Proxy Statements, Part Two

Proxy Statements, Part Two

I’m back with more good stuff on the proxy statement. Let’s start with the board of directors. The responsibility of the board is to enhance the long-term value of the company for its stockholders. In executing its responsibilities a board has specific functions in addition to the general oversight of management and the company’s business performance. This would involve things like evaluating strategic initiatives, reviewing financial and business goals, approving the terms of a major acquisition, hiring outside council and all that other good stuff.

As for myself I have my own personal agenda. I prefer not to see more than seven directors on the board (I want to avoid the old boy’s club). I don’t want too many of the company’s employees on the board as I’m looking for an independent and objective voice to keep management’s feet to the fire. I don’t want to see a lot of the members with the same last name (despotism is alive and well). I prefer to see directors with short tenures to avoid complacency. Do all the directors own shares in the company and how many do they own? I hope they bought those shares themselves and didn’t have them handed to them. As you can see I’m a demanding boss, maybe that’s why I’m unemployed. The bottom line is that the board has to be independent. If not they are liable to go easy on management and rubber stamp what ever management wants to do, like boost the compensation package for the CEO.

And then there is the dreaded “related party transactions”, can you spell, ”conflict of interest”. Look for employees or directors who own stock in companies that are suppliers or customers to their own company. And look for family members who are being used as consultants. You get the idea; despotism again, isn’t human nature wonderful.

And lastly you want an independent auditor who doesn’t earn a lot of money providing consulting services to the firm, conflict of interest again. The proxy will tell you all the fees paid to the independent auditor.

After reading all this stuff about the proxy statement I think I’ll have a look at it myself sometime, which leads me to the next post. Do you really want to spend all this time doing your due diligence or would you prefer to let randomness do the heavy lifting for you. Stay tuned.

            

Proxy Statements, Part One

Proxy Statements, Part One

The best way to learn something is to teach it

somebody

Since I have already discussed M,D&A, it only seems fair to be talk about the Proxy Statement. In the Proxy statement, how should I put this, management has to disclose all the stuff they don't want to. Think of a married cross dresser who has to show the world his wardrobe. The purpose of the proxy statement is to provide investors with enough disclosure to make important shareholder votes when attending the annual shareholder's meeting. And no, I've never attended one, perhaps I should.

The proxy statement is fairly complex and there is a lot in it but I'm only going to discuss the fun parts.

Executive compensation, oh yeah, got to love this. A glimpse into the life of the rich and famous. Well not the companies I invest in anyway. It's not so much the salary but the employee stock options where the executives of a company make their real money. Now some executives deserve to be well compensated because of the results they provide to shareholders. But of course, human nature being what it is, some will dip into the troth a bit too long. Some points to keep in mind while perusing the proxy statement.

Look at the size of the employee stock options. If it is more than say, 10 million shares, it is probably verging on the obscene. If the stock goes up $1.00, the executive gets a nice $10 million boost to his net worth.

Compare stock grants to the current shares outstanding. If last year's grants amount to more than 10 percent of the shares outstanding, be careful. Not only is the executive getting a big payday, but when he decides to exercise his stock options he will flood the market with additional shares of stock thereby diluting the average shareholders holdings. Yes, Virginia, there is a Christmas. It would be a good idea to compare compensation with others in the same industry.

To be fair executive compensation is a balancing game. The company wants to attract and retain highly motivated and skilled managers to generate profits for the company while at the same time making sure that abuses of compensation are not taking place.

In the proxy statement, you will have full disclosure of executive and director compensation but be sure to read their biographies as well. It will give you added insight into their experience and background. That's all for now but I will have more to say about the proxy statement in my next post.