The article below was published in
a Financial Times private subscription service for corporate directors, and
presented with permission.
Note: Frank Zarb of Katten of
Katten Muchin Rosenman, quoted below as a former
special counsel with the SEC on the significance of problems with proxy
advisers, is a member of the Forum's
Program Panel for "E-Meetings."
Agenda, August 30, 2010 article
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Advisor Wants to Make Recommendations Free
Article published on August 30, 2010
One proxy advisory firm is
trying to open the debate on setting corporate governance standards — and
save its flailing business — by turning itself into a nonprofit institution.
Proxy Governance Inc. (PGI), which is in the process of
searching for funding, is floating a business proposal that would make its
proxy advisory recommendations free for retail investors to access. In an
effort to open the corporate governance debate, the new institution, dubbed
Proxy Governance Institute, would allow third-party institutions, such as
mutual funds, to share their voting advice on the company’s platform.
Investors and issuers would also be able to appeal the proxy advisor’s
recommendations (for a “non-burdensome” fee, according to the proposal).
The goal of the new institution is to increase retail investor voting and
offer a meaningful alternative to ISS. The idea is not new. Retail voting
has fallen in the past couple of years because of the elimination of broker
voting in director elections and the SEC’s e-proxy rules. MoxyVote.com,
which launched last fall, provides a platform for retail investors to
collect information about how other investors are voting on a proxy ballot
and then cast their own votes. However, Proxy Governance’s COO,
Michael Ryan, says his business plan will expand upon the work
MoxyVote has already laid out by offering professional
recommendations and research.
PGI’s plan to overhaul its business model sounds good to those that claim
ISS has a monopoly in the proxy advisory industry. But that
market dominance by ISS could present challenges for PGI.
Many funds are dependent on the services ISS offers that go beyond proxy
voting recommendations, says one professional involved with proxy voting for
a mutual fund. That includes company-specific data and customized proxy
voting guidelines that ISS offers. For example, a fund can give ISS a list
of its own proxy voting guidelines to follow when issuing specific proxy
voting recommendations for the fund, even if the guidelines are in conflict
with what ISS considers best practices.
Another challenge could be to get other parties that the reconstituted Proxy
Governance Institute will rely on for funding and viability to buy into the
concept, says one expert familiar with the proxy advisory industry who asked
not to be named.
Under its new business plan, PGI would be funded through initial grant money
and would sustain its funding through possibly charging a fee for
institutional investors to access its data and recommendations. Retail
investors would be able to access the information for free through their
brokerage accounts. The company is also considering charging issuers a small
fee for data and research.
Despite the challenges, Ryan says he’s determined to make the change as PGI
continues to lose money under its current business strategy. “I’ve told
people there’s two ways this can go, success or failure,” he says. “The only
outcome I can guarantee at this point is failure, and that’s if we do
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