Can We Do Away With Paper Dividend Checks? Plus, Our Top 5 Ways to Get Results.

A month or so ago, Liz Dunshee, one of the three wonderful bloggers on the incomparable thecorporatecounsel.net blog, e-mailed the following question to us, that she’d received from a subscriber: 

“Has anyone implemented plans to eliminate (or reduce) your stock transfer agent costs associated with issuance of quarterly paper dividend checks?  Have you passed the paper check charges along to your shareholders, or implemented mandatory electronic deposit, or mandatory DRIP enrollment, or some other idea?  Can you point to any legal issues that need to be reviewed before “eliminating” paper checks?  Thanks!”

Here’s what we wrote back: Wow! And how timely! In the last issue of the Shareholder Service OPTIMIZER, we asked readers if they are paying “high 20th-century prices” for services that are totally outmoded in the 21st century.

The paper dividend check should, perhaps, be “People’s Exhibit A” for ways a company can reduce and/or re-orient their shareholder-servicing budget, by thinking in a 21st-century manner - and by paying attention to “details”.

For starters, when it comes to dividend disbursements, the biggest potential cost-saver - by a country mile - is to move from a quarterly to an annual disbursement schedule: Many public companies are paying $.25 per check for issuance and another $.55 or so per item for the check itself, postage, a “stuffer” and the envelope. So a company can save at least $2.40 per-shareholder per year this way. But, in addition, paper checks generate added costs - that are usually embedded in transfer agent fees schedules or in their “flat-fee arrangements” - for things like replacing lost, destroyed or outdated checks, to account for and follow-up on - and eventually having to escheat - funds left-behind by careless and/or truly “lost” shareholders…So be sure to negotiate appropriate fee reductions if you move to an annual or semi-annual disbursing schedule.

In addition, most companies pay “hidden” check-reconcilement costs - which are typically paid-for by the earnings-on-balances the agent gets to earn on the check-float. This brings us to the biggest potential money-saver of all: With an annual disbursement schedule, the company not only cuts its disbursing costs by three-quarters, it gets to hang onto a growing “pot” of funds for 365 days a year. The ability to retain and use them as working capital will often cover most if not all of the company’s short-term financing needs!  (A small note of caution here: There are still a few companies whose founders, senior officers, retail shareholders and retirees receive dividends in amounts that are significant - to them - and sometimes in the aggregate. If that is the case you can consider a semi-annual schedule and still reap significant savings.)

As to the questions about eliminating checks altogether, or passing along the costs, let’s remember that companies DO owe ‘fiduciary duties’ to their shareholders, so this would not be a good way, or a fair way to deal with shareholders in our view. Also, in our non-lawyer’s opinion, it would not withstand - much less be worth inviting - a legal challenge. Plus, we think, it would almost certainly generate a public-shaming in the bargain.

Lastly, as to those DRPs…No, you can NOT make them mandatory…Nor would you really want to, we think, once you review the alternative solutions - and the perils of having “orphaned DRPs” to pay for: We continue to get two statements each quarter - despite our best efforts to eliminate them - from two “orphaned DRPs” - where we moved all the full shares to our broker years ago, but where the “fractional interest” that remained could not be moved through “the system.” So eight statements a year - plus, most years, proxy materials too, where we have way less than $100 worth of stock in total!

And…OUCH AGAIN: we continue to get quarterly dividend checks - for a whopping $.52 each - from a company that eliminated its DRP a few years ago, but where the agent did not automatically cash-out the fractional interest that we had to leave behind….thanks to “the system” - and maybe as an easy way to make a bit of easy money…for nothing of value. The teller laughs when we go to the bank to cash a check that is equal to the postage on the envelope - and that takes the teller’s time - and the banking system’s time - and ours - and that is a total waste of the company’s money besides! But when we call the T-A’s call center, as we do periodically to stop the annoying and resource-wasting checks - we get told each time that the fee to sell the fractional interest is $15 - $25 - no exceptions…But yes, they would take a bit less - specifically the entire sales proceeds - rather than send us a bill for the “privilege” of cashing-out if our holdings are worth less than their fee!

So on to the subject of ACH disbursement - which, really is the 21st-century way to deal with the costly and totally outmoded 19th and 20th-century payment methods: Even old grandpas like your editor-in-chief are using the web to check our bank balances, pay bills and move money these days…And, increasingly, shareholders don’t need or want to take a trip to the bank - UGH! - no matter how young or old they are.

Plus, we always get our money in good funds on the payable date! So please read down for our Top-Five Tips to eliminate checks:

WHY HAS EVERY STOCKHOLDER NOT SIGNED UP FOR ACH DIVIDEND PAYMENTS??

HERE ARE OUR TOP-FIVE TIPS TO GET RESULTS:

1. Make sure the invitation to sign-up comes from your company - not from the transfer agent - and that it comes in an eye-catching and reader-friendly way.
2. Response rates will be highest when a brief but carefully written letter to check-getters is made - and when the letter is signed by a company officer. Including it with the check is a good way - and the most cost-effective way to go. But often - especially if you have mailed many “statement stuffers” on this subject - a separate mailing will yield better results, that will pay back the expense right away.
3. Carefully explain the many benefits of ACH delivery - both to shareholders and to the company itself; safety, security, convenience, privacy and timeliness for the shareholder, environmental “friendliness” - and significant cost savings for the company.
4. Make sure that your disbursing agent will clearly identify the dividend payment as what it is on their outgoing ACH payments - so you can assure stockholders that the payments will be clearly identified on their bank statements. (Some sending banks stink at this! And this, in our own experience, is a major reason for NOT signing up for ACH payments.)
5. Most important: Make sure the “required forms” are easy to follow - AND require a minimum amount of time and effort on the part of shareholders: Here’s another aspect where a separate mailing will pay for itself: consider pre-filling the account name - and allow the shareholder to simply attach a check marked VOID, rather than requiring - and coaching them to locate and “Enter the Bank Routing Number” - and the holders’ Checking Account Number - and then allow them to simply “Sign Here”…