Proxy Governance mulling business shake-up
The proxy advisory business has been under significant scrutiny recently, with concerns over conflicts of interest and the undue influence some firms hold over investors. If some leaders at Proxy Governance, Inc. (PGI) get their way, the industry could be in for a serious shake-up.
PGI, one of the three main advisory firms in the US, is considering the possibility of making its proxy advisory recommendations free to all retail investors. In the process it would effectively make itself a non-profit company.
The broader motivation, according to company COO Michael Ryan, who came up with the idea, is to open up the market for proxy and governance advisory services, allowing – indeed, encouraging – third parties such as pensions and mutual funds to openly share voting advice and opinions.
Ryan expresses what many issuers and most investors have known for some time: ‘the current for-profit business model is a barrier to serving the full range of investors, including individual investors,’ he explains in the outline for the new business model. He suggests a better way would be ‘to redeploy PGI’s services in a new business model supported by users fees and supplemented by third-party sponsorship.’
This directly addresses the serious conflict that exists at other advisory firms that take significant payments from issuers for ratings while simultaneously selling ratings to investors. The new model also addresses the issue of disparate interests among investors.
There is no such thing as a single ‘shareholder value’ because different investors have different needs. ‘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,’ Ryan says in a statement. ‘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.’
One issuer, who requested anonymity, is tentatively encouraged by the idea, mostly because issuers would be able to challenge the advisers’ recommendations in an open forum, something that they are not currently able to do under the rigid regime of other advisory firms. This would attract a small, ‘non-burdensome fee’.
PGI is aiming to break the market dominance of ISS and make proxy advisory and voting a more open and transparent operation.