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Inside:Going Paperless in the Securities Industry: Benefiting Issuers and Investors - A Word from the President - The Society's David W. Smith has his say on "say on pay." Fall Regional Events - Our chapters are hosting a series of great events around the country this fall. Here are some highlights.
Going Paperless in the Securities Industry:
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| James Balbo |
"Paper certificates are the last vestige of a bygone era. A new generation of investors takes electronic registration for granted," says James Balbo, DTCC managing director, Asset Services. "They don't want stock certificates; they want a DRS statement showing that they own X number of shares in a given corporation registered in their names. This provides them with greater security — they can't lose the stock certificates — while giving them greater flexibility in buying and selling securities."
In a recent DTCC study of several brokerage houses that have chosen to 'default' their systems to DRS — that is, the shares are automatically registered electronically if an investor does not insist on a paper certificate — the number of DRS statements has risen dramatically. In January 2007, one brokerage firm reported that, for the month, it had issued 130 paper certificates compared to 1,218 DRS statements. The number of DRS statements went from .03% in July 2005 to 90.4% in January 2007.
Greater Corporate and Investor Savings
With electronic registration, corporate secretaries can eliminate the expense and manpower associated with issuing or transferring paper stock certificates, saving their companies and their investors millions of dollars each year. It's estimated that finance industry and corporations spend approximately $350 million annually to print, process and issue paper certificates. This figure includes $50 million to replace lost or stolen certificates — more than a million stock certificates are reported lost or stolen each year.
Many investors don't know that they have to replace paper certificates if they lose them and that it can be an expensive proposition. Replacement fees needed to cover the surety bonds for lost securities can be substantial — two to four percent of the current market value of the shares or value of debt instruments. That means if a lost certificate has a value of $20,000, the shareholder would pay upwards of $800 to replace the paper certificate.
When investors purchase securities via DRS, they receive a statement acknowledging the purchase and number of shares. The cost of a DRS statement is free when issued by a transfer agent; in 2006, it averaged less than $6.00 to request a transfer from certificate ownership to a DRS statement of ownership. By comparison, it can costs investors anywhere from $25 to more than $100 for a certificate registered in their name. And charges involved in selling a paper certificates are almost as great.
Fragile Paper
"Paper certificates are perishable, too," said Balbo. "In addition to being lost or stolen, they can be easily destroyed in natural or man-made disasters." He pointed to the estimated $16 billion worth of paper certificates that were lost on 9/11 with the collapse of the World Trade Center towers. "By using its electronic records, the securities industry eventually was able to reconstruct the ownership of the securities. But the lesson was not lost. Paper proved far more perishable than computer files."
Going "certificateless"
As more and more companies look to electronic securities registration to reduce the volume and cost of issuing paper certificates, more than 200 corporate leaders have taken a giant step and gone completely "certificateless" and only register shareholders via electronic ownership. These companies include Society members:
- Chevron Corporation
- Broadridge Financial Solutions
- Intel Inc.
- MetLife Inc.
- Mueller Water Products, Inc.
- NCR Corp.
- Quovadx Inc.
- Unisys Corporation
- U.S. Airways, and
- Western Union Company.
More than 2,000 companies and their investors are already enjoying the benefits of DRS. Many more will be joining them in the next year or so as the securities industry keeps pushing paper certificates closer to extinction. Companies and investors should be prepared to move into the era of electronic registration and paperless securities.
For corporate secretaries, moving to paperless securities has no downside — only pluses. It will reduce cost for both you and your investors, reduce risk and increase security, and make trading easier and faster.
For more information on DRS and the paperless campaign, visit DTCC's No More Paper Web site at www.DTCC.com/nomorepaper.
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AUTHOR: Joseph Trezza is a vice president, Asset Services for The Depository Trust & Clearing Corporation. |
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A Word from the Society's President:
The Only Solution: Directors Must Be the Shareholders Representatives
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By David W. Smith
CEOs making $200 million a year is outrageous. But does anyone think that Congress — which created the gigantic Federal regulatory entities — is really the body to deal with the outrage? House Financial Services Committee Chairman Barney Frank (D-Mass.) thinks so.
Mr. Frank has proposed (and Congress has enthusiastically voted for) the "Shareholder Vote on Executive Compensation Act." Shareholders would have an advisory vote on the compensation of senior executives. Mr. Frank said in a press release: "I do not understand those who argue that the people who make up our stock markets are collectively very wise, but at the same time are somehow incapable of rendering a coherent opinion of what they should pay those they employ to run the corporations that they own."
Phrased that way, it's hard to argue the point. Owners should have a say in the running of the businesses they own. Well, yes . . . but: Do shareholders see themselves as company owners?
Shareholders fall into two categories: huge institutional owners like public and corporate pension plans, mutual funds and large, sophisticated investors such as hedge funds, and the rest of us, the people whose stock is in 401k's, mutual funds and equities as part of relatively small investment portfolios. The rest of us are investing to send the kids to college or for our retirement.
The first category, the institutional owners, have comprehensive knowledge of their investments thanks to staffs of analysts, and because of the large size of their share positions, often have clout with and access to corporate management. The rest of us . . . not so much. I would argue that the rest of us don't see ourselves so much as company owners but more as the holders of investments. I doubt we differentiate between owning shares in a company versus corporate bonds versus certificates of deposit and on and on. As investors, we express our coherent opinions by buying or selling our investments.
Mr. Frank implies that it's only an advisory vote — a nonbinding resolution in Congressional terminology. Even without a vote, shareholder anger and attendant publicity helped send CEOs at Pfizer and Home Depot to the exits. The repercussions of shareholder opinion can be immense. Isn't a short leap from advisory votes on compensation to advisory votes on mergers and acquisitions? On spending for a large R&D program to fill the product pipeline versus increased stock dividends? On the direction of labor negotiations? Any CEO who acts for the long-term benefit of the company but causes short-term pain is likely to face loud and angry disapproval. Won't the possibility of such disapproval dampen the CEO's initiative? And change the course of the corporation itself?
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One wonders if Mr. Frank would accept the American voters having an advisory vote on the compensation packages that Congress grants to itself, to the executive branch and to the judiciary. What if Congress supported a war that became hugely unpopular? What if Congress didn't expand the benefits of Federal programs — would members want to face an annual "approval" of their actions in the form of a non-binding referendum?
Government by popular referendum was used once, by the Athenians in the sixth century B.C. That's the last time a large organization tried direct democracy. Virtually every democratic system in the intervening 2500 years has been a representative democracy. If it works for the citizens of United States with Congress, why not Corporate America?
The current model of corporate governance is excellent, providing huge value to shareholders for decades. The board of directors can function as a representative corporate government. Directors should be accountable through a majority vote of shareholders, or, at the very least, through directors tendering resignations if they receive a substantial withhold vote. The result: Shareholders will have a real voice in the running of companies through their representatives, and management will be able to do its job unencumbered by what amounts to opinion polling.
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Fall Regional Conferences
Western Regional Fall Conference
Including the Los Angeles, Phoenix, Pacific Northwest, Rocky Mountain, San Diego and Northern California Chapters
Wednesday, September 19 - Friday, September 21, 2007
Hyatt Regency Huntington Beach Resort & Spa
Huntington Beach, California
Program Highlights:
- Wednesday, September 19 - Golf tournament on the Arthur Hills-designed Black Gold Golf Course, opening reception, dinner on-site.
- Thursday, September 20 - Full day of informative presentations and panel discussions, followed by dinner.
- Friday, September 21 - Morning session with additional presentations. Conference adjourns at 12:00 noon.
Northeastern Regional Fall Conference
Including the New York, Eastern New England, Fairfield-Westchester and Hartford Chapters
Wednesday, September 26 - Friday, September 28, 2007
The Fairmont Washington DC
Washington, DC
Information on other regional meetings will be updated soon.
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