As an investor, you know you own a piece of a public company. Have you ever wondered what management doesn't want you to know? Have you ever felt like you had no voice in the way your company's run? Have you ever felt as if there's not much you can glean on the inner workings of a company, digging deeper than its glossy, feel-good annual reports and its press releases, which are so often full of spin?
But there is a place where you can go to find out some of the information you crave, and it's not a dumpster behind corporate headquarters. A resource that many individual investors don't take advantage of often enough is the wealth of knowledge buried in Securities & Exchange Commission filings, available for free at www.sec.gov.
You might already be aware that a proxy statement (most commonly known as DEF 14A) is where you can dig up management compensation information, or find out who's on the board of directors. You've probably voted a few times; management makes it "easy" for you to vote by telling you what it thinks you should vote for or against.
Some of the best nuggets of information can be found by digging through shareholder proposals. (Check out related party transactions, too.) Indeed, proxies are often the soap opera scripts of the financial world. (Sometimes certain corporate skirmishes come to blows -- that's when you've got what's known as a "proxy battle" on your hands.)
What management doesn't want you to know
Oftentimes, the shareholder resolutions that can be found in proxies can highlight some of the biggest risks or controversies that face a company. (Some common themes in recent history include executive compensation and the way companies' boards are elected.) Many of the issues may be the ones management might not want you to think about too much.
During the course of recent article research, peeks into proxy statements lent me some interesting insights. These nuggets run the gamut from corporate governance issues to political hot potatoes. Let's take a look.
- Monsanto (NYSE: MON ) -- In Monsanto's most recent proxy, shareholders made several interesting proposals. They proposed requiring disclosure of Monsanto's political contributions with business rationale, as well as separating the CEO and chairman positions in order to elect an outside chairman to help "bring greater focus to ethical imperatives" and bring about "greater independence and accountability, which would allow the company to have greater focus and thereby better address issues of environmental and health impacts of the company's products." The latter resolution claimed that an independent board and chairman would help the company face several issues, including "reputational risk," "concern of the investment community with possible 'off-balance sheet liabilities,'" and disputes regarding Monsanto's patent rights claims, which many contend are monopolistic and unfair.
- Gap (NYSE: GPS ) -- It's been a shabby couple of years for Gap shareholders. In 2002, Paul Pressler, a former Disney (NYSE: DIS ) executive, took the reins to execute Gap's turnaround. If you're a Gap shareholder, you might be a little bit irritated to learn that Pressler made $2.6 million in salary and bonus in 2004. The year before, it was a staggering $4.6 million (it's worthwhile to note that at that time, Gap did appear to be turning around). These figures don't even include large stock options packages that bulk the value of Pressler's compensation even more. Regardless, a shareholder resolution in the 2004 proxy suggested capping executive compensation at a $1 million base salary, with a bonus not to exceed 100% of that amount. (As much as that didn't fly with the board, Gap's problems continue -- and investors are growing less and less patient. In this year's proxy statement, we learned that Pressler didn't receive a performance bonus, which of course makes sense -- on the other hand, he did get a stock options package worth $15 million and a $2.6 million payout from a tender offer.)
- Wal-Mart (NYSE: WMT ) -- It's probably not surprising that Wal-Mart's last proxy statement included eight shareholder proposals. (I'm not what you'd call a big Wal-Mart fan, but I concede that Wal-Mart's one heck of a popular whipping boy.) Talking points include amending executive compensation policies, transparency of political donations, and nominating more independent directors to the board. The other suggestions include the creation of a "public sustainability report," which would report on corporate responsibility efforts; a resolution dealing with allegations of gender and race discrimination; and the introduction of "performance-vesting" shares, stock grants that reflect the achievement of performance goals.
Is it any wonder that all the managements in question suggested voting against the aforementioned resolutions?
A brave new world?
Back in 2003, Bill Mann wrote a great column on shareholder activism. There, he made it clear that shareholder proposals often amount to nothing. (My favorite lines from the article: "To say that these proposals rarely succeed would be an insult to the things that actually succeed sometimes -- like blue moons and Halley's comet. Shareholder proposals never succeed.") However, Bill underlined all the reasons why they're still worthwhile, regardless.
Part of the reason shareholder proposals aren't always effective relates to the voting power that large, institutional investors hold in most public companies. It stands to reason that it would be hard to get a majority vote for any shareholder resolution without their backing. On the other hand, hedge funds often agitate for change, sometimes making proposals with the intention of improving shareholder value.
Lots of times shareholder proposals are put forth by groups with clear political or social agendas, such as unions or environmental groups (let's not disregard a few cranks, too). Many of the resolutions above came from union-connected funds. (I'd say that, even given such clear bias, such resolutions still often represent important issues and risks that investors should take into consideration.) That said, it is important to note that such proposals are often not in the best interest of shareholders, so consider the information carefully.
It's been three years since his article, so I asked Bill if he feels the climate has changed. He pointed out that Motley Fool Hidden Gems recommendation Flamel (Nasdaq: FLML ) had an upset last year when a dissident shareholder -- OSS Capital Management, headed up by Oscar Shaefer -- won a proxy fight to replace the existing slate of directors (indeed, the Hidden Gems team supported the rebel dissidents). Meanwhile, many of you are probably familiar with the fact that Wendy's (NYSE: WEN ) agreed to spin off Tim Hortons, an action that was proposed by shareholders. In that case, Wendy's chose not to fight at all. McDonald's (NYSE: MCD ) has also faced pressures from activist shareholders.
The hubris, ineptness, or even greed of some managements gives very good reason for shareholder concern -- and sometimes, shareholder proposals recommend the right course of action. As a shareholder, you can always vote your shares any way you wish, making your opinion known. You are part owner, after all. In fact, you are eligible to submit a proposal yourself, if you hold 1% or at least $2,000 of the stock of the company in question for at least one year, and will continue to hold through the date of the annual meeting. You have more than simply the choice to buy or sell when contemplating the direction of the companies you invest in.
In closing, though, there is one truth that bears attention here: Such proposals show that investors have their eye on what goes on at the companies they own shares in, and that they are willing to bring issues to light in a public forum that's archived for posterity. Furthermore, knowledge is power, so don't ignore these freely available sources of best-kept corporate secrets. Proxy season is upon us -- don't forget to do your homework.
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