The total value of financial assets seeking their rightful owners can probably be reckoned in billions of pounds in the UK alone. They take the form of unclaimed lottery winnings, dormant bank and savings accounts, National Savings and, as far as shareholders are concerned, unpaid dividends and shares. Not many companies, however, seem to be doing much about tracing their disappeared shareholders.
The issue is about to come under public scrutiny in the UK. Under the 1988 Companies Act there is a statutory obligation for companies to make ‘reasonable efforts’ to trace missing shareholders. Unclaimed shares or dividends must be held in trust for twelve years, after which they have to be paid over to the court. With the first twelve-year period about to expire, the courts will have to decide what to do with the money.
Time-bomb
Missing shareholders are relatively small in number when it comes to this first period, but there is a time-bomb ticking. In the next few years the first of the big privatizations and then the demutualizations will come of age; and they involved vast numbers of people purchasing shares for the first time. Many of them knew little about share ownership then and know little about it today. Some have not even bothered to cash their dividend warrants; others may have forgotten they even own their shares.
Ian Baker, deputy company secretary at BOC, identifies four categories of shareholders: ‘You have your current shareholders who have failed to claim their dividends. You have your ‘goneaways’, where the Post Office has returned their dividend cheques because they are no longer at their last known address. The third category is what we call closed accounts where someone was a shareholder, has sold their shares and for one reason or another failed to realize that there were dividends outstanding. And lastly there are deceaseds’ accounts, where someone has died but their heirs or executors have not done a particularly good job of tidying up.’
On the face of it the risks to companies from this would not seem great. The vast bulk of UK listed company shares are owned by institutions and other large shareholders. Private individuals tend to hold no more than 10 or 15 percent of the stock and most of those are traceable. The ‘disappeareds’ make up a very small proportion. But as Ian Baker explains, ‘It is time-consuming and wasteful of resources and frankly companies haven’t got the staff to trace them.’
And in the case of the larger privatizations the risk of public embarrassment is not insignificant. British Gas had a vast number of shareholders at the time of its sell-off. But the company was obliged to report that 150,000 of them failed to cash their dividends. The publicity risk is that ‘fat cat utilities’ are written up as sitting on large amounts of small shareholders’ money; that they are not taking sufficient care of the ‘Sids’ they encouraged so intensely to become shareholders in the first place.
There are also additional costs in maintaining entries on the share register. The annual fees payable to the share registrar are usually of the order of £2 for each one.
Action stations
But the largest risks arise at the time of corporate actions. ‘You ignore the private investor at your peril,’ says Roger Tyson, chief executive of consultancy Shareholder Communications plc. ‘If you do keep hold of them, then in the event that you do have a crucial vote the number of active shareholders you can access can be very useful to you.’
Tyson cites the recent contested bid by 3i for fellow venture capitalists Electra. Electra needed 75 percent of the vote to survive and managed in the event to achieve 76.15 percent. It was a close call and, adds Tyson, ‘There have been a number of cases where takeover battles have been won on a handful of votes…These things can go to the wire.’
Tyson clearly has a vested interest in pushing the issue since his firm does a lot of work in the small shareholder field. But he is not alone in believing that it needs to be taken more seriously. ‘There is a growing view that this needs to be pursued more actively,’ concurs Philip Hooker, a director at ABN Amro stockbrokers Hoare Govett Limited. ‘The more financial engineering you do, the more people you have on the share register and the more you have to communicate with your shareholders.’
Hooker explains that in cases where scrip issues or dividend reinvestment programs are involved the problem compounds itself. In these structures companies allocate the shares which are due instead of dividends and this repeats, annually for example, so the unclaimed assets increase as time goes on.
Roger Housechild of the Institute of Chartered Accountants in England and Wales notes that a further problem arises when companies go into liquidation. Where there are recoveries of funds, distributions to missing shareholders cannot be made.
While registrars themselves are keen to help trace shareholders they say they merely act on instructions from the companies whose shares they register. Naz Sarkar of the UK’s largest registrar, Lloyds TSB Registrars, believes an industry-wide solution needs to be found, but he wants to keep the problem in proportion. ‘The vast majority of shareholders are dealt with successfully,’ he says. ‘And I have never known of a large shareholding institution or nominee which has gone missing.’
Public offering
One of the industry solutions which is steadily gathering support is the Unclaimed Assets Register. Keith Hollander, director of the newly-formed Register, plans to leverage the available technology and research tools to compile a database of unclaimed assets of all different sorts. He hopes to offer the public the opportunity to recover missing assets in return for a fee. ‘We don’t know exactly how much is there but the institutions themselves are very keen to resolve this before it becomes an issue,’ explains Hollander.
The main stumbling block, however, is the Data Protection Act that prevents companies and institutions from divulging details of private individuals’ affairs. Until this is resolved it will not be possible to open up the field to this sort of initiative. As Hollander points out, for the most part the ‘disappeareds’ have merely gone away and not left a forwarding address. Those who may have inherited shareholdings from deceased relatives or as gifts may not know that they own the shares or what to do with them.
In many cases it is a matter of companies making a real effort to trace their shareholders. BOC’s Ian Baker, in conjunction with the company registrar, took the initiative of writing to all current shareholders to ask if they were aware of an amount of unclaimed dividends and if they would like to claim it. ‘We had about a 60 per cent response rate to that. But,’ he adds, ‘it still amazes me that 40 per cent are offered money and do not respond.’
Another obvious step is to mandate all dividend payments to a bank account. Although there are still 2.5 mn people in the UK over the age of 16 who have no bank account, and although people change their accounts more often now than ever before, this move ensure a greater degree of success in paying shareholders. In addition this process can be easily and cheaply automated using the BACS electronic payment system.
There is now the opportunity, adds Tyson of Shareholder Communications, for new issues and offerings, such as privatizations and demutualizations, to avoid building up such problems for the future. This may be particularly the case in some continental European countries where there has been relatively little activity of this sort to date. There is certainly plenty of scope for learning from the errors and omissions that have emerged in the UK.
In some countries the share-owning culture is not particularly widespread and where share investment does take place the bulk of holdings are bought through banks or nominees who are better able to keep in touch with their customers. However, the problem of bearer shares can be significant (see cover story, Reverse angle). Once the original purchaser passes shares on it is nigh on impossible for the company to keep an accurate track of their whereabouts.
Double-edged approach
In future closer contact with shareholders may well be recognized as a way of maintaining a worthwhile marketing edge. The many shareholders in UK utilities, for example, were also customers in many cases. The marketing opportunity is immense by virtue of the size of customer and shareholder bases that such utilities have.
In an environment where there is huge competition for shareholder interest on the one hand and for consumer interest on the other, privileged access can be a significant competitive advantage.
As lost assets and missing shareholders receive greater public and media exposure the chances are that they will need more attention from investor relations professionals. Adverse publicity, increased shareholder maintenance costs, accusations of insufficient care taken of smaller shareholders and the risk to critical votes in bid situations are all risks which can largely be avoided.
