Proxy Statements: What Investors Need to Know

Overview

What is a “Proxy Statement” and Why Are They Showing Up in Your Inbox?
What Should You Look For?
Summary
Further Reading/Sources

What is a “Proxy Statement” and Why Are They Showing Up in Your Inbox?

Every spring, investors find themselves inundated with proxy materials. What are they? Do I have to vote?

First, investors are not required to vote on their proxy statements.

Investors owning shares of stock have the right (in most cases) but not the obligation to vote on their shares. However, for those inclined to learn more about their investments and take an active role in the companies they own, the proxy materials include useful information. In the US, proxy statements are submitted to the SEC in a filing known as the 14A. This document sets the agenda for the annual meeting of stockholders.

This is where investors vote on the choice of:

Directors of the company
Company’s independent auditor
Compensation of the company’s executive officers (on an advisory basis)
Shareholder proposals
And various other items that come up for a vote

What Should You Look For?

I believe the proxy statement is one of the most important documents when evaluating a business. When we invest in the stock of a company, we are by extension hiring the management team and board of directors to look after the company we own shares of. The proxy statement is one of the best ways to evaluate whether the interest of shareholders is being cared for.

We like to see companies that minimize conflicts of interest by seeking alignment. It’s best to read this from a commonsense standpoint. Some key issues for me include:

Directors

What are their qualifications?
Do they have a strong mix of skillsets, experience, backgrounds, and viewpoints for the business in question?
Do they have time to dedicate? What other obligations do they have?
Are they truly independent or are they “golfing buddies” with the CEO?

Auditor

Is this a reputable firm?
What do they have to say about the company’s books and internal controls?

Compensation

Does the compensation seem reasonable in context to the performance of the management team?
What does the incentive structure look like for executives?
Ask yourself: What’s the easiest way for management to maximize their pay? Get creative. Do you like the answer? The best incentive structure can depend on the company in question but many of these incentives can be easily and legally manipulated.

Related-Party Transactions

This occurs whenever a deal is made between the company where some pre-existing relationship exists. For example, the company hires a company owned by an executive at the company to lease office space or supply widgets. Read these with a skeptical eye. It doesn’t necessarily mean investors are being taken for a ride but these transactions warrant scrutiny.

Summary

If you read through the document and are pleased with its contents, great! You may vote your shares (or not) any way you see fit. However, if after careful consideration, you are uncomfortable with the arrangement you have two choices. First, you can vote against any and all proposals you disagree with. Or you may decide to sell your shares and find a company with policies more to your liking.

Further Reading/Sources

Invest Curiously,
Austin Crites, CFA

Disclosure: This blog does not constitute advice. This is not an offer to buy or sell securities. The material has been gathered from sources believed to be reliable, however Aurora Financial Strategies cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which tax planning strategies may be appropriate for you, consult your tax advisor. Investment Advisory services are offered through Aurora Financial Strategies Advisory services are only offered where Aurora Financial Strategies and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.

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