A Number Cruncher Gets An `E' For ErrorsElizabeth Lesly
With fewer than 72 hours to go until its Apr. 22 annual meeting, there was havoc in CPC International Inc.'s executive suite. Corporate Secretary John B. Meagher had received only 72.4 million shareholder votes, too few for a quorum. The culprit: Automatic Data Processing Inc., the giant information handler that distributed and tabulated the proxies. Fumes Meagher: "Everybody gets anxious when we don't know three days before whether we'll be able to hold a meeting legally." After a last-minute rush, ADP managed to process enough votes--but even then, about 4% went uncounted.
Meagher wasn't the only executive biting his nails this proxy season. Martin Marietta Corp. lacked a quorum for its Mar. 25 special meeting to approve its purchase of General Electric Co.'s aerospace business until a day or two beforehand. According to a spokesman, CEO Norman R. Augustine was so concerned that he phoned Josh S. Weston, ADP's CEO, to complain. Martin Marietta ended up with a quorum, but with 16% fewer votes than usual.
The 1993 proxy season, indeed, was a royal mess: Officials at several large pension funds fear that ADP didn't count their ballots at all--potentially breaching the integrity of corporate elections at such companies as Paramount Communications, Pfizer, and McGraw-Hill, parent of BUSINESS WEEK. Says Kurt Schacht, general counsel of the Wisconsin Investment Board, which has assets of $33 billion: "Shareholder initiatives are difficult enough without dealing with a system that does not tabulate votes correctly."
BAD SOFTWARE? ADP officials declined to comment, but an Apr. 24 memo sent by ADP Proxy Services Div. President Rich Daly to corporate issuers and transfer agents and obtained by BUSINESS WEEK confirms that ADP failed to count about 5% of the votes in an undisclosed number of corporate elections. Daly blamed "a programming bug" that was "immediately corrected."
Many shareholder groups aren't so sure. They're calling for audits and regulatory scrutiny into the increasingly important role in corporate elections of ADP, which handles 70% of all corporate proxies. ADP's long-held reputation for reliability was tarnished further on May 7 when the Bureau of Labor Statistics revealed that employment data it collects through state governments from ADP and other, smaller firms were responsible for inflating job-gain figures in the late 1980s and exaggerating job losses until 1991 by about 540,000 jobs.
The BLS blamed the inaccurate employment figures on the computer software that ADP and other firms use. Since the BLS was receiving the ADP data through state agencies, it took years to discover that ADP was counting the number of paychecks issued instead of the number of people paid, as the BLS asks. ADP's data "reach now into the whole fabric of our financial and economic reporting in this country," notes BLS Associate Commissioner Thomas J. Plewes. ADP wouldn't comment on the problem.
Why the chaos? Institutional investors believe that vote-tabulation problems actually existed in the past, but not enough to be noticed. That they're showing up now may be a function of ADP's aggressive acquisition strategy, which has added bulk and complexity to all its key businesses in the last 18 months.
In proxy services, ADP acquired its only sizable rival, Independent Election Corp. of America, last year in a deal that gave it a virtual lock on the market. After the deal, ADP scrapped IECA's more sophisticated computer system in favor of ADP's existing program, which was unable to handle the volume and complexity of its newly expanded role, says John C. Wilcox, chairman of Georgeson & Co., a major proxy-solicitation firm. Wilcox says he met with Daly and other ADP executives in early November and was told the software problems would be fixed.
NO CHOICE. The problems have broad implications, given that for most customers, ADP is the only place to go for proxy services. "How do we know our votes get counted?" says Maryellen Andersen of the Connecticut Office of the Treasurer, which saw the votes for its 200,000 shares in the Paramount election go uncounted until a recount found them missing. "ADP has a monopoly, and there really isn't any control of them."
That may change. Investor groups and corporations, overwrought with ADP's fumbles, are taking their concerns to the SEC and Congress in the hopes of making sure ADP cleans up its act. Representative Edward J. Markey (D-Mass.), chairman of the House subcommittee on telecommunications and finance is considering shareholder-rights legislation that could affect ADP. He is scheduled to meet with ADP and irate shareholders in late May, says an aide who notes that ADP "is relied on to be impeccable, to say that these numbers are good."
Barring severe regulatory action, though, it's unlikely that the turmoil will seep down to ADP's bottom line. The Roseland (N.J.) company is simply too powerful. It processes paychecks for 16 million Americans--easily the biggest share among independent firms--and counts proxies for most public companies. Such dominance has brought double-digit earnings growth for a stunning 127 consecutive quarters--most recently, in the quarter ended Mar. 31, when profits jumped 16%, to $92.5 million, on 12% sales growth. "This is more of an embarrassment," says Merrill Lynch & Co. analyst Stephen T. McClellan. "Those glitches happen." Try explaining that to an angry corporate secretary.