Key Risks – And Internal-Control Checkpoints To Check With Current And Potential Service Suppliers – Ranked By Riskiness

Here’s our “Top 5” list of internal-control risks areas - ranked in order of “riskiness” - that deserve an extra level of scrutiny by public companies going into the 2023 proxy season:

1. ABANDONED PROPERTY SERVICES

Of all the services where a public company needs to stay compliant with complex and fast-changing regulations, avoid costly “audits” by cash-hungry states – with potentially big fines and penalties – and worst of all – deal with the possibilities of fraudulent conveyances and outright thefts by suppliers - and often by one’s own employees – this is, statistically, the riskiest area on the corporate scene. The very label is akin to posting a sign that says, “steal me, since no one is looking.”

Not surprisingly, there have been many bad actors in this field over the  years – and many good corporate citizens have lost their own jobs because of bad hiring decisions. (See the OPTIMIZER’s classic article for some frightening examples: Tales From The Crypt @ OptimizerOnline.com)

Currently, we count over 15 companies – all purporting to have extensive experience here (often by counting up the tenure of every employee, regardless of real experience) – AND to be the very best at what they do – most of which we would never list in our Directory of Service Providers. The barriers to entry are very low while the opportunities for flimflammery, conflicts of interest and outright thefts are infinitely high, so look carefully at all of our vetting tips before hiring anyone here.

2. CORPORATE TRUST AND AGENCY SERVICES

(Trustees, Depositories, Exchange, Tender and Redemption Agents and “Reorg Services” in general.)

The third-quarter OPTIMIZER, and now this issue too, details a truly frightening number of costly errors made by Corporate Trustees – and the trend seem certain to continue, due to a very serious brain-drain here. (Can you imagine a major bank Trustee distributing the entire $900,000,000 in principal instead of the interest that was due??? Or issuing hundreds of millions of bonds that were not “duly authorized for issuance”?)

If one were to cite the biggest financial losses arising from one-time mistakes, the once stodgy old Corporate Trusteeship business would be the number-one source these days, with “Corporate Agencies” (think “Reorg work”) a close second.

And if we were to cite the field where Internal Control Systems are most seriously lacking these days, THIS would clearly be it. 

3. TRANSFER AGENTS

As we often remind readers, Transfer Agents are the keepers of a public company’s most critically important resource; its Shareholder Records.

Also, Transfer Agents are most often the chosen agents in corporate reorg deals – charged with disbursing tens and even hundreds of millions of dollars and/or securities – in an environment where single holders are often due payments in eight or even nine digit amounts. Accordingly, this is the area that requires the most serious vetting of all – at least if your company is a high-or-large-cap one.

4. PROXY DISTRIBUTORS AND TABULATORS

With more and more shareholder proposals than ever – and with more and more razor-thin margins than ever – and more proxy fights on the horizon as well - a review of the distributors of proxy materials and tabulators of votes - and their internal-control systems - is more important than ever, we say. Here, of course, the risks are largely reputational ones, but that makes the internal control environment no less important these days

How, exactly, does your agent assure that all of the required materials are delivered to all of the eligible voters? How, exactly, are incoming votes validated – and double-checked to assure the accuracy of the tabulation? (We see tabulators each year who check simply at random – regardless of the size of the vote – while other, better ones, have much more rigorous procedures.)  Very important to ask these days, how auditable are the results, in the event of close calls - or official challenges?

5. INSPECTORS OF ELECTIONS

Today’s environment has seen a major raising of the bars for the appointment of Inspectors of Elections considerably, year after year.

“Inspection” by sitting or retired corporate officers no longer passes the sniff test – nor does the appointment of someone from one’s proxy solicitor, since there are clear conflicts of interest here too. Here are our own vetting tips, though, we hasten to note, we have a vested interest in this space:

• Review the bios of prospective Inspectors to be sure they have the relevant experience. Most candidates out there have fairly impressive bios, but often their experience with corporate elections at publicly-traded companies is essentially nil. Many retired “industry veterans” were used to simply showing up - and signing documents prepared by others. Make sure they can sniff-out trouble, early on.
• Make sure your Inspector of Elections has written Guidelines in place – and written Presumptions as to the Validity of Proxies too.
• Make sure you IOE has a strong back-up system – with other experts who can be consulted when unusual situations arise - as increasing they do.
• Make sure that your IOE can effectively ‘stand up and be counted’ if any challenges arise.