October 1, 2020
Schedule 14A, the “Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934” is perhaps the ugly stepchild of SEC filings. It seems that many investors, including professional portfolio managers and analysts, tend to ignore the proxy statement and it is difficult to understand their ambivalence. After all, the proxy contains a wealth of information and includes details on one of the more important and valuable aspects of stock ownership – your right to vote. Just like your ability to buy or sell shares, and your rights to dividends declared by the company, your right to vote to elect directors and shape the future of the companies in which you invest has intrinsic value. So why not treat the proxy statement with a bit more respect?
The General Presentation You can learn a lot about how a company views its governance and responsibility to operate its business in the interest of shareholders just by the look and feel of the proxy statement. Does the proxy have page after page of text with limited charts and graphs? This might suggest that the company is not really interested in having investors understand what information the proxy contains. Beyond the look and feel of the proxy statements, there are three main areas to consider when reviewing the annual filing: Governance, Compensation and Ownership.
Governance The governance aspects of the proxy statement cover two broad areas, the most basic is the management or shareholder proposals that may impact corporate policy or strategic direction. The more interesting aspects of governance surround disclosures around the company’s approach to governance. This is often addressed initially with the Chairperson’s letter or broader Board letter to shareholders, highlighting the governance priorities. Additional disclosures on environmental, social and governance (ESG) matters should also be high on the list of things investors should prioritize in reading the proxy. Investors should be attuned to the details of governance, asking questions surrounding director independence, board committee membership and service on other boards. Pay attention to the committee reports for the various audit and governance committees to understand where leadership priorities stand.
Compensation Executive compensation has received the lion’s share of attention for the past decade, particularly following the implementation of “say on pay” voting requirements. Pay close attention to the metrics used to determine incentive compensation levels – these metrics will be the priority of the executive team, but do they align with shareholder interests? How hard is it to achieve these goals? This may tell you more about whether the goals are designed to maximize performance or compensation. Examine the breakdown of compensation between cash and stock, as greater stock compensation will likely better align management’s goals with those of the shareholders. Finally, examine CEO pay in terms of the company’s results. A CEO may seem to be highly compensated, but when comparing to the company’s profits, it may seem more reasonable. For example, if you look at J.P. Morgan Chase CEO, Jamie Dimon, his total compensation of $31.5 million for 2019 may seem high but compared to the $36.4 billion in net income the bank generated, his compensation amounted to 0.86% of total company profits.
Ownership The last area of interest when reviewing the proxy, it the stock ownership table. This shows not only the ownership stakes of the management team and Board of Directors, it shows the largest institutional or outside shareholders. Knowing the main holders of the stock might shed some light on what outside influences might be exerted on management and the Board. Is the largest shareholder a known “activist” that may seek to influence how the company is run? You might also examine how big the largest shareholders are on a relative basis (i.e. do they control 10% of the outstanding shares or something closer to a majority?). Finally, look at insider ownership of the Board and management team. This has always been a key point when considering whether to vote for or against directors, because directors should always be stockholders.
Hopefully, this brief overview helps demystify the proxy statement and underscores the importance of exercising your right to vote. Voting rights of common shareholders are valuable, so don’t let that valuable asset go to waste, read the proxy statement and vote according to your conscience!
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