Every time a company announces dividends, a stock split, a rights offering, a tender offer or other such corporate event, investors have decisions to make – and a brief time to make them.
Related: Automating the Sourcing of Corporate Actions Data
The challenge for investors is finding the information they need to make an informed decision, which is often buried in lengthy notification documents. Further, this information generally flows through numerous intermediaries before it reaches investors, costing valuable time and creating the potential for errors each time humans intervene to transmit the information on to the next link in the communication chain.
A recent report by the ValueExchange found that 46% of all corporate event data is processed entirely manually as it flows from central securities depositories to custodian banks, brokers and fund managers.
Add to that scenario the fact that corporate event information has become more complex as investment products such as derivatives, special purpose acquisition companies (SPACS) and other structured instruments are more common. As issuers add new options to corporate events, even a simple dividend announcement can be a complicated, rules-based challenge.
This increasing complexity is also driving up cost: The same ValueExchange report found global investors expect the cost of managing corporate events to rise 17% in the next three years. U.S.-based investors expect an even steeper rise of some 33%. The cost of errors is also expected to push up costs, by an average of some 25% over the same period for elective events in the U.S.
We met Tim Lind, Managing Director of DTCC Data Services, to talk about what investors can do to better to manage this challenge.
DC: Why are corporate actions becoming more expensive and difficult to process?
TL: Corporate events are not only becoming more frequent, but they are also becoming more complex. These two trends combine to make managing them more challenging as investors need to read, interpret, and fully understand the specifics of each event to decide which action will create the greatest returns. But information often arrives late, is presented in inconsistent formats and assessing the full impact – especially for complex investment instruments – can eat up a lot of time.
This can create problems as issuers may allow five days to respond. However, investors usually have only one or two days left by the time they receive the information.
A lot of this activity is also conducted by email or using other manual processes, so in addition to the cost of manual processing, there is also greater potential for operational risk. It’s customary for the asset manager or custodian to compensate the underlying fund in the event of an error, so mistakes can be expensive in this operation.
DC: What’s the root cause of the challenge?
TL: The lack of standardization is the core issue. That, and the complexity of disseminating the information.
In many ways, the corporate action process is broken at the very beginning and the downstream workflow and reconciliation is a grand coping mechanism for how information is translated to the portfolio manager at the end of the chain. Plus, you have teams in legal, compliance, finance and various other departments weighing in to create the notification documents, again, often for the first time. The result is often a complex set of terms that humans have to interpret in order to take the best course of action in the interests of fund. You can structure most of the information to make it machine readable but humans remain an integral part of the workflow for many events that require a decision to be taken.
The original issuer’s information also flows through numerous intermediaries, including market data providers and custodial agents, before it reaches the investor. It’s a bit like the childhood “telephone” game where a message is passed down from one person to another: By the time the message reaches the end of the communication chain, it may be inadvertently changed. It’s not unusual for one investor holding the same security with different custodians to receive different details about the same event because it flowed to them through different channels. The asset manager is forced to reconcile various translations of the same event.
DC: Who ends up paying the cost of this inefficient process?
TL: Pretty much everyone involved bears additional cost – and takes on additional risk. Ultimately though, it’s the investor who pays for systemic inefficiency in any investment process.
There are increased back-office and other operational costs incurred as everyone along the chain continues to use manual processes for something that really should be automated, or at least, far more automated than it is now.
This is not just a back-office issue: Aside from the substantial and rising costs of human involvement, there is operational risk as errors can be costly. If you miss the deadline for the tender offer, for example, your investor clients may insist you honor the tender price, which is usually a premium to the market. In fact, the ValueExchange report found that 17% of U.S. funds experienced errors that cost them millions of dollars.
DC: How can the industry better manage more frequent, complex corporate actions?
TL: Standardization of information is critical, especially in terms of how central securities depositories and stock exchanges capture data from issuers and agents. To improve operational risk and inefficiency downstream, we need to look upstream and the entire process between issuers and investors. We have seen other markets adopt standardized connectivity between issuers and market infrastructure and the benefits that accrue to investors as a result, which include better accuracy, less reconciliation, and increased velocity in the time it takes to get information into the hands of investors.
With Environmental, Social & Governance (ESG) and shareholder rights directives, regulators and activists are focusing on improving transparency between issuers and their shareholders. Effective governance – the “G” in ESG – doesn’t get nearly as much attention but good governance means that investors are aware of their rights and entitlement when it comes to any events that impact their holdings. Streamlining the dissemination of corporate actions and modernization of processes that improve transparency between companies and their investors is consistent with the fundamental principles of ESG.
Much has been invested in coping strategies for non-standard, fragmented processes but the industry is again asking questions of how we address the root cause of issues. It’s time to focus on improving corporate action processing from end-to-end.
Click here for more information on how DTCC’s corporate actions services can help you improve operational efficiency and reduce errors in processing critical events.