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The Proxy Statement, More Important than You Think

In evaluating a company, it can be difficult to get a read on management.  Are they running this company in an upstanding and honest way?  Are the directors and officers paid commensurate with their contributions to the firm?

Here's where the proxy statement comes in.  Though it is obviously not a direct evaluation of management, it can help you "read between the lines" to form an opinion on management, and whether or not they care about you.  It also contains a few other great nuggets of information that you might find useful.  I'll run through those as well, don't worry.

Here are eight things to look for in the proxy statement:

1) Who owns the company.  Firms are required to disclose director and officer ownership, as well as 5%+ owners of their stock.  Many people (including myself) think that having insiders with a considerable ownership stake in the company is a good thing.  There is a limit to this in my mind, however, because I don't want to be an owner in a company that is controlled by an insider or founder.  Too risky.  Some companies require that directors and/or officers hold a certain amount of stock.  I like these companies.

2) Who the directors are.  Each director will have a short bio in the proxy.  High level officers will as well.  I like to see that the directors and officers have been with this company for a while and that they have been promoting from within.  This shows that the firm has a good development system and recognizes internal talent, giving employees the incentive to work hard.

3) Director independence.  I like to see a majority of independent directors, especially on the committees.  This gives me comfort that I'm not looking at the next Adelphia.  Companies that are controlled by a person or group are not required to have a majority of independent directors; I won't touch these companies.

4) Who is on the committees.  As mentioned, I want these to be almost entirely independent.  Hopefully the outsider directors will better monitor the officers.  The charters of these committees will also be available; I have found these useful on occasion.

5) The Compensation Committee.  If the CEO is on this, tread carefully - I would probably toss this in the garbage can.

6) Compensation.  How much are these guys making?  Does it seem reasonable?  Use your best judgment.  The proxy will also tell you compensation guidelines; it is from this that you can judge the ways in which management is evaluated and can decide whether or not you agree with this.

7) Any other perks afforded the directors and officers.  Golden parachutes, tax gross ups, use of corporate jets, gym memberships, etc.  Are the executive perks reasonable?  Or does it seem like management is milking this company a little too much?

8) Related party transactions.  This is going to be especially important for smaller and/or newly public companies.  See if there are any transactions and what sort they are.  Do they seem fishy?  Are they a significant amount of money?  Small related party transactions don't bother me, but when the CEO has some small company that is being paid a "management fee" I start wanting to know more.  If you have any concerns, don't hesitate to move on.

In short, there are a many things in the proxy that can help you decide whether a given company is your next investment, or another one for the trash heap.

I recommend skimming the proxy (search for the DEF 14A on EDGAR) for these particular things, and anything else that sounds important.  You might be surprised what you find!

Disclosure: No positions.