Can You Improve Shareholder Behavior? (Part Four)

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 Parts One, Two and Three we addressed the first seven items above, which comments can still be accessed in Resources on this web site.   Now, in the fourth and last part, we will discuss numbers 8 through 10.

Report Address Changes Promptly

This innocuous-sounding practice actually carries special importance in the stock transfer arena, because financial assets like stocks (and corollary dividend payments, stock split distributions and the like) must make their way into the hands of the registered shareholder or be subject to “escheatment.”   When these assets are returned (twice) by the post office as undeliverable, the shareholder’s account is specially coded such that future mail is suppressed until a valid/current address is established.   If such valid address is not found after three years in most states, the assets (stock and related cash) must be turned over by the transfer agent to the state of the shareholder’s last known address.   In order for the shareholder to subsequently recover these assets, no little time and paperwork is required – and there is the loss of any appreciation in the value of the stock because the state usually sells it for the cash value at the time of escheatment.

Besides the risk of escheatment, a “bad address” can also mean non-receipt of valuable company communications such as those relating to a corporate action.   Not being aware of a tender offer or exchange obviously carries its own set of negative consequences for a shareholder.   Bad addresses also cost the issuer money, because most transfer agents charge extra fees to handle associated “lost shareholder” or “abandoned property” activities.   One of these is SEC-mandated, semi-annual searches for “good addresses” by the transfer agent within commercially available databases.   And beyond extra fees to the issuer, there is the simple fact these shareholders can not be reached to participate in a critical proxy vote, or that tender offer/exchange, for the issuer’s benefit.

So what can an issuer and its transfer agent do to minimize bad shareholder addresses?

  • Use a transfer agent with sound practices upon its discovery of a bad address: a) sending the item a second time to see if it gets through (which many times it does), and b) putting the item the second time in an envelope with different-colored lettering, to know it was the second attempt
  • Have address correction “media” prominently and frequently displayed on the company’s, and the transfer agent’s, web site
  • Have address correction media prominently displayed on other company communications like annual and quarterly reports, which a “lost” shareholder might come across and realize he/she is not receiving this material directly
  • Through the company’s and transfer agent’s web site, and the company’s broadly distributed corporate communications, make shareholders aware of other web sites that help locate “lost” property which might belong to a shareholder, such as
  • Hire reputable “deep search” firms in the second and third year property is lost, who seek out lost shareholders like private investigators and are paid a reasonable amount out of the asset’s value to reunite shareholders with this property

Bad addresses are only good for states wanting to use escheated money, and intermediaries paid to find lost assets.   They are definitely not good for shareholders and issuers, and these corporations and their transfer agents should constantly seek ways to keep addresses current, proactively.

Participate in a Small Shareholder Reduction (“Odd-Lot”) Program

Owning less than a round lot (100 shares) of a company, i.e.   being an “odd-lot” holder, actually puts such an investor in a very large camp.   In fact, if the stock holding is not part of an IRA or 401k, and the investor is an individual person, there’s a good chance that position in the stock is less than 100 shares.   Odd-lot holders, like all holders, can be going in three different directions:  they can be growing their position, shrinking it or maintaining it.   From a shareholder services perspective, companies should do something about odd-lotters in the latter two (shrinking/maintaining) categories.   Why?   Because such holders do not produce as much financial value for the company as they cost the company money.   Investor relations, communications, printing, stock transfer agency fees, etc., etc.   The average shareholder cost to a company is estimated to be $15-$20 per year…every year.   A shareholder “sitting there” with 20 shares of a $35 stock is not, on a net basis, doing the company any good.   He/she doesn’t even have enough potentially pro-management votes to add corollary value…if such a holder could in fact be induced to vote in the first place.

Odd-lot holders can also be simply “accidental.”   They received the stock through an inheritance, or they bought a stock they wanted but the company got bought by another so the stock they now have is not that interesting to do anything with (let alone “grow”), or they now hold so little of the stock that it would be more expensive to sell it than to hold on to it.   So the stock just sits there.   Maybe the shareholder changes address and is so uninterested in his/her 20 shares of ABCorp that he/she doesn’t tell the transfer agent, or broker, about the move and soon the shareholder is “lost” on the transfer agent’s/broker’s books.   Now the holder is even more expensive, because a lost shareholder search and escheatment process has to happen, which is ultimately paid for by the company.

Companies should look at a small shareholder reduction program (aka odd-lot program) every 4-7 years.   Most transfer agents are good at administering such programs, not only operationally but also in how the message to the shareholder is conveyed.   This is critical, and speaks directly to our discussion here.   How do you get an odd-lot holder to happily participate in a plan/process designed to make them no longer a holder?   Here are a few ways…

  • Explain in the program material that the company values all shareholders, but recognizes a small shareholder might be “trapped” by the cost of selling
  • Make such cost zero, by the company picking up related fees (which is still cheaper in the not-so-long run for the company given resultant, ongoing shareholder cost reduction)
  • Make the cost to the shareholder to round up to an even 100 shares zero as well, from a fee and commission perspective – there is more than one direction for an odd-lotter to go in, including up, if given the right incentive!
  • Make it easy for the holder to participate even if the stock certificate evidencing the shares is lost, by having requisite documentation to reclaim the shares included in the material, and having any related share-replacement fees conveniently deducted from the holder’s proceeds if a cash-out is elected
  • Offer to donate the odd-lot sale proceeds to charity or an environmental effort, thus appealing to holders who might not consider participating for themselves, but absolutely would for a “higher ideal”

There are other considerations that can accompany this discussion.   A “reverse-forward split” can eliminate odd-lotters, but it is a non-voluntary, heavy-handed approach.   Putting a direct stock purchase plan in place can create a “home” for odd-lotters that is more financially beneficial to companies, and facilitates the growing of small positions (out of odd-lot status) over time.   We would actually encourage most companies to have such a plan in place in any event.

Our goal in this segment was to point out ways to get small shareholders enthusiastic about a program targeting them, with understanding and sensitivity to their needs, that benefits them as much as the company.

Become an “Investomer”

How many individual shareholders do you have who do not use your products?   This question and this subject apply particularly to “retail companies,” of course, but it offers food for thought for any investor relations program.   If you invest in an energy company, do you buy gas at its filling stations?   If you invest in a consumer products company, do you use its products in your home?   And here’s an interesting one:  if you invest in a bank that pays dividends, do you deposit those dividends in that bank or at another financial institution?   There is definite evidence that investors tend to use the products of companies they invest in.   There is also definite evidence that individuals who happily use the products of a company (even indirectly, like the aircraft of an airline they use most) will be inclined to invest in those companies.   The question is, though, what are you, the company, doing to maximize this situation??   Investors who are also customers, and customers who are also investors, are often called “investomers.”   How does a company create more of these people?

  • Do the homework, e.g.   check your transfer agent’s registered shareholder list, and a “NOBO” list you can get from ADP, against your “frequent patron card” list
  • Conduct customer and investor surveys and focus groups to identify “dual appeal” concepts
  • Offer incentives and promotions (within securities law, of course) to be both a consumer and an investor
  • Offer a credit card in an investor mailing, such as enclosed with the proxy statement (subject to the legal department’s sign-off on privacy issues)
  • Fully utilize the investor marketing latitude you have with an issuer-sponsored direct stock purchase plan, vetted through an S-3 filing with the SEC, using product distribution media — like a beer company did not long ago by attaching direct stock purchase plan sign-up material to its six packs!

The bottom line is, you want your shareholders to be customers, and vice versa.   It makes them more loyal constituents on both fronts.   The corporate secretary’s office, investor relations, the treasury area – all should collaborate on these kinds of initiatives, with the input of their marketing department, outside marketing specialists and their transfer agent.

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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.