Remember the old movie “Network”? That’s the one where the anchorman Howard Beale, faced with the loss of his job and the collapse of life as he’s known it, throws open his apartment window and bellows: “I’m mad as hell and I’m not going to take this anymore!” Soon he has millions of Americans chanting along with him.
If you’re holding a tanking stock (and who isn’t these days?), the daily business headlines may make you feel like joining that angry rant. Eight-figure CEO paychecks! Million-dollar office renovations! Fat management bonuses that reward failure! Whose company is it, anyway?
It’s yours, of course. And this is the time of year when you can flex your ownership muscles. Spring is corporate annual meeting season, when the loftiest CEOs stand humbly before their shareholders and face the music. It’s your chance to let management know what you think of the job it is doing and exert some influence over where the company is going.
As a shareholder, you can vote for or against members of the board of directors and say yea or nay on major decisions affecting the company, such as mergers or liquidation. If you’ve owned $2,000 in the company’s stock for at least a year, you can submit a resolution on just anything from executive compensation to environmental policies, and put it to a vote of your fellow shareholders.
Granted, you may not have management shaking in its shoes. Even the biggest investors can’t always budge a headstrong CEO, as T. Boone Pickens and Carl Icahn learned when they tried to convince Yahoo to accept Microsoft’s buyout offer last year. But as activists like Evelyn Y. Davis demonstrate yearly, someone with a mere handful of shares can command attention.
This sidesteps the ongoing debate — partly ideological, partly practical — over how much shareholders actually should get involved, and on what matters. Ira M. Millstein, a prominent Wall Street lawyer and long-time advocate of shareholder rights, has written and spoken extensively on this issue. He believes investors can and should be vocal about how the company is run. Moreover, he argues that they have “legitimate interests” in how the company behaves in such areas as climate change, sustainability, labor relations and political contributions.
However, Millstein, who heads the Millstein Center for Corporate Governance and Performance at the Yale School of Management, warns that at some point shareholder involvement can hamstring the board and management. In an article he recently co-wrote with two legal colleagues, he points out that “the fundamental role of shareholders in corporate governance is to assure that the board of directors is composed of persons capable of ‘managing and directing’ in the best interests of company and its shareholders.”
If you decide to roll up your sleeves and get involved, how do you begin? Typically, by poring over the proxy statement the company mails every shareholder several weeks before the annual meeting. “Many shareholders simply toss their proxies in a file or, worse, the trash,” says John E. Deysher, president and portfolio manager of the Pinnacle Value Fund, a diversified SEC-registered mutual fund. “But with it, they are throwing away their votes — and their shareholder right to keep management’s interest in line with their own.”
The proxy statement — in some cases it’s actually a packet containing several documents — describes when and where the annual meeting is to be held. It also contains a detailed outline, in Q&A form, of the proposals that are to be voted on. This includes the election of directors, the approval of other corporate action and solicitations by other shareholders.
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:
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.
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.
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.
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.”
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.
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.