When seeking information about the health and well-being of a company, the first place investors often look is the 10-K or the 10-Q. But the proxy statement really should be the first stop. It offers a brief, yet thorough, description of a company's health. More specifically, it delves into business relationships, the backgrounds and compensation of corporate officers, and the future potential of the firm in plain, easy-to-read text.

The typical proxy statement addresses many topics of value to investors. Below is some of the information you can find in this important document.

The proxy outlines a company's management employment history. This is valuable because it gives investors insight into officers' abilities and experience. Have the officers worked in the industry before? Did they move up the corporate ladder in the typical fashion, or were they somehow transplanted from another industry? Do they sit on boards at other companies? Do they have any potential conflicts of interest, or are their duties spread too thin? These are all important questions that the proxy can often answer.

Insider Ownership/Salaries
The proxy statement can tell you whether a company is being run for the benefit of the shareholders or insiders. One section will detail executive compensation. Check out how much management is being paid. Also look at their option positions. Do they have a vested interest in seeing the shares rise? Or are they merely collecting a fat paycheck?

Ideally, you want to see a large percentage of management's pay coming from out-of-the-money call options, meaning options that are currently worthless, but that could be worth a bundle if the share price moves materially higher. Put simply, option-based compensation gives management an incentive to enhance shareholder value and to find ways to drive the share price higher.

Sometimes in the course of business, companies will make sweetheart deals with their senior-level executives. These loans are sometimes in the hundreds of thousands or even millions of dollars. This is bad for the average shareholder for several reasons. First, the company should not be acting as a bank. Its capital, if it were looking out for the common shareholder, should ideally be retained to spur business-related growth, or be paid back to the shareholders in the form of a dividend.

A second issue is that the interest rate being charged on these loans is often below what is being offered in the broader lending market. This is problematic because it means the company is being inadequately compensated for making the loans. A third problem, and perhaps the most worrisome, is that many times companies will forgive these loans entirely, particularly if the employee is fired or retires, leaving shareholders to foot the bill.

Change In Auditors
Sometimes a company will switch auditing companies. The proxy will outline the rationale behind the change and give the investor some insight into whether it was a legitimate switch or due to a disagreement on accounting.

General Discussion
Similar to an annual or quarterly filing, in a proxy statement, management will also typically include a general discussion about the overall health of the business. Interesting insights can often be gleaned from information on backlog, gross margin trends, balance sheet opportunities or concerns.

The proxy will detail business plans or issues on which the board may vote. This information, while sometimes contained in the 10-K, is often much more concise and easy to read in the proxy statement. This valuable information should be analyzed by the investor to determine whether the company is facing any potential challenges down the road, or if there are any opportunities that management has not outlined on conference calls, or in the management discussion and analysis (MD&A) section of the 10-K or 10-Q.

Related Party Transactions
In the proxy, there will also be a section that reveals "related party transactions." Look for potential conflicts of interest or sweetheart deals that management has set up for themselves. For example, is the company obtaining a critical raw material for its products from another company owned by the chief executive? If so, perhaps the company may be paying more than it has to.Too many conflicts of interest should certainly pique your interest as a shareholder and make you wary of the company's investment merits.

The company may describe litigation risks in the footnotes of other financial statements. The proxy will often comment on the potential outcomes of certain suits, or the possibility that management may set aside money in the form of a reserve to pay for the potential loss of a suit.

Bottom Line
The proxy statement is probably the most overlooked form that is filed with the Securities and Exchange Commission. However, it can inform and enlighten the curious and diligent investor.

Related Articles
  1. Investing Basics

    A Peek Into Shareholder Meetings

    Shareholder meetings can be glamorous, exciting or controversial, but not particularly revelational. Here's a quick look at what to expect.
  2. Fundamental Analysis

    Interpreting A Company's IPO Prospectus Report

    Learn to decipher the secret language of the IPO prospectus report - it can tell you a lot about a company's future.
  3. Professionals

    Conference Call Basics

    These group calls offer investors a chance to hear management respond to analysts' hard-hitting questions.
  4. Mutual Funds & ETFs

    Proxy Voting Gives Fund Shareholders A Say

    You have the right to take part in important company decisions - even if you cannot attend the meetings.
  5. Fundamental Analysis

    Conference Calls: Press 1 For Investment Insight

    These calls can be an investor's most direct line to information about a company's operations.
  6. Economics

    What Do Central Counterparty Clearing Houses Do?

    A central counterparty clearing house facilitates trading in European derivatives and equities markets.
  7. Investing Basics

    What Is Schedule 13G Used For?

    Schedule 13G is an SEC form an investor must file upon taking ownership of 5% or more of a company’s outstanding shares.
  8. Taxes

    6 Reasons to Donate Your Car to Charity

    It's no longer a free ride, but there are still tax benefits to doing so.
  9. Economics

    What Does Vesting Mean?

    Vesting is the process of accruing non-forfeitable rights.
  10. Economics

    What's a Conglomerate?

    A conglomerate is a corporation that’s comprised of several different independent businesses.
  1. How do modern companies assess business risk?

    Before a business can assess or mitigate business risk, it must first identify probable or likely risks to its bottom line. ... Read Full Answer >>
  2. Why has emphasis on corporate governance grown in the 21st century?

    Corporate governance refers to operational practices, management protocols, and other governing rules or principles by which ... Read Full Answer >>
  3. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>
  4. Why should investors research the C-suite executives of a company?

    C-suite executives are essential for creating and enacting overall firm strategy and are therefore an important aspect of ... Read Full Answer >>
  5. What is the difference between a direct and an indirect distribution channel?

    A direct distribution channel is organized and managed by the firm itself. An indirect distribution channel relies on intermediaries ... Read Full Answer >>
  6. How can an investor determine a company's annual return from looking at its financial ...

    The funds in a share premium account cannot be used for a company's general expenses. These funds are restricted in terms ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!