Proxy Statement

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.

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For eg:
Source: Proxy Statement (wallstreetmojo.com)

Proxy Statement Example

The information related to the compensation the management is receiving is often of particular interest to the shareholders of the company. Thus the companies must disclose the amount of compensation, and a person is compensated in the statement. For example, 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 companyRevenue Of The CompanyRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more. 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.

Proxy Statement Example

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

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

Ownership

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 dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more. So directly or indirectly, it is a loss to the shareholders of the company.

One section of the proxy statement (SEC) also reveals the related party transactionsRelated Party TransactionsRelated party transaction is an arrangement between two related parties for the transfer of resources, services or obligations, irrespective of whether a price is charged or can affect the statement of profit or loss and the financial position of an entity.read more 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 a 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

Auditors

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

Conclusion

In any company, shareholders have the right to vote in matters like selecting the auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more, 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 meetingShareholders MeetingShareholders Meeting means a meeting of the stockholders of the corporation wherein resolution are placed before the shareholders to discuss and approve the corporate matters and other matters required by the bylaws of the company.read more 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 an informed decision.

This has been a guide to what is Proxy Statement and its definition. Here we why it is important to shareholders along with practical examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

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