THE ANNUAL PROXY STATEMENT: AN OVERLOOKED TREASURE TROVE FOR THE SAVVY INVESTOR
By The Sick Economist
Book A Personalized Consultation Directly With The Author
Quick Quiz: What is the key difference between a large, well known privately held company, and a large, well known publicly traded company? After all, companies like Space X and Mars Incorporated are almost household names, and they are often in the media. Just like a publicly traded company, they may have a full slate of owners, investors and lenders. Just like a public company, they may well offer products and services that touch the general public in a number of ways.
One of the biggest differences is: disclosure. We know that Space X has multiple owners, but we don’t exactly know who, or how much each shareholder owns. We know people who work there get paid a lot, but the compensation information is private, and not available to the general public. One of the biggest differences between a prominent privately held company and a prominent publicly traded company boils down to just one word: disclosure.
Unlike Space X, we know exactly who owns Tesla, and how much of the company they own. We know exactly how much the executives get paid, and what incentive systems are utilized. Bottom line? We know that Elon Musk is a key player for both Tesla and Space X, and both companies are in the media a lot, but the general public knows a lot more about the details of Tesla’s financing, ownership and operations, because, as a publicly traded company, the firm is legally required to disclose this information.
But what if I told you that millions of investors don’t know nearly as much as they should? Or actually that they know too much, while at the same time, the average investor doesn’t know enough of the critical information that they should know?
Most investors are simply looking in the wrong places, and therefore being fed the wrong information. The annual proxy statement is a key document that every investor should peruse before purchasing shares in a publicly traded company, and a strong understanding of this document helps the investor cut right through the media hype and misdirection. Let’s explore the key attributes of this standardized SEC document, in a bid to become more informed investors.
THE PROBLEM
The core problem is that, human beings with dishonesty in their hearts, will always find some way to scam. In the case of publicly traded companies, it is highly illegal to simply make data up. The wholesale invention of data is fraud. But bending the truth a little, simply emphasizing certain favorable details, while passively obscuring certain less favorable details? Well, that’s legal and as American as Apple Pie. Whatever legal rule is created, inherently dishonest people will always find a way around it.
In the case of Wall Street, dishonest people don’t want to commit a crime through lack of disclosure. So they often seek to cover up certain critical details by burying them in a landslide of disclosure. The simple law is that publicly traded companies must disclose key data and metrics. So, they do disclose. And disclose, and disclose, and disclose, until critical, unfavorable facts can be harder to find than a diamond in a mountain of coal.
This barely honest disclosure comes in several forms. The most common is media hype. Clever entrepreneurs and smooth executives know how to manipulate the financial media so that they only report on the good aspects of a certain new product offering or quarterly report. Questionable CFO’s invent non-official “non-GAAP” metrics that the media often embraces because they can be easier, on the surface, to understand than traditional GAAP accounting.
The tsunami of deception may not get much better when you arrive at the company’s website. Remember, the SEC regulates the data that a publicly traded company must disclose, but nobody regulates the data that a company may disclose if they feel like it. So, on each publicly traded company’s website, typically under the tab labeled “investors,” you will find a mix of relevant, clear, simple information, and ornate, unnecessary dreck designed to obfuscate and bamboozle. The relationship between these two kinds of information could be expressed as a percentage. On the website of a well managed company with honest executives, an investor is likely to find 75% relevant, straightforward data, and 25% puffery. On a website of a company with more questionable management, the percentage will be exactly reversed. Remember, as long as the publicly traded company discloses that legally mandated, formulaic information, somewhere, then they have complied with the law.
But it’s easy to bury relevant information under pages and pages of corporate speak gooblegook non-sense. Warm, welcoming letters from management, fancy graphics with very official sounding statistics. The aforementioned “Non-GAAP” financial measurement, which CFO’s often make up out of thin air. Amongst hundred and hundreds of pages of disclosure, the honest, direct, unfiltered information is there, somewhere. But where?
THE SOLUTION
In the 80’s my bookish parents scorned any time watching Saturday morning cartoons, swearing that I would never learn anything that way. I’m proud to report, they were wrong. G.I Joe taught me the phrase, “Knowing is Half the Battle.” Turns out that, at least in the world of investment, G.I. Joe was right. Once you know where to look for clean, clear, standardized investment data, it gets a lot easier to make good decisions.
Luckily, the SEC mandates the availability of certain reports on an annual, quarterly or occasional basis that cut through all the clutter and hype. By law, these reports can be found on every publicly traded company’s website, usually under the tab entitled “investors.” Once you reach the page dedicated to investors, you will usually find a sub page entitled “financials” or, even better “SEC Filings.” The most common format is to find a chronological list of recent fillings, submitted to the Federal Government in a standardized format, with scary names like “10Q” or “10K.”
Although these kinds of dry, technical sounding names turn off many newbie investors, your reaction really should be the opposite. The fact that these are government mandated forms, with specific, mandated presentation of standardized data, should beckon to you like an oasis of honesty in a desert of hype.
The key about these government forms is that they are required, standardized, and straightforward. In terms of the general presentation of information on a public firm’s website, there are few laws about what data needs to be emphasized, or how the data is to be illustrated. This allows the “creative juices” of a deceptive management team to flow like a river of deceit. However, there are no fun and games allowed with the mandated SEC forms. By law, the data must be presented in a standardized format. This means that you could go to the websites of ten different publicly traded companies and find the relevant data presented in much the same way on all ten sites. This makes honest comparison and analysis much easier!
The other benefit of the SEC mandated forms is that they are plain Jane. No embellishments with fancy, distracting charts. No selective presentation of only the most favorable data. The most fluff you will find will be a warm “welcome” letter from management, but even then, those are typically limited to just a few explanatory paragraphs, instead of the flowing, overly optimistic prose that management often presents elsewhere on the website.
Unfortunately, many, many mainstream investors are scared off from these forms because they are scared of “hard’ data. But, with practice, it’s the farthest thing from hard! Analysis of these forms is actually easier because you don’t have the machinations of a deceptive CFO working against you. Just plain, clean information about the performance of the company over the last year, or the last quarter. This is why most professional analysts carefully analyze forms 10Q and 10K.
But there is another form, one that is often overlooked even by professional investors. That’s because there is a fundamental misunderstanding about what information is contained in the form.
The annual proxy statement, a standardized form that all American publicly traded companies must disclose, really separates business owners from mere traders and stock analysts. Mastery of this form will greatly aid you in accumulating long term stock market wealth.
HOW TO USE THE PROXY STATEMENT AS A TOOL
Even though the proxy statement is one of the most straightforward and honest documents out there, the name is a bit misleading. Because a proxy statement does, in fact, include, “proxy materials,” which is one critical element of the document, but the name does not even mention a lot of other critical information that is contained in every proxy statement. In fact, the truncated name, “proxy statement” is actually what causes many, many investors to miss out on the real “good stuff.”
So what, exactly does the proxy statement document contain? For starters, it does contain “proxy” materials. But what the heck are those?
The proxy process is the process by which the owners of a corporation vote on big decisions that affect the whole corporation. If you own even one share in a publicly traded company, then you are one of the owners. Therefore, each and every shareholder has access to these materials one time per year. In the old days, this used to mean that you would receive fancy paperwork in the mail, where you would get all of the required SEC documents (10Q, 10K, Proxy Statement, and other stuff) in one giant mailer. If you owned stock in ten or more companies, as many people do, this meant a dining room table piled high with paper. In fact, even in today’s digital world, you still have the option of having these hard copies sent to your house. But more and more shareholders prefer to simply peruse the digital version, which, as we mentioned before, can be found under the “investors” section on the website of every publicly traded company.
The proxy voting process is the process by which, you, as a shareholder, may offer your vote, by proxy, in this year’s pressing corporate matters. “By proxy” means your vote counts, even if you are not at the shareholders’ meeting in person. (Just for reference, major brand name corporations can have thousands of shareholders, so most people just vote by proxy instead of physically showing up at the annual shareholder’s meeting).
Probably the first 50% of the pages are dedicated to the process of proxy voting. Each corporate issue of the year will be described in detail, with pros and cons listed, and an indication as to whether company management supports the proposal. All corporations have different by laws that set different requirements for just how a shareholder proposal winds up being voted on at the annual meeting.
The main reason why the proxy statement is often ignored by investors, is because a lot of these proxy votes are often lame and irrelevant. For example, every year, the shareholders must ratify the contract of the company’s financial auditor. Yawn. The shareholders must vote on the employment contracts of various members of the board of directors. In some cases this can become a hotly contested topic, but typically, corporate directors are nominated or re-nominated without drama. Often there are all kinds of ceremonial or tangential questions that get put to a vote. (I can remember where a group of Catholic nuns, who were shareholders, requested ethical audits of corporate activities. Also, various kinds of environmental advocacy groups are often putting up questions for a vote). Usually, this stuff is quite boring and routine, with the real important corporate questions being resolved between the Board of Directors and CEO behind closed doors. Therefore, to the untrained eye, the proxy statement can seem like page after page of irrelevant bureaucratic dribble.
But you have to know where to look for the good stuff! The proxy statement is also the place, typically the only place, where the actual ownership of the corporation is disclosed, and executive pay is discussed in detail. These two data points, contained in maybe just ten pages amongst hundreds of pages of fine print, can really, really make a difference in an investment decision.
Geez. No wonder average folks just hire money management professionals and forget about it all. But remember GI Joe! ‘“Knowing is half the battle.” And now, you know this: Each proxy statement comes with a table of contents in the front. You can use this table of contents to instantly identify the pages that are of interest to you, and easily filter out the voluminous pages of corporate dreck that discourage less educated investors.
Typically the sections of the Proxy Statement that will interest you are located about halfway through the .PDF document. You are looking for the words “ownership” and “executive compensation.” These pages are typically about halfway through the document, and halfway down the list of the table of contents.
But it’s even easier than that! If you don’t like tables of contents, or you can’t find it for some reason, you can quickly scroll through the pages and find what you want. Isn’t this like looking for a needle in an information haystack?
Not really, because the pages that contain the golden information will look different, visually. The compensation pages will be the only pages that contain significant amounts of numbers, and will often contain some very stripped down, basic charts.
Even more importantly, the ownership information is usually displayed as a chart or a list. They will typically list all members of senior management and the whole board of directors, and next to their name they will indicate how much of the corporation they own, expressed as a percentage. Other large shareholders will also be named, even if they have no role in management.
While the format is standardized so that most proxy reports look roughly the same, you will be shocked by what you find when you review the ownership and compensation charts. You could look at ten different proxy reports, and see ten different situations. And ownership matters.
In part two of this post, we will reveal tips on what to look for, pitfalls to avoid, and the implications of the different kinds of ownership and compensation information that you may find in the proxy statement.
The post THE ANNUAL PROXY STATEMENT: AN OVERLOOKED TREASURE TROVE FOR THE SAVVY INVESTOR appeared first on Sick Economics.
