Proxy Governance Inc. is considering a “radical change” to restructure the corporate governance and proxy-voting advisory firm into a not-for-profit entity called the Proxy Governance Institute, according to Michael J. Ryan Jr., president and chief operating officer.
Proxy Governance, a McLean, Va.-based unit of FOLIOfn Inc., was founded in 2004 by Steven M.H. Wallman, FOLIOfn CEO and a former Securities and Exchange Commission commissioner.
Depending on the restructuring, Proxy Governance Institute could be owned by FOLIOfn or separated into an independent entity, Mr. Ryan said.
He said he has been talking with officials at pension funds, foundations, publicly traded companies and others about the transformative plan.
How soon Proxy Governance would undertake the change depends on “how much interest there is in the concept and support for it,” Mr. Ryan said.
A question is “whether a new approach and business model can be developed by the private sector to better align the societal need with the business opportunity,” according to Proxy Governance's outline of its transformation proposal.
The “current for-profit business model is a barrier to serving the full range of investors, including individual investors,” according to the outline. The outline concluded that “a superior way” would be “to redeploy PG's services in a new business model supported by users fees and supplemented by third-party sponsorship.”
Transition to a new entity could cost an estimated $1 million to $5 million, and operations would cost an estimated $5 million to $20 million annually, all depending on the nature and extent of services, the outline said.
Financing sources could include user fees, sales of research and data, foundations or other third-party sponsors, and fundraising appeals, the outline said.
The new model under consideration would provide “thoughtful corporate governance research and recommendations” and “state-of-the-art and market-tested proxy voting technology” to execute voting decisions. It would serve only investors and not provide consulting services to issuers, the outline said. It would “offer basic corporate governance and proxy voting services for free” or reduced cost.
Many small and medium, and some large, institutional investors “conduct little or no analysis” on corporate governance in proxy voting, the outline said.
Corporate governance is “critical to achieving long-term shareholder value,” and its “practices transcend individual companies and investors, affecting the economy as a whole and the long-term progress of society,” the outline said.
“The SEC and Department of Labor have imposed a fiduciary duty for voting proxies on many investors,” the outline said. “Issuers and shareholder proponents expend hundreds of millions of dollars annually preparing and distributing proxies to each shareholder and soliciting their votes.”
Yet, “the business opportunities for providing access to corporate governance and proxy voting services are substantially narrower than the wide-ranging need for these services. As a result, many investors — especially individual investors and small and medium-size institutions — are unserved or underserved,” the outline said.
“The underlying premise of this new approach is that corporate governance and … proxy voting are matters of public policy with important societal implications that transcend any one company, shareholder or group of shareholders,” according to a Proxy Governance statement.
The new entity would serve “individual and institutional investors, issuers and the public interest by proving low-cost — and, in some cases, free — independent and conflict-free corporate governance advice and information,” the statement said.
“We believe strongly that the current system has outlived its useful life and is no longer up to the task of serving investors, issuers and the broader public,” the statement said. “The corporate failures of the past decade — Enron, WorldCom, Arthur Andersen, Lehman Brothers, Bear Stearns, AIG, Merrill Lynch, just to name a few — arguably had many and varying causes, but one common theme certainly has been shortcomings in corporate governance.”
“Consistent with this view … radical change is needed,” the statement said.