What is a Proxy Statement?

A proxy statement is a document containing the information the Securities and Exchange Commission (SEC) requires companies to provide to shareholders so they can make informed decisions about matters that will be brought up at an annual or special stockholder meeting. Issues covered in a proxy statement can include proposals for new additions to the board of directors, information on directors' salaries, information on bonus and options plans for directors, and any declarations made by the company's management.

How Proxy Statements are Used

A proxy statement must be filed by a publicly traded company before shareholder meetings, and it discloses material matters of the company relevant for soliciting shareholder votes and final approval of nominated directors. Proxy statements are filed with the SEC as Form DEF 14A, or definitive proxy statement, and can be found using the SEC's database, known as the electronic data gathering, analysis and retrieval system (EDGAR).

Requirements for Proxy Statements

Proxy statements must disclose the company's voting procedure, nominated candidates for its board of directors, and compensation of directors and executives. The proxy statement must disclose executives' and directors' compensation, including salaries, bonuses, equity awards and any deferred compensation. Proxy statements can also shed light on any other perks used by executives, such as the use of a company's aircraft, travel, and other material expenses covered by the company.

Important

Because the election of directors is the most important part of shareholders' meetings, a proxy statement goes into great detail about directors, their background information and how much they had been paid in the past several years.

Additionally, a proxy statement discloses any potential conflict of interest between the company and its directors, executives, and auditors. Specifically, proxy statements must list any related-party transactions that occurred in the past between the company and its key personnel. The statement also provides information about the company's audit committee, as well as audit and non-audit fees paid to its external public accountant. A proxy statement indicates persons with material ownership of the company's common stock, including its executive officers and directors.

Benefits of Proxy Statements

While a proxy statement is most relevant for shareholders preparing for a company's special or annual meeting, this document can aid potential investors in assessing qualifications and compensation of its management team and board of directors. A finding that chief officers of an underperforming company are paid compensation significantly above those of peers may raise a red flag of excessive spending and weigh on an investor's decision of undertaking an investment. Also, frequent and material related-party transactions between the company and its executives or directors may pose a risk the company's resources are being misused and warrant further investigation.