Risk mitigation is a hot topic these days…

Interview With Ellen Philip And Cal Donly Of Ellen Philip Associates

“Risk mitigation is a hot topic these days… and risk mitigation, in a very real sense, is a significant part of the function we fill. There’s a cost, certainly, in getting things right, but there’s an even greater cost in getting things wrong.”

Carl: In all the years we’ve been getting together for an annual review of what’s going on in our industry, I’ve never experienced a time quite like the one we’re in now. A number of players in shareholder services seem to be sitting in silence, waiting to see when things will start moving again. How are you finding it?

Ellen: In the 33 years that we’ve been in business we’ve seen lots of peaks and valleys - but never a dip that comes close to what this past year has been. When the economic outlook is positive, when companies are confident and in an expansive mood, when they’re launching new projects and have stretched their internal processing resources to the limit, that’s when we get really busy. The past year, as you know, has not been such a time. Everyone seems to be sitting tight and waiting to see which way the ball will bounce.

Carl: So where does this leave you?

Ellen: It leaves us reassessing our strengths – focusing on where and how we can put our best foot forward when things start opening up again, as we know they will, sooner or later - and focusing intently on our long-term clients, of course. When economic times are difficult, we know there is a big temptation to do everything possible “in-house” rather than to hire outside experts. But the savviest companies know what a risky strategy this can be – and that it often turns out to be the most expensive path in the end.

Carl: What are some of the strengths you feel you can turn to your advantage? What’s unusual in what you bring to the table, and what benefit can this be to your clients?

Cal: One thing that makes us stand out is the depth of experience we have as an organization, and the know-how we bring to the projects we tackle. Also, the stability that comes from the long service of all our employees is a major strength. We not only understand how to get things done, we understand how to get things done in a way that reduces the risk of something going wrong.

Risk mitigation is a hot topic these days, and risk mitigation, in a very real sense, is a significant part of the function we fill. There’s a cost, certainly, in getting things right, but there’s an even greater cost in getting things wrong. That’s something on which we’ll make a stronger play than we’ve done in the past.

Based on our years of experience, we organize flows of work in a way that builds toward accuracy - and we are paranoid about constant checking and cross-checking, in every way that we can devise. Quality isn’t something that suddenly pops into existence, full-blown. It’s something you have to build toward, step by step. It’s an end product. To get quality you have to work to a plan, and plans are based on experience.

A key strongpoint is our understanding of why certain things should be done in specific ways – if you don’t want to run the risk of finding yourself, at some point in the process, painted into a corner. That’s the advantage of experience and a long organizational memory. You have to understand and buy into not only the methodology but the rationale that lies behind it.

Carl: Can you give us an example of the type of thing you’re getting at?

Ellen: One good example is in how questions to plan participants are framed in a tender offer. Why not ask the participant right out: “How many shares do you want to tender?” That’s what you usually do with Street holders, and with registered holders. Why not do the same with plan participants?

There seems no earthly reason why you shouldn’t do the same – unless you happen to be aware that a plan participant’s holding on expiration date might not be the same as his or her holding on mail date. A variety of plan transactions can take place in the interim. And what happens if a participant has fewer plan shares, at expiration, than were specified on the instruction form? A considerable reconciliation problem can be neatly sidestepped by having the tender instruction expressed as a percentage of the holding rather than a specific number of shares. That way the arithmetic is plain sailing, regardless.

Carl: In terms of institutional experience and know-how, what about the waves of consolidations and cutbacks that have taken place over the last five or ten years?

What do you see as you look around you?

Ellen: When I look around, what really strikes me is the amount of institutional memory that’s disappeared in recent years. It’s people who have vanished, along with the jobs that have vanished, and that’s sobering enough. It’s even more sobering when you think of all the experience that has vanished along with the people. Most organizations simply don’t have the cadre of experienced people that they had in the past. This makes mistakes more likely to happen, and increases the value of what an experienced supplier can pro- vide. The question is: Who do you want to have in your corner when the chips are down?

Carl: I know that proxy tabulation is one of the key areas you focus on. What, in your estimation, gives a tabulation integrity? What is it that separates one tabulator from another?

Cal: A sound tabulation is one that is able to stand up completely to any challenge that may be made: It’s one that has followed the rules, to the T, and is based on sound methodology. It’s one in which everyone who’s entitled to vote has had a fair opportunity to do so, and everyone who’s not entitled to vote has been successfully excluded. To do this, the tabulator has to have a firm understanding of every facet of the process, from beginning to end. The tabulator has to be aware of every piece in the puzzle - it’s a lot more than just a matter of collecting votes and delivering a tally.

Our very first step is always to double-check the integrity of the master file we receive. Do the totals that we run, for both shares and holders, match the totals the client provides? And if they don’t, why not?

You’d be surprised at the number of errors we catch during the total-confirmation process. One chief difficulty, it turns out, is that the “official” totals are sometimes generated on a system other than the one that generates the actual file – and a discrepancy gets by unnoticed. A file often comes to us after someone has merely pressed a button, and made the assumption that the computer will get it right. One of our cardinal rules is to check to make sure that the machine is doing what we think we told it to do. And we have the diag- nostic tools to accomplish that.

Carl: Give us a few examples of some of the discrepancies you catch.

Ellen: Sometimes, when our total is under what we’re given to prove to, it turns out that an entire sub-group within the universe of voters has somehow been omitted from the file. This can easily happen if a crucial class code is inadvertently dropped during the file-creation process.

My all-time favorite example, though, is on the other extreme – when our total is higher, and we have to find the reason for the difference. In the instance I have in mind we were over by close to 100,000 shares. Back and forth we went, asking questions and double and triple-checking. Eventually we found the answer – and it’s the reason why, in fun, I sometimes suggest that all shareholders move to California. We discovered that in this case the zip code of a California shareholder had somehow wound up in the share field.

Contact Ellen at ephilip@ellenphilip.com or Cal at cdonly@ellenphilip.com