With another seemingly endless winter in our rearview mirror, we begin the annual spring rituals of digging our warm-weather clothes out of the closet and delving into annual reports and proxy statements. Arriving by the handful in each day’s mail, these reports provide unique insight into the inner workings of businesses, corporate boards, and their philosophy on everything from operations to compensation. For those who take the time to read them, proxy statements and annual reports can be fascinating and informative documents. The ballot that accompanies each proxy statement provides the most direct feedback mechanism from shareholders to board members and management – depending on how shareholders cast their ballots, they can send a message of approval, or can demand change at the top.
As the fractional owner of a business, it is crucial for shareholders to understand both how their business is performing and how management is being rewarded for that performance. By reading companies' annual reports, proxy statements and all accompanying footnotes, with a critical eye, shareholders can often come to understand if their investment is living up to expectations. When Wintergreen reviews proxy statements and annual reports for companies in which the Fund owns shares, these are some of the questions we ask ourselves, among others -
- Is the underlying business performing up to our expectations?
- Is the company meeting the goals it has laid out in previous annual reports and proxy statements?
- s the company's management and board of directors acting as good stewards of shareholders' capital?
- Is the company balancing necessary and profitable reinvestment into its business with returning excess cash to shareholders via dividends and buybacks?
- Is the company taking imprudent risk? For example, putting excessive debt on the balance sheet or undertaking a risky expansion into an unrelated business line?
- Is the company's compensation committee setting tough but attainable goals for executives to meet in order to earn incentive compensation?
- Is management focusing on growing shareholder value over the long term, or are they focusing on the short-term in order to earn a big annual bonus?
- Are board members acting on behalf of shareholders’ interests or those of management?
As long-term owners of businesses, it is satisfying to read a company’s annual report and proxy statement and come away with a feeling that the company has a strong underlying business and is being led by capable and shareholder friendly people. Although the strength of a business and its employees is often not reflected in the price of the company’s stock, it is almost always evident within the pages of its shareholder reports. It is, however, critical to read the entirety of the reports – while companies will usually tout their achievements in glowing terms on the glossy front pages of reports, the more critical details are often found buried towards the back. Few CEO’s will boast about what a disappointing year the company had, but the numbers themselves do not lie.
Once we have reviewed a company’s shareholder reports, it is time to cast our ballots. While many votes are relatively routine matters (approving auditors, authorizing final dividend payments, approving financial statements), most items require more critical thinking. For For example, when a company seeks approval for its pay practices, we must evaluate whether or not executives are being appropriately compensated for the per-share value they add. Is a business performing well because of the actions of management, or in spite of them? If a company is asking shareholders to approve a new equity compensation plan, we must ask ourselves how much of our company we are willing to give management in exchange for their services. Are executives required to meet demanding goals in order to receive their equity compensation, or simply show up for work each day?
When we answer these questions, we do so with a business owner’s viewpoint. We ask ourselves, “If we owned 100% of this business and controlled every aspect of it, would we take a course of action similar to what the company and its board of directors has done?” If the answer is yes, the company will often receive an affirmative vote from Wintergreen. If the answer is no, it may be time to ask more questions of the company, and to reevaluate our investment in its stock.
As we reviewed this year’s proxies, we generally supported management-sponsored proposals and voted in favor of director nominees. Our votes reflect the confidence we have in the leadership of these companies and their commitment to working for all shareholders. The notable exception was The Coca-Cola Company (KO, Financial), where we voted against the annual executive compensation award (“say on pay”) and against all of the company’s directors. We like Coca-Cola’s business and its potential for long-term value creation, but we believe Coca-Cola’s management and board have not served the interests of shareholders.
The first quarter of each year is a particularly busy one for us, with many hours spent reviewing annual reports and proxy statements, of the companies in which the Fund has invested, and discussing how to vote on each ballot item. We believe the vote attached to each share of stock is an important and valuable aspect of the intrinsic value of that share. We take seriously our fiduciary responsibility to vote the Fund’s shares in accordance with the best long-term interests of the Fund’s shareholders. Thinking and voting like an owner is a critical aspect of what we do every day at Wintergreen, as we believe it should be for all serious investors.
David J. Winters
- Mr. Winters is Chief Executive Officer of Wintergreen Advisers, LLC, an independent investment advisor founded in 2005.
- Mr. Winters was nominated by Morningstar for International-Stock Manager of the Year in 2010 and 2011.
- Prior to forming Wintergreen Advisers in May 2005, he held various positions with Franklin Mutual Advisers where he led the Mutual Series group of global and domestic equity value funds, including serving as Portfolio Manager of Mutual Discovery from 2001 through 2004.
- Mr. Winters graduated from Cornell University with a BA in Economics and holds the Chartered Financial Analyst (CFA) designation.
Important Disclosures
The views in this material were those of Fund management as of the date written and may be subject to change. This material should not be considered as an offer to sell or a solicitation of an offer to buy shares of any other funds or individual securities mentioned.
The Fund is subject to several risks, any of which could cause an investor to lose money. Please review the prospectus for a complete discussion of the Fund’s risks which include, but are not limited to, the following: possible loss of principal amount invested, stock market risk, interest rate risk, income risk, credit risk, currency risk, and foreign/ emerging market risk. These risks include currency fluctuations, economic or financial instability, lack of timely or reliable financial information or unfavorable political or legal developments. These risks are magnified in emerging markets. Short sale risk is the risk that the Fund will incur an unlimited loss if the price of a security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security. In light of these risks, the Fund may not be suitable for all investors.
The S&P 500 Index is a broad based unmanaged index representing the performance of 500 widely held common stocks. The MSCI World Index is a capitalization weighted index that is designed to measure the equity market performance of developed markets. One cannot invest directly in an index.
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Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus, a copy of which may be obtained by visiting the Fund’s website at www.wintergreenfund.com. Please read the prospectus and summary prospectus carefully before you invest.
