by Peter Breen,General Manager, Broadridge Corporate Issuer Solutions
Synopsis: Even when corporations are satisfied with their transfer agents, they should periodically review these relationships rather than let them run on inertia, for three reasons: 1) the registered shareholder base keeps gradually shrinking, which potentially warrants cost reduction; 2) new technologies are enabling service enhancements; and 3) the industry remains very competitive during an era of consolidation. This article describes five questions each public company should ask before renewing transfer agent service contracts.
Transfer agency is one of many relationship-based services public companies procure from third parties – similar in some ways to relationships with auditors, accounting firm or advertising agencies. One important difference is that transfer agents interact with shareholders, as well as company employees.
Public companies and their shareholders take for granted their existing transfer agent relationships, so changing vendors may not seem worth the effort and expense. Consequently, most transfer agent contracts automatically renew, which promotes relationship longevity.
This is not always a blessing, for companies or shareholders. Without a comprehensive relationship review, public com- panies may be missing opportunities to enhance shareholder service, reduce costs, and anticipate or avoid complex chal- lenges down the road.
Industry Dynamics
Let’s evaluate dynamics that are unique to the transfer agency industry, all of which help to understand why a relationship review is important.
- Shrinking registered shareholder base. Registered shareholders gradually have been reduced to holding only about 2% of all U.S. public company shares. As the registered base keeps steadily shrinking, the projected cost of serving the last remaining registered share- holders will be relatively high for some companies.
- Tech and service enhancements. Keeping technol- ogy up-to-date and maintaining high service stan- dards is no longer an option for transfer agents. It’s become mission-critical in an industry with constantly expanding regulatory requirements.
- Competition. In recent years, the transfer agency indus- try has consolidated as many firms have been acquired or merged. Even if a company’s registered shareholder base keeps shrinking, its business can be incrementally profitable for a transfer agent. It pays to stay abreast of the competitive market, especially as contracts approach renewals.
Five Questions to Ask about Your Transfer Agent Relationship
Although each transfer agent contract may provide for an automatic renewal, it’s not the relationship that should be automatic. Rather, it’s a consistent review process to deter- mine how well your transfer agent is meeting current needs at competitive costs. Here are five strategic questions that can help to focus a service contract review process.
1. How do current service needs and costs compare with those of a few years ago?
In a dynamic industry, change should be expected. A continuation of the status quo, year after year, can be an indicator of opportunities for a better contract, as shown by the following examples:
After the 2008-09 financial crisis, hundreds of public companies stopped paying quarterly dividends to conserve cash. Yet, some transfer agents have not yet made meaningful adjustments in their costs to account for less dividend-payment responsibility.
Why is this important? The perspective of several years’ time can be useful in evaluating a long-term transfer agent relationship. If the ratio of service-to- cost has declined, your company should be aware of the fact and use it for leverage. At some companies, procurement policies require cost-benefit analysis and in-depth vendor reviews in such cases.
2. What are the deadlines and terms for the renewal process?
By asking this question, you can open a dialogue with your transfer agent, while also avoiding the impacts of automatic renewals.
Why is this important? When companies are not aware of their contract terms or deadlines, it can be costly. Under an “exit clause” contained in many contracts, the current transfer agent may impose additional fees if contracts are not renewed by specified deadlines. Contracts also may contain terms that automatically lock in the current vendor and specified terms (including automatic cost increases) unless timely notice is given. There is no reason for surprises about renewal dates and terms. Start talking to your transfer agent early, and get the answers you need well before the renewal date.
3. Is the transfer agent clearly disclosing any way that it monetizes revenue from your shareholder base?
4. What do your shareholders think?
5. What will be the cost of the last registered shareholder?
For answers to questions #3-5, please email corporateissuer@broadridge.com
How to Assure the Right Relationship Track
Strong long-term relationships between companies and transfer agents are desirable. But without periodic reviews, your relationships may fall out of alignment with competi- tive standards in a dynamic industry. Your next contract renewal offers an opportunity to “true-up” the relationship by evaluating: changes in your registered shareholder base; service levels and satisfaction; competitive industry trends; and terms proposed by your current vendor and competi- tors. It never hurts to know what other transfer agents are offering, and what other public companies are negotiating.
It’s important for corporate secretaries (and others who lead negotiations) to stay in touch with transfer agent industry events and trends. Talk to competitors and develop a deeper dialogue with your own vendor, including the five strate- gic questions above. Start the review process at least six months before contract renewal to cover all bases without pressure.
Transfer agent services are not now, and won’t ever be, a commodity business. More than ever, this is a relationship- business. A thorough review process will help to make sure your relationship stays on track.
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