Reading a Company's Proxy as a Socially Responsible Investor - dummies

Reading a Company’s Proxy as a Socially Responsible Investor

By Consumer Dummies

Each year, companies send their shareholders statements of issues for them to vote on. Proxies are important sources of information to consult before you invest, with specific things you’ll want to look for if you’re a socially conscious investor. Just like annual reports, proxies are public information that must be filed with the SEC. You can often get them from the company, even if you aren’t a shareholder, or you can go to the SEC’s website.

Proxies contain three key tidbits of interest to prospective investors: who the members of the board of directors are, what potential conflicts of interest exist that may cloud the executives’ or the board members’ judgments, and how much money the executives make.

The board of directors’ information

Legally, companies are owned by shareholders who elect a board of directors that oversees the work of management. The proxy is the medium for electing the board, so the proxy statement includes biographical information about the people in the running. Look it over. Here are some things you definitely want to know if you’re a social investor:

  • Do these seem like people who understand business, finance, and the company’s industry? You want to see that the board has members who understand their responsibilities and who have the time to do the work. Some boards nominate glamorous people, maybe because the other board members want to hobnob. Now, a celebrity may well be able to do the job, but do your research to make sure.

  • How often do the board members attend meetings? Most governance experts believe that a board member needs to attend at least 75 percent of all meetings to provide good guidance.

  • Do the board members have any conflicts of interest? You’ll find this info in the section titled something like “Committee Interlocks and Related Transactions.” A common issue is compensation, because the CEO may well be on a board determining compensation for a board member who is an officer at another company. In that situation, both have incentives to push for big raises and little oversight. You may also see board members arranging jobs for their children, receiving significant discounts on products that the company sells, or working for customers. Then decide: Are these conflicts great enough that the board member may not be making good decisions for me?

The execs’ compensation and conflicts of interest

The fun part of the proxy is the section on executive compensation. It usually starts with a description of the company’s philosophy, or mission statement: Is it to be an industry leader in all aspects, including executive pay? Is the goal to reward top performers? Share gains with all employees? Maintain equity? Promote loyalty? Provide incentives? These different attitudes affect the way that people at all levels are paid. No system is right or wrong, but the choice affects the organization’s culture. It may also affect the company’s performance, depending on what market conditions it faces.

Following the discussion of how the firm approaches pay, the proxy includes a description of employee stock option programs and other incentive compensation that involves stock. Shareholders care because new stock issued reduces the percentage of the firm that other shareholders have. They want to know whether the performance incentives offset that dilution.

The proxy then lists the compensation of the five most highly paid officers in the firm, as well as the compensation for members of the board of directors and the chairman of the board, if the chairman isn’t also an executive.

There’s nothing wrong with executives making a lot of money as long as they’re generating results for shareholders and as long as all employees are compensated for their work, too. There’s a problem if the executives get fat raises while everyone else sees their returns go down.

The best part of the proxy statement’s discussion of compensation is usually found near the end under the heading “Certain Relationships and Related Transactions.” Here, the executives disclose any conflicts of interest they may have, which can range from owning the office building that the company leases for its headquarters to giving their children summer jobs. Most of these conflicts at most companies are minor, but on occasion, you’ll see conflicts so large that they smack of management contempt for the shareholders.