What is a Proxy Statement?
Proxy Statement is a document which contains the information which the Securities and Exchange Commission asks the companies to provide to their shareholders that are material and relevant for making the informed decision by the shareholders of the company and it is to be filed before the meeting of shareholders by the publically traded companies.
In simple words, it is a document containing all the essential information that the shareholders may need for decision making before an upcoming shareholder meeting.
- The issues that this statement may include are information about the salaries of the directors, information about the bonus to the directors, additional in the number of board of directors, and other declaration that management of the company makes, etc.
- The information available in the proxy statement must be filed by the company with SEC before soliciting the vote of the shareholders on the election of the directors and approval of the other corporate action.
Proxy Statement Example
The information related to the Compensation, management is receiving is often of particular interest to the shareholders of the company so the companies must disclose the amount of compensation particular person is receiving from the company and how these persons are compensated in the statement. For example, of the company may disclose that the CFO of the company is given an incentive or bonus on the basis of the increase in the sales revenue of the company. This important becomes useful for the company as it will clear that the CFO is concentrating more on the advertisement rather than the product development or the other activities.
source: Apple
Proxy statement example may include the information about the salaries of the directors, information about the bonus to the directors, additional in the number of board of directors, and other declaration that management of the company makes, etc. The information available in this statement must be filed by the company with SEC before soliciting the vote of the shareholders on the election of the directors and approval of the other corporate action.
Advantages
Due to the proxy statement, you get to learn more about the company as it provides detailed information about the company. The various kinds of information provided by this statement to the shareholders or the investors include the following:
#1 – Management Profile
source: Apple
The proxy statement may provide information about the employment history of the management. This helps the investors to know about the abilities and the experience of the management. It helps them to know whether the officer has worked in the industry before or not, whether they are also the part of the board at another company, whether there is any potential conflict of interest in the management. These are the same question that the proxy can answer and helps the investor in decision making.
#2 – Ownership of insider and Compensation of Executive
source: Apple
It can help the investor to know whether the company is running for the sake of the shareholders or in the interest of insiders. Investors can know about the compensation paid to the management. Investors can look into the options positions of the management as for how much-vested interest do the management has in seeing the rise of shares or they are only interested in getting a fat paycheck.
#3 – Senior-Level Loan
Sometimes the company provides the loan to the senior level executives in some hundreds or thousands of dollars or even in millions of dollars. This loan given by the company is not good for the average shareholders of the company. The reason for the same can be the company is not compensated adequately for such loans provided as the company charges interest rate which is below the interest rate charged by the banks or other institutions in the lending market. Another issue with the company providing loans is that many times companies forgive the loans given entirely because of the retirement of the employee or for other reasons making the shareholders bear the same in the future as such amount may have been paid to the shareholders as a dividend. So directly or indirectly it is a loss to the shareholders of the company.
#4 – Related Party Transactions
One section of the proxy statement (SEC) also reveals the related party transactions of the company. Investors should know about the sweetheart deals set up by the management for their benefit. The investor should check for example, whether the company is purchasing its raw material from an organization related to any senior management personnel like chief executive or other and if so whether the transaction is done at arm’s length price or the company is paying more than that price. Too many related party transactions may worry about the shareholders.
#5 – Auditors Change
A change in the auditing company is another thing mentioned in the proxy statement. It will provide the reason for the switch from one auditing company to another which can be due to the disagreement on accounting or maybe because of the legal changes.
Disadvantages
- If the company gives too much disclosure or divert from the core purpose then it could lead to overloading of the information to the shareholders.
- When the information is more it becomes a time-consuming task and investors, in that case, might not read the whole document.
Important Points
- It is possible for shareholders to vote by mail instead of attending and voting in annual meeting personally.
- In case the shares are held by the person in an indirect manner then they might not receive the proxy statement. For example, in the case of the mutual funds’ shareholders own the mutual fund share and not the underlying asset.
- It is possible that the Investors might not receive the proxies in case shares are held by them in the street name where shares in the street name mean that shares are registered in the name of the brokerage firm of the investor and not in his own name. In this case, the brokerage firm will receive a proxy statement and they will have the right to vote as in eyes of the company they are the investors.
Conclusion
In any company shareholders have the right to vote in matters like selecting the auditors, electing the directors, merger, and sale of the company, etc. The public companies have to file the proxy statements to the (SEC) prior to the annual shareholders meeting in the company. It is a useful tool for the shareholders as it informs shareholders that what matters regarding which are voting are to be done along with the instructions to do so. As it has background information, it helps shareholders in making informed decision.
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