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“Pulling It All Together” As You Prepare To Tackle Employee-Plan Voting In 2009

An interview with Ellen Philip and Cal Donly of Ellen Philip Associates

Carl: Ellen and Cal, I think this marks the 10th annual interview we’ve done with you on areas that you see as being critically important for public companies to address as we look toward the next year. What are some of the most important issues you think issuers will have to address in 2009?

Ellen: With all the turmoil and uncertainty in financial markets of late, I can’t imagine a more appropriate time for public companies to re-assess their approach to shareholder services in general - and those relating to employee plans in particular. There’s a big crisis in confidence out there. For a plan participant – or for any shareholder for that matter – there’s a great need to know that best practices are in place. You have a lot less anxiety and frustration when you see that things are being done the way they should be done – and when you sense that your interests are being well cared for. This isn’t new, but in the 30 years I’ve worked in the shareholder services community there’s never been a time with such a crying need for reassurance.

Carl: Why single out employee plans?

Ellen: For one thing it’s because, as independent tabulators, that’s where we concentrate a great deal of our time and energy. It’s something we know a lot about. It’s also because we believe that since plan participants are both shareholders and employees, they have a strategic value that’s often out of proportion to the number of shares they might hold. As a distinct and important shareholder constituency, they merit special attention - and now more than ever. You’ve been making this point too, for some time.

Cal:The fact is that issuers can ill afford to neglect or undervalue their employee- plan constituency, especially at a time when the non-street proxy vote is declining. And Plan shares, as we know, are not always a mere drop in the bucket. Sometimes they represent a very sizable percentage of the total outstanding. Sometimes they even outnumber the registered shares. On many occasions we’ve all seen plan shares play a pivotal role in winning approval on an important issue…or losing it. Another very important issue, I think, is that plan trustees, as fiduciaries, are held – and generally hold themselves - to a much higher standard of care when dealing with employee plan voting, as indeed they should.

Carl:That being said, what can an employee-plan specialist contribute, especially in this climate of general uncertainty? Of what help could a plan specialist be, for example, to a plan sponsor and/or to a plan agent who might be going through a re-assessment of procedures and trying to pull it all together?

Ellen: A key benefit for plan sponsors is that we provide a pass-through voting process that is completely insulated from the voting process for other types of shareholders. It’s safe. It’s secure. It’s a best practice, in that it provides strong reassurance on the confidentiality issue, which is vital to plan participants – and to Plan trustees too. It keeps the process free from even a whiff of suspicion.

Carl: There are those who say the risk is minimal and that it really doesn’t matter.

What would you say to the substantial number of issuers who throw plan participants into a big melting pot with other types of shareholders, ostensibly to cut costs?

Ellen: I’d say straight out that the practice is not a prudent one. It’s an accident waiting to happen. It’s a practice that would be hard to defend, in retrospect, if something were to go wrong. If an employee-shareholder were to raise a question, or if the tabulation were to be challenged by anyone, all those savings – which are actually pretty minimal ones these days, given the ability to deliver materials to plan participants electronically - would seem to be a pretty poor trade-off. Any savings would fast go up in smoke.

Carl: But tabulations can be kept separate, surely? How might things go wrong?

Cal: If I’m a plan participant, and I also hold registered shares, and you, as the company’s plan administrator, are entitled to know how your registered holders have voted, then you can, if you are interested, find out how I voted. That you would want to do so might not seem highly likely, perhaps, but the possibility is there. As Ellen said, it’s an accident waiting to happen. I’ll never forget how a plan participant, years ago, ran into retaliation after having voted against management. She had been picked out from a vote summary because her account included an identifiable fractional share. It was Murphy’s Law in action. What could happen did happen.

Carl: Sadly, I have seen this happen too. And if company employees have access to this information, the fact that they have it gets all around the company fast. This can be a bad thing in terms of employee morale – and as a basic issue of “trust” – even if no one is misusing the information. But are there other advantages in treating plan participants as a distinct and separate shareholder group?

Ellen: Another very important benefit is the communication possibilities that open up when you address plan participants as a distinct group. If they’re not mixed in with everyone else you can be more specific than general in the way you address them. You can zero in on their particular interests and concerns. You can also set up procedures that accommodate any particular needs plan participants might have. It’s good shareholder relations and good employee relations at the same time.

You’ve always said, Carl, that a company’s employee-shareholder constituency is a natural first priority for management in efforts to build a core of long-term support. Having the platform you need for a two-way flow of information is central to such an effort.

Carl:What would be some examples of focused treatment for plan participants?

Ellen: One thing might be giving a distinctive look to the voting instruction form itself, and to use language that’s targeted specifically to employees. The participant notice that might accompany the voting instruction form is another opportunity for focused communication. You might want to provide for re-mails when participants say they didn’t get the proxy package, or for kid-glove handling for a VIP sub-group. It could be analyses or special reports. There are any number of initiatives that will come to mind once you have a vehicle that makes them possible.

Carl:What other pay-offs might a plan sponsor expect from a specialist company such as yours?

Cal: A big advantage is that we’re quick off the mark. This is particularly important in the so-called special situations we’re known for – proxy contests, tender offers and the like. Timing is always critical. You have to act almost instinctively.

This past season, for example, we were brought into a complex project on a Friday afternoon and were able to mail the following Tuesday. In the interim we helped develop documents, coordinated responsibilities with other key players in the process, loaded the master file and also built customized Internet and telephone data-collection sites and an online, real-time reporting site.

Carl: How is it that you’re able to move so quickly?

Ellen: It’s long experience, for the most part. As a team that’s been very stable over the years we’ve put in a lot of mileage together. We usually understand what must be done and how to do it. We often know we’ll be going down a road we’ve traveled before, and while the specifics will be different the basics will stay the same. We’ll understand at the outset what makes a process work and how its components must be brought together. We’ll also know where common procedural traps lie, and how to steer clear of them. Ours is a good brain to pick, so we play a very useful role in planning, coordination and document development. We don’t describe ourselves as consultants, but consulting is a significant part of the role we play.

Carl: It strikes me that at times you’ll have clients who are dealing with a particular corporate event for the very first time – say a Dutch auction, which most managers might encounter once in a career, if that. There’s also the impact of high turnover among seasoned managers in many financial institutions. I

Ellen: That’s very much so. Not infrequently we’re brought into projects that others have specifically said they want no part of – for a variety of reasons. We’re able to quickly bring focus and a sense of direction. Not every wheel needs to be re-invented. The information we have on tap facilitates planning in general. It also helps in planning specific procedures – as an example, the way issues are worded on the instruction form.

Carl: Give me an example of this type of practical input.

Cal: Take tender offers. A piece of advice we invariably give is to make sure participants are directed to express their tender election as a percentage of their total plan holding, instead of giving an instruction to tender a specific number of shares.

Carl: Why is this important?

Cal: It’s important because of a tricky peculiarity in employee plans. A participant’s holding on the expiration date – and it’s in book shares, as you know – might be different from what it was on mailing date. That’s because certain plan activity, including distributions and share acquisitions, can take place while the offer is open. A participant might issue a tender instruction today, for example, and take a distribution or borrow against the same shares a week from now.

It’s our job to ensure that a participant’s position at expiration is accurately tendered. The neatest, most elegant way of doing this is to have tenders expressed in percentage terms. When this has been done, any activity in the plan during the course of the offer can be automatically accommodated. One hundred per cent of zero is zero. It avoids confusion and saves precious time at expiration.

Carl: On a different practical issue, you frequently tabulate both sides in contested situations, either in a proxy contest or a hostile tender offer. What’s the benefit in having a single tabulator for all plan participants?

Ellen: For a plan trustee, who can take no action without a tally that has taken into account activity on both sides, there’s a tremendous advantage in saved time. With all data flowing into a single tabulation system, which decides by a totally impartial algorithm which vote or election counts, we’re able to provide the trustee with a fully reconciled tally for both sides, immediately upon expiration. Naturally this can only be done with agreement between both sides.

Carl: What does a tabulator really do? Could you share some thoughts on the tabulation process?

Cal: Every process involving a number of players must have a principal orchestrator, in the same way that musicians need a conductor or actors a director. There must be someone who’s in a position to see the process as a whole; to make sure that the pieces come together in the most advantageous way, and to make judgment calls where necessary. That’s the role of the tabulator – either in a proxy or a corporate action. It’s not a passive role.

As tabulator you’re not in a position to control everything, but whatever control you have has to be sufficient to enable you to make a good-faith certification of the results. This goes a lot deeper than merely providing a tally. The tabulator has to be sure that everyone eligible to participate has an opportunity to do so; that everyone not eligible to participate has no possibility of doing so; that procedures are sound and fair, and that they hang together in a watertight, cohesive way. Above all, the tabulator must understand what practical implications deadlines have for each player in the process, and what has to be done by each if deadlines are to be met. It’s a pretty complex role.

Carl: Are there key guidelines you follow?

Ellen: Every project has it’s own realities, and these dictate specific practice. But there is something that influences our approach in planning a tabulation. Since a challenge to the tabulation would be the worst-case scenario, we assume right up front that there will, in fact, be a challenge. And we plan accordingly. We ask ourselves how comfortable we’d feel if an investor, or an inspector of elections, such as you wearing one of your many hats, were taking a hard look at how we did things. It’s a safe approach, and a best practice. And frankly, as we look toward the 2009 proxy season, we are expecting many more close results, and many more “challenges” as to the outcomes than ever in history.