screen of “clubs” of individual investors looking to put their billions of dollars into the right stocks.
  • Make sure you have established on-line access to shareholder records for potential new registered investors, through your stock transfer agent, thus adding a new “portal” for retail ownership to supplement the more common broker medium.

2) Write your proxy proposals so the average individual investor can understand them; not only in SEC-mandated “plain English” but also in a way that the investor can appreciate why the proposals are good for the company and its shareholders – not just good for management.

3) Offer registered shareholders electronic receipt and voting options for proxy materials, so they have these options as well as investors who own through brokers.   (The latter category of investor, most of us frankly, have this option universally available now through a company called ADP.)  And remember, the telephone is an “electronic” voting medium also – indeed, so far it is proving to be the most popular one out there!

4) Check out retail investor proxy solicitation.  This was historically a “moot” exercise because a) institutions could usually be counted on to vote for management with modest solicitation effort, and they represented all the votes management needed; and b) NYSE Rule 452 allows brokers to vote (for management) on routine matters 10 days prior to a meeting, if they haven’t received instructions to the contrary from their retail investor clients.   Changes are in the offing to make some proposals, even director elections, non-routine, and thus not able to be voted (for management) under the “10-day rule;” and there is even some question as to whether the 10-day rule itself will be around come 2010.   This makes it prudent to investigate (now) the solicitation of proxies from retail holders, on a descending level of ownership basis to make it most cost-effective.   The major proxy solicitors have all geared up for this development, with varying degrees of “automation” in their processes.

Use Electronic Media

Electronic media are a great tool to facilitate communication between corporations and their shareholders, invite positive behavior from shareholders (like vote proxies and invest in a stock plan) and mitigate the cost of having a human being supply a service that a computer could just as readily do.   In the realm of stock transfer, these are some of the activities that lend themselves to this tool:

  • Check a share balance
  • Change an address
  • See when a dividend check was issued (or likely will next be issued)
  • See if a stock transfer to or from a stock plan, or a broker, took place as instructed/expected
  • Request material describing the company’s dividend reinvestment or direct stock purchase plan
  • Sign up for the plan, including make an initial investment and perhaps opt for continuous ACH investments swept from the shareholder’s bank account
  • Sign up for receipt of proxy material on-line from the agent – or be notified of a web site to go view the material – and subsequently vote proxies on-line or via a toll-free number

Note that “electronic media” fall into two categories:  on-line and telephonic.   The latter is obviously oldest, and is comprised essentially of “interactive voice response” (IVR) software.   We all know the menus of choices, and that some systems and consumer experiences are better than others.   On-line media are much newer, and becoming more sophisticated and robust with each passing year.   This phenomenon is not only software-driven, but also hardware-driven, as devices become smaller, “faster,” more multi-tasking and more affordable.

But use of either of these primary electronic media by shareholders (computer and IVR) is no slam-dunk, as transfer agents who have invested a lot of money into them are painfully discovering.   People, especially older people, like to resolve their more important financial matters through other people.   We’ll address this further at the end of this section.   Let us first look at what means corporations and transfer agents have to induce shareholders to use electronic media more often:

  • Have a great IVR system in place.   Closely study the statistics surrounding its use.   Be careful not to arrange the service options too much in favor of the agent, because it will backfire.   Too many options, and especially too many before the option to “push zero,” will almost guarantee a large percentage of shareholders trying to by-pass the system rather than “work with it.”   Make the system as user-friendly as possible.
  • Have a great on-line interface in place.   Have password access make sense in terms of required information, and be clearly “secure.”   Have the site be as easily navigable as the best ones out there in cyberspace, because those are the benchmarks you will be judged against.   Any problems and the shareholder will pick up the phone and dial zero.
  • Transfer agent…don’t get greedy and charge (much) for the on-line tools you want your corporate clients to make available to their shareholders.   Sure you want to recoup your cost of putting these new systems in place, but you are going to create ill-will with your clients if you try to do this all at once.   Moreover, you know that more electronic connectivity by shareholders and corporate clients will save you money in the long run, so have patience.
  • Incent shareholders to opt for electronic receipt of proxy materials and other company communications by, as some agents are doing, offering to plant a tree in the name of the shareholder making such a choice, or donating a dollar to charity upon such an election.   This is a great way to modify shareholder behavior, to both the corporation’s and transfer agent’s credit.   It shows a “green streak” at both organizations, helping the environment and giving something to charity.   Win-win-win-win.

As promised above, before leaving this article, one of the “red flags” Shareholder Service Solutions® sees on the horizon is an intention by some stock transfer agents to try to replace the human touch with a 99% computerized “self-service” approach.   This will likely backfire, just as did the attempt by a money-center bank some years ago to “charge extra” for a customer to use a teller instead of an ATM machine.   Sure, stock transfer functions will continue to become automated for everyone’s benefit.   “Paperless legals” (facilitating transfers requiring legal documentation) are a good example.   But if transfer agents think they can significantly and quickly reduce the time corporations and their shareholders will demand of the agent to prepare for events like annual meetings, shepherd VIP transfers through, track down a sizeable lost dividend check, deal with an embarrassing “early escheatment” – they do so at their peril.

Shareholder behavior can be improved by a company and its transfer agent if the opportunities are acknowledged and the two parties work together.   A consultant like Shareholder Service Solutions® can help optimize this synergy, and the resultant benefits.   Stay tuned for more updates, right here, in this series of discussions on improving shareholder behavior.