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How to exercise your shareholder power

Although the SEC has taken some heat for its oversight (or lack thereof) in the financial industry, it has significantly tightened corporate disclosure rules in the wake of the Enron, MCI and other scandals. Proxy statements are denser and more fact-filled than ever. They contain financial data and operating results as well as specifics on a variety of matters such as changes to corporate structure, acquisitions and debt issues. They spell out voting procedures, lists nominees for the board of directors and fees paid to independent auditors. Of particular interest to investors this year are descriptions of executive compensation packages.

What's in the proxy

Proxy statements are not nearly as fun to flip through as the glossy photo-filled annual reports. Nevertheless, here are some issues you'll want to pay particular attention to:

Become an active shareholder
Here are the key parts of a proxy statement that a shareholder needs to examine:

Directors 

Are most of the nominated directors executives of the company or are they outsiders with no business or family ties to management? Increasingly, shareholders are demanding that the majority of directors be fully independent and free of conflicts of interest.

What board committees do directors sit on? Ideally the audit, governance and compensation committees will be made up exclusively of outsiders.

How much do the executives have invested in the company? The more common stock -- as opposed to restricted shares or short-term options -- the better. You want to make sure management's financial interests are closely aligned with yours.

Auditors 

Who's watching the books? Having a Big Four firm -- Deloitte & Touche, Ernst & Young, KPMG or PricewaterhouseCoopers -- is a definite plus. If you haven't heard of the accounting firm, it makes sense to check out its reputation.

Is the company switching accountants? That could suggest some sort of disagreement -- never a good sign. The company must explain such changes in an 8-K filing with the SEC, which may or may not be in the proxy materials you get.

Does the accounting firm also provide other consulting services to the company? That could lead to a conflict of interest. Companies are now required to separately list payments for audit, tax and consulting services.

Compensation 

How are executives rewarded? Read the proxy statement's Compensation Committee Report to help you discern the company's compensation strategy.

What is the balance between cash and equity compensation? There's no magic ratio, but there should be a common-sense balance between short- and long-term decision-making

How are bonuses tied to performance? Ideally they'll be linked directly to the company's return on assets or capital. Some companies base bonuses in part on net income or share prices, which can encourage decisions that may work against shareholders' interests.

Conflicts 

Do any members of the management team have conflicts of interest that could affect their independent judgment? For example, the company might lease real estate from the individual or a member of his family, or give an executive an interest-free loan. Proxy statements must disclose transactions between executives and so-called "related parties."

Anti-takeover 

Are shareholders being asked to OK measures that serve mainly to enrich management or secure their jobs? Be suspicious of "poison pills," aka shareholder rights plans, which discourage takeovers that might be in the best interest of the majority of investors. Staggering board terms can also discourage suitors. Such bylaw changes are not bad per se, but management should be able to explain to your satisfaction how they serve your long-term interests.

Annual meeting 

If you can go to the annual meeting, do so. You'll get the opportunity to hear management first hand and ask pointed questions. By hobnobbing with other investors, you'll get a sense of issues and currents that might not be apparent from afar.

If you don't attend, you can still vote, by means of a proxy card that's usually contained in the premeeting package. If you don't get one, it's probably because it went to your money manager or financial adviser. If this is the case, they may vote in a way that you may not agree with. Some companies now use Web-based proxy systems that let shareholders log in and use a control number or personal identification number to vote.

If you don't take some action, your vote won't be registered and your voice won't be heard. In that case, the only person to be mad at is yourself.

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