The Proxy Statement for New Investors

How a Company's Proxy Statement Can Reveal Things About a Business

Proxy Statement
A proxy statement is a special type of report publicly traded businesses must file with regulators detailing information that includes everything from pay packages for upper executives to matters being submitted to stockholders at the annual meeting.. Joshua Kennon

Each year, financial regulators in the United States require publicly traded companies to provide their stockholders with a special document known as a proxy statement.  A proxy statement details several important categories of vital information information that cannot be found in other disclosure documents such as the annual report, 10-K filing, income statement, balance sheet, or cash flow statement.

As an owner – and that is precisely what you are if you own the common stock of a company – the proxy statement can shed light on things that help you better understand the firm on which you have staked your hard-earned money.  Here is just a partial list to help you get an idea:

  • The proxy statement must include an explanation of matters the company’s stockholders need to vote upon at the annual stockholders' meeting.  These matters might include something such as changes to the corporate by-laws, mergers, spin-offs, or other corporate actions. This is where the document gets its name – the voting card that you fill out as an owner of the company is called a proxy.  (Sometimes, if an outside stockholder and the company's Board of Directors are fighting over a proposal, you might receive more than one proxy in the mail or electronically, asking you to support one side over the other in what is known as a proxy fight.)
  • The proxy statement includes the names, ages, and biographies of the current directors serving on the Board of Directors so you can make an informed decision about whether or not you want to vote for each man or woman to represent your interests.  To provide an illustration, one of my favorite investments has a director that is a county coroner serving on its board that has often baffled and frustrated me. I decided to invest regardless of this, but it gave me serious pause because you want to make sure the directors aren’t just a rubber stamp for a powerful CEO.
  • Just as importantly, the proxy statement includes the pay and perks received by the top managers of the firm, including the CEO, CFO, and other important executives. This lets you see if they are robbing the company blind, help give you an understanding of total executive compensation to compare to the performance of the business in an attempt to determine whether or not their pay is justified based on the company’s performance, and whether you are dealing with shareholder-friendly businessmen and women.
  • The number of shares of stock owned by directors and executives must be disclosed in the proxy statement so you can decide if you trust the company’s managers to do the right thing; to determine whether you think the directors and executives have enough of their own money on the line to motivated the same way you, as an owner, are motivated. By looking at the proxy statement of the same company I mentioned earlier, I was able to see that the CEO earned more from dividends received on his shares of company stock than he did in salary and bonus. That made me confident that he would do what was right for the stockholders because he was in the same economic boat as everyone who took their paycheck and bought a stake in the firm.

    The truth is, the proxy statement is one of the most interesting documents you’re likely to read as an investor. It shows you just how much some executives are paid and how ridiculous some of the perks are. Several years ago, there was a company that actually had a private jet sent to pick up the CEO’s dog from across the country at the cost of tens of thousands of dollars to the corporation. When you read that, you are able to ask yourself whether you believe this type of person - an executive who is so careless with your money as an owner - the type of person to whom you want to entrust the task of managing your wealth, especially if you are dealing with irreplaceable capital at the core of your retirement funds as it is money you will need to live on during your golden years.

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