This article is a follow up to Part I, which can be found here.
In continuing to speak about proxy statements, I would like to touch on another item concerning these statements. If the voters don’t actually take notice of the changes, then the board can sneak their own agenda by.
Many will argue that unless you are a major shareholder, the proxy statement doesn’t really matter. They have faith that the board will just make the correct decisions to ensure success and that top management will continue to have the shareholders’ best interests in mind for the future of the company. While that statement is largely true and desirable outcome for investors, the reality is that the proxy statement itself is almost a form of “checks and balances” against the board and management to protect the investors.
Another interesting point to note would be that the proxy statement serves as the payroll statement of the board to the shareholders. If a CEO and his top managers are telling you that they fought for every penny but barely produced a profit, while at the same time they took millions to pay the board, then are they really doing what is best for the company? Once again, this is just another way that an investor can find out if the board truly has the best interests of the company in mind.
It is almost guaranteed that you understand the importance of why an investor needs to actually vote at every opportunity. Voting should not be viewed solely through the prism of voicing concerns about ill-advised management decisions. The significant item to note is that if the shareholders simply proxy over their vote to the board, then the board can not only present the ideas that they want to act on in the company’s future, they are then able to vote for those very ideas due to a lack of interest from the very owners themselves.
Another key item on the proxy statement is that it the composition of managements’ compensation. This can be a strong indicator of where managements’ allegiances lie. If a CEO has the majority of his compensation based on certain metric i.e. EBITDA rates, he would be more likely to care about the company’s long term performance than another board member who has a high base salary and low payment incentives to perform.
A proxy statement shows an investor not only what is going on with the company in terms of the “business as usual” from operations to marketing, but the financial accounting and HR information as well. A proxy statement allows investors to keep tabs on the management. Are these guys looking out for the interests of shareholders? Or, are they simply lining their own pockets?
Yes, this can be a daunting task to some. Unfortunately, a vast majority of individuals don’t seem to do their due diligence, either because they do not care, do not realize the full implications, or simply think that there is nothing they can do. In the updated version of The Intelligent Investor, Jason Zweig points out that Benjamin Graham stressed strongly the importance of shareholder voting in earlier points of his life. However, Zweig writes that Graham gave up eventually when he realized that most shareholders simply cannot be convinced to vote.
In my opinion, the problem is that we look at voting in company matters as similar to voting in elections; Most people are apathetic or believe that their vote does not count anyway.
A proxy statement is far from the only informational piece on any given company. The income statement, balance sheet, and statement of cash flows are more important. However, if the proxy statement is neglected when it comes to analyzing a company, then an investor has an incomplete picture of what is really occurring within the company and specifically with regards to management. Instead of people talking about the three financial statements, it should really be called the four financial statements.
http://www.valuewalk.com/
In continuing to speak about proxy statements, I would like to touch on another item concerning these statements. If the voters don’t actually take notice of the changes, then the board can sneak their own agenda by.
Many will argue that unless you are a major shareholder, the proxy statement doesn’t really matter. They have faith that the board will just make the correct decisions to ensure success and that top management will continue to have the shareholders’ best interests in mind for the future of the company. While that statement is largely true and desirable outcome for investors, the reality is that the proxy statement itself is almost a form of “checks and balances” against the board and management to protect the investors.
Another interesting point to note would be that the proxy statement serves as the payroll statement of the board to the shareholders. If a CEO and his top managers are telling you that they fought for every penny but barely produced a profit, while at the same time they took millions to pay the board, then are they really doing what is best for the company? Once again, this is just another way that an investor can find out if the board truly has the best interests of the company in mind.
It is almost guaranteed that you understand the importance of why an investor needs to actually vote at every opportunity. Voting should not be viewed solely through the prism of voicing concerns about ill-advised management decisions. The significant item to note is that if the shareholders simply proxy over their vote to the board, then the board can not only present the ideas that they want to act on in the company’s future, they are then able to vote for those very ideas due to a lack of interest from the very owners themselves.
Another key item on the proxy statement is that it the composition of managements’ compensation. This can be a strong indicator of where managements’ allegiances lie. If a CEO has the majority of his compensation based on certain metric i.e. EBITDA rates, he would be more likely to care about the company’s long term performance than another board member who has a high base salary and low payment incentives to perform.
A proxy statement shows an investor not only what is going on with the company in terms of the “business as usual” from operations to marketing, but the financial accounting and HR information as well. A proxy statement allows investors to keep tabs on the management. Are these guys looking out for the interests of shareholders? Or, are they simply lining their own pockets?
Yes, this can be a daunting task to some. Unfortunately, a vast majority of individuals don’t seem to do their due diligence, either because they do not care, do not realize the full implications, or simply think that there is nothing they can do. In the updated version of The Intelligent Investor, Jason Zweig points out that Benjamin Graham stressed strongly the importance of shareholder voting in earlier points of his life. However, Zweig writes that Graham gave up eventually when he realized that most shareholders simply cannot be convinced to vote.
In my opinion, the problem is that we look at voting in company matters as similar to voting in elections; Most people are apathetic or believe that their vote does not count anyway.
A proxy statement is far from the only informational piece on any given company. The income statement, balance sheet, and statement of cash flows are more important. However, if the proxy statement is neglected when it comes to analyzing a company, then an investor has an incomplete picture of what is really occurring within the company and specifically with regards to management. Instead of people talking about the three financial statements, it should really be called the four financial statements.
http://www.valuewalk.com/
