Global Proxy Exchange How Proxies Should Work.

Capitalism Transformed Capitalism has been transformed over the last 100 years. No longer are corporations owned by Morgans, Rockefellers and Carnegies...

Democracy of Capitalism Today, corporations are owned by the masses, through mutual funds, pension plans and direct stock holdings.

It’s Broken... Democracy of Capitalism is broken because individuals don’t vote the shares they own. rational apathy due to individual holdings being too fragmented. institutional ownership prevents individuals from voting shares they beneficially own.

Result: Managerial Capitalism “... control may be held by the directors or titular managers who can employ the proxy machinery to become a self-perpetuating body, even though as a group they own but a small fraction of the stock outstanding. “ Berle and Means, 1932

Solution Put individual investors back in charge.... by implementing a non-profit, Global Proxy Exchange. Unlike an exchange for trading stocks or futures,... this will allow individuals to secure, transfer, aggregate and exercise proxy rights. This includes proxy rights they hold: Directly through stocks they own, and Indirectly through mutual funds, pension plans, etc.

Imagine a Woman... If her mutual fund company allowed her to transfer her voting rights to anyone she chose,... how would capitalism be transformed?

Transfer Proxy Rights to Whom? The woman could transfer her rights to: A charity, A professional association, Her union, Her investment club, A faith-based organization, Her uncle Howard,... Anyone willing to accept them.

Transferring Rights Th e proxy exchange is accessed through a secure website. The woman has an account already established for her by her mutual fund company. The fund company has deposited her rights into the account. With a click of the mouse, she can transfer all current and future rights to whomever she chooses.

Different Sets of Screens Offer Various Options Actually, the exchange website offers various options: Basic screens allow the woman to transfer all her rights to another party. Intermediate screens offer other options—say to transfer rights to two or more parties. Advanced screens allow her to vote her shares herself through the exchange. Most individual investors will use the basic screens and transfer all their rights to a single party.

Example Suppose the woman uses the simple set of screens and transfers all her rights to a charity involved in children’s issues. What will the charity do with the rights?

What Will the Charity Do? The charity is in the same position as the woman: It has an account on the exchange, Voting rights are being deposited into it... from the woman, and from other investors.

The Charity has the Same Options as the Woman The charity can use the same basic, intermediate or advanced screens to Transfer the rights on to another party it trusts, Directly vote the shares itself, or something else, like vote some shares and transfer the rest.

Proxy Exchange In Action Investment Advisor VOTE

Four Categories of Participants in the Exchange Assigners: anyone—primarily financial institutions or institutional investors—who assigns proxy rights to the exchange; Beneficiaries: the beneficial owners—primarily individual investors—on whose behalf those proxy rights are assigned to the exchange; Aggregators: anyone willing to accept voting rights from beneficiaries or other aggregators; and Voters: parties who ultimately make voting decisions.

The Categories Overlap: Example Suppose a woman and her father are both investors in a mutual fund. The fund assigns its proxy rights to the exchange, identifying the woman and her father (along with its other investors) as the beneficial owners. The father transfers his rights to the woman. She transfers their combined rights to a charity, which votes the shares. Mutual Fund

Example Continued In this example, the mutual fund is an assigner. The father is a beneficiary. The woman is both a beneficiary and an aggregator. The charity is an aggregator and a voter.... the roles overlap. Mutual Fund

Can Shareholders Appoint Any Proxy They Like? Shareholders have a legal right to appoint a proxy to vote shares and otherwise act on their behalf. They can dictate how a proxy is to act, or they can leave that decision to the proxy. Today, the only viable proxy most individual investors can appoint is management. The notion that shareholders can select their own proxy resembles Henry Ford’s comment that people can buy any color automobile they want— so long as it is black.

Proxy Fights Offer One Alternative In rare circumstances, a proxy fight arise in which a competing group sends out a mailing to shareholders soliciting a grant of proxy rights. That situation is akin to offering automobiles that are either black or gray.

A Proxy Exchange Offers Choices A proxy exchange will allow shareholders to select anyone they like to exercise their voting rights.

Legal Issues A proxy exchange can be launched under existing laws. There are no legal or regulatory obstacles in the United States. Other Common Law jurisdictions are similar. From a legal standpoint, a proxy exchange is a surprisingly simple entity. To understand why, we have to perceive the proxy exchange in a different way from how we have described it so far...

The Exchange Will Serve As Everyone’s Proxy Legally, the proxy exchange will serve as the proxy for everyone. It will hold all proxy rights. It will exercise those proxy rights according to the instructions of beneficiaries. If a beneficiary chooses to vote her own shares, the exchange will vote the shares according to her instructions. If she transfers rights to an aggregator, the transaction will legally be her instructing the exchange to exercise the proxy rights on her behalf according to the aggregator's instructions.

Distinction Proxy rights are constitutional rights. They are granted to the exchange by assigners. The exchange exercises them according to the instructions of beneficiaries. Exchange rights are contractual rights. They are rights to instruct the exchange on how to exercise the underlying proxy rights. They are granted to beneficiaries by the exchange on the instructions of assigners. Exchange rights may be transferred to and among aggregators.

A Proxy Exchange In Action Proxy Exchange Assigners BeneficiariesVoters Aggregators Corporations Exchange Rights Decisions Proxy Rights

Adam Smith Disliked Corporations “... being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners of a private copartnery frequently watch over their own... ” Adam Smith commented on managers of corporations:

Agency Costs Agency theory tells us that board members, managers, and aggregators will make the personal commitment their roles require if they get something in return. Is there any real difference between a board member who acts generally for the financial benefit of shareholders so he can pursue his own agenda of securing perks for himself, and a board member who acts generally for the financial benefit of shareholders so he can pursue his own agenda of getting corporate money out of politics?

? Competition Among Aggregators A proxy exchange will attract numerous aggregators who will compete for beneficiaries’ voting rights based on quality—their perceived ability to maximize shareholder value, and price—the perceived magnitude and nature of their agency costs.

A New Market for Corporate Control A proxy exchange will be a new market for corporate control... more efficient and less costly than hostile takeovers or traditional proxy fights. This will: minimize agency costs, maximize shareholder value, and advance social agendas that have broad support among shareholders.

Global Proxy Exchange Implementation Strategy

Challenge: How To Implement Proxy Exchange Assigners BeneficiariesVoters Aggregators Corporations Exchange Rights Decisions Proxy Rights

Stakeholders Millions of Individual Beneficial Stock Owners Mutual Funds Pension Funds Brokers Other Thousands of Corporations Globally Investment Advisors Unions non-profits Other

Vision: A Global Proxy Exchange

Hub & Spoke Organization The exchange can be established as a network of affiliated organizations: One central exchange in the US that serves as proxy for everyone, and “Spoke” regional organizations to serve as the exchange’s representative in each country or region. All organizations will be non-profit.

Six-Step Implementation ACDEBF Incorporation Media Campaign Voting Infrastructure Cultivate Early Voters Recruit Aggregators Recruit Early Beneficiaries Both the central and “spoke” organizations will follow a similar progression. “Spoke” organizations will do so concurrently or lagged a few months.

Step A: Incorporation Goal: Incorporate and secure funding. Form a board of directors. Incorporate a non-profit that will become the proxy exchange. Develop a detailed business plan, including funding needs. Obtain a grant from a major foundation.

Step A: Incorporation Proxy Exchange Assigners BeneficiariesVoters Aggregators Corporations Exchange Rights Decisions Proxy Rights

Step B: Voting Infrastructure Goal: Acquire personnel and infrastructure to actually vote shares of all listed US corporations. The funding foundation and partner pension plans will contribute the votes to be exercised They will appoint the proxy exchange as their proxy. They will direct the exchange on how to vote. They will transfer their existing proxy voting departments to the exchange, so there will be the same people and systems doing the work. Over time, those resources will be expanded to meet the future needs of the exchange.

Step B: Voting Infrastructure Proxy Exchange BeneficiariesVoters Aggregators Corporations Exchange Rights Decisions Foundation & Pension Funds Proxy Rights & Decisions

Step C: Cultivate Early Voters Goal: Cultivating organizations willing to serve as early voters. Essentially, we will be marketing the proxy exchange concept to charities, unions, professional associations, etc. We will identify groups of like-minded organizations and convince them to pool resources and each form a captie voting organization. A group of environmental organizations. A group of unions. Etc.

Step C: Captive Voting Organization VOTE Unions’ Captive Voter

Step C: Cultivate Early Voters Early voters will be granted some exchange rights, so they can direct how shares are voted. Those exchange rights will come from the foundation that had previously directed the exchange on how to vote its shares. Some pension plans may also allow their shares to be voted by the early voters.

Step C: Cultivate Early Voters Proxy Exchange Beneficiaries Aggregators Corporations Exchange Rights Decisions Exchange Rights Foundation & Pension Funds Proxy Rights & Some Decisions Voters

Step D: Recruit Aggregators Goal: Recruit as an aggregator every recognizable organization beneficiaries might want to transfer exchange rights to. We will work with early voters recruited in Step C to identify and recruit aggregators. Recruiting aggregators will be easy as being an aggregator entails little more than: Having an account on the exchange, and Selecting another aggregator to transfer exchange rights to.

Step D: Recruit Aggregators Proxy Exchange Beneficiaries Corporations Exchange Rights Decisions Exchange Rights Foundation & Pension Funds Proxy Rights & Some Decisions Voters Aggregators

Step E: Recruit Early Beneficiaries Goal: Recruit initial or “pioneer” beneficiaries. As a practical matter, this will be about recruiting assigners: mutual funds defined contribution plans brokers, etc. Their clients will then become pioneer beneficiaries.

Step E: Recruit Early Beneficiaries “Pioneer” financial institutions will have two incentives to participate: The opportunity to make a difference by helping launch the proxy exchange, and The prospect of benefiting from marketing of the proxy exchange in Step F—investors to switch accounts from other financial institutions to pioneer institutions. The first incentive will apply to all institutions. The second will be relevant for mutual funds and brokers.

Step E: Recruit Early Beneficiaries Proxy Exchange Assigners BeneficiariesVoters Aggregators Corporations Exchange Rights Decisions Proxy Rights

Step F: Media Campaign Goal: To expand the proxy exchange to all financial institutions and beneficial shareholders. We will launch a media campaign to create interest among beneficial shareholders. We will work with non-profits, unions and other aggregators to promote the proxy exchange to their constituencies. Message to beneficial shareholders: “If your financial institution doesn’t participate in the proxy exchange, move your account to one that does.”

Step F: Media Campaign We will directly approach non-participating financial institutions and encourage them to get involved. We will also target institutions we didn’t focus on earlier: Defined benefit pension plans, Life insurers.

Today What can ICPM and its partners do today? Form a committee to start work on Step A: Recruit a board of directors. Incorporate a non-profit. Develop a detailed business plan and financials. Seek foundation funding.