T. Rowe Price: Invest with Confidence… but vote with skepticism?
When we think about complexity, we naturally think about systems that seem risky, like nuclear power, aviation, space flight, the power grid, or high frequency trading. But a recent, and costly, proxy voting mistake shows that even systems that seem really boring can have big consequences when they fail.
T. Rowe Price, the asset manager, announced this week that it was paying almost two hundred million dollars to clients for mishandling of a proxy vote related to the 2013 leveraged buyout of Dell Inc. At the time of the buyout, T. Rowe Price held the computer maker’s shares in a variety of its mutual funds and client accounts.
Even as T. Rowe Price actively opposed the buyout and advocated for a higher price for Dell shares, their proxy voting system mistakenly voted “for” the merger. Like almost all complexity-driven errors, this was a combination of human error (T. Rowe Price employees failed to check that the voting record matched what they expected), external factors (the shareholder vote was postponed several times, which overwrote the “Against” vote that T. Rowe Price recorded), and seemingly benign design decisions that have unintended consequences: in this case, that the T. Rowe Price’s default vote for a management-supported merger was “For” the proposal.
On May 31, 2016, the court ruled that Dell’s fair value per share was $17.62 and not $13.75. Because of their mistaken vote for the merger, T. Rowe Price’s shareholders were denied the additional $3.87 per share.
In a press release, T. Rowe Price pointed out that the $3.87 difference in share value “[validated] the firm’s original investment thesis.” A validation that’s now resulting in a $200 million loss for the firm. Seems like a Pyrrhic victory.
The challenge for any firm with complex technology like this is that it’s hard to tell where such errors might be lurking. The vast majority of the time, T. Rowe Price’s system recorded the intended vote. The problem is that this mistake came with a large price tag. And more likely than not, the next costly and unexpected error (at T. Rowe Price or another firm) won’t have anything to do with proxy voting. Instead, it will be a mishandled options conversion, dividend election, or something outside of the corporate actions space entirely.
So how can firms manage to protect themselves against the spectrum of possible errors? First, they should think of complexity itself as a risk factor. One way that this could have been explicitly considered is by noting near misses, instances where a vote or other corporate action was almost recorded incorrectly, but was caught. Sensitivity to near misses allows firms to correct deep and systematic errors before they become costly.
Second, recognize that organizational (and technical) boundaries can obscure what’s going on. In this case, interactions between T. Rowe Price’s fund managers and corporate actions group diffused responsibility. And their technology platform, integrated with an external processing agent, didn’t always tell the full picture. Boundaries like this create risk.
Finally, design systems defensively with the assumption that individuals are fallible. T. Rowe Price’s corporate action voting system had sensible defaults recorded for the majority of votes. And though there was a process to change the vote, the Dell leverage buy-out was a clear special case, especially as its multiple postponements required multiple votes. Just as happened at Knight Capital (where a technologist failed to roll out new code on all eight of Knight’s servers), humans struggle to accomplish tasks that require exceptional precision with little differentiation. Designing and using checklists can help, but only when supported by an organizational culture of dissent and healthy checks and balances.
Hat tip to Steve Lofchie at The Cadwalader Cabinet for the story.