Proxy Statement: Form 14-A

The Rules

Companies must file Form 14-A when they solicit a shareholder vote. In many cases, you’re voting on a routine reappointment or election of the board of directors. Occasionally, however, shareholders may have a voice in larger business issues, such as the sale of a business unit or a merger. For example, shareholders had to approve the 2007 merger of Sirius Satellite Radio and XM Satellite Radio Holdings.

A company must issue the proxy statement at least 40 days before the vote, which usually occurs at the annual meeting. The statement, typically 20 to 40 pages long, includes the following information:

• Voting procedures and information
• Background on nominated directors
• Director compensation
• Executive compensation, including any loans to senior executives
• Change in auditors
• General discussion of the firm’s health
• Future plans or issues on which the board may vote
• Potential conflicts of interest among a company’s executives and suppliers

What to Look For

Read a proxy statement in search of trouble signs — or signs of progress in a company you are following. Often, you’ll have to bear down on facts that might at first seem insignificant. Here’s a sampling of what you might discover:

Noteworthy new moves by management. Proxy votes are often routine affairs, but they sometimes include controversial or telling provisions. It’s worth taking note of the details when a firm wants to boost a CEO’s compensation, say, or issue new stock options, which may dilute shareholders’ stake in the firm.

Management turnover. Compare the list of honchos in the executive compensation section of a company’s last three or four proxy statements to see whether there’s a revolving door among the higher-ups. While high turnover doesn’t prove anything, it could signal problems: an emphasis on short-term growth, say, or a CEO in search of yes-men. Perhaps it’s just a toxic corporate culture — not often a recipe for success.

Responses to shareholder concerns. The executive compensation section of Oracle’s 2009 proxy statement included the news that CEO Larry Ellison would earn a base salary of $1 for the 2010 fiscal year, down from $1 million annually for the prior three years. Shareholders had expressed outrage at the size of Ellison’s compensation package—in particular, the $543.8 million he realized by exercising stock options in fiscal 2008. The latest proxy statement noted that Ellison agreed to reduce his salary (while still taking significant stock options).

Relationships with clients and major investors. Say you own shares of a polymer sciences company that has a major contract to supply GE—and GE is also one of the firm’s major stockholders. “The related party transactions section of the proxy statement might show that the contract is still in place, but that GE is no longer a major stockholder,” says John Cushing, a partner with K&L; Gates, which advises clients on securities law and SEC filings. “You’d be smart to wonder if the contract is going to be renewed—and if not, what that would do to the share price.”

Perks for top executives. Here’s where you might discover that a firm’s executives are taking liberties with the corporate cookie jar, as when former Tyco CEO Dennis Kozlowski threw a $2 million “shareholder meeting” on the Italian island of Sardinia. (The purpose of the meeting was to celebrate his wife’s 40^th birthday.) More recently, some financial institutions that participated in the government’s Troubled Asset Relief Program (TARP) are cutting executive perks. Bank of New York Mellon, for example, disclosed in its 2009 proxy that it is eliminating club memberships and home security services for its executives, as well as discontinuing a financial planning benefit.

*Footnote:

A company might use the proxy statement to report a significant deal that it would otherwise report in an 8-K. “A material event note in a proxy typically won’t get the media attention that an 8-K does,” says Cushing.