When investors seek information about the health and well being of a company, the first place to 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 that are of value to investors. Read on to learn about what you can find in this important document.

Biographies
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 will often be able to answer. (For related reading, see Putting Management Under The Microscope.)

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Insider Ownership/Salaries
The proxy statement can tell you whether a company is being run for the benefit of the shareholders or the insiders. To that end, there is a section that 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? (For more insight, read Evaluating Executive Compensation and Lifting The Lid On CEO Compensation.)

Ideally, you want to see a large percentage of management's pay coming from out-of-the-money 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. (There are downsides to this type of incentive as well. Read more in The Controversy Over Option Compensation.)

Looking for some juicy examples of what many would consider excessive executive compensation? Check out some of the proxy statements from the past decade for companies such as Tyco, Worldcom, Cendant, HealthSouth and Conseco. You'll be left wanting to renegotiate your contract at work!

Loans
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 the 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.

The second issue relates to the fact 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 this means that the company is being inadequately compensated for making this loan. The 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. This is just plain wrong!

Incidentally, Worldcom and Tyco are two companies that earned lots of press for giving exorbitant loans to its execs. In fact, Bernie Ebbers, Worldcom's former chief executive had his company on the hook for some $160.8 million, while Dennis Kozlowski, Tyco's former chief executive sported loans that totaled $61.8 million. Mattel's former head, Jill Barad was given $7.2 million in loans that she ultimately did not have to repay when she left the company. (For more on these executives, see The Ghouls And Monsters On Wall Street.)

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 legitimate switch or due to some sort of 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.

Future Plans
The proxy will also detail future 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. (To learn more, read The Flow Of Company Information.)

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 investment merits of the company.

Litigation
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.