In preparation for its annual shareholders' meeting on Nov. 13, Microsoft (Nasdaq: MSFT ) recently sent out a proxy statement to set the stage for the event. Even if you don't like to read financial statements, proxies can be lots of fun and very informative, because they're the only place you'll find a whole lot of details on how a business is run. So let's take a look at the Redmond-issued installment.
For one thing, a proxy will summarize any changes in a company's bylaws during the year. In this case, we see that Microsoft has recently refined the voting procedures for board seats, clarifying what happens in a contested election. Each executive officer is now required to hold a significant stake in the company in the form of long-term stock holdings, and each director is now subject to annual performance evaluations. Previously, only the subcommittees had annual reviews.
The company's takeover defenses are pretty light. The new plurality voting can make it a little tougher to get a hostile takeover going, but every director is up for re-election every year, there is no "poison pill" provision in the bylaws, and Microsoft is incorporated in Washington state, rather than in takeover-averse Delaware.
Not that the Redmond giant needs defenses, really. Who can cough up enough capital to cover a $261 billion enterprise value, plus at least 15% in takeover premiums? Even among the world's biggest banks, only Credit Suisse even comes close to having that kind of uninvested capital handy. And the Credit Suisse guys have no business buying software giants, anyway.
The board is almost the same as it was last year. The one new addition is Netflix (Nasdaq: NFLX ) CEO Reed Hastings, who now serves on the Finance Committee. Career director Ann McLaughlin Korologos left the board last November, handing the chairperson's position of the Compensation Committee to former JPMorgan Chase (NYSE: JPM ) CFO Dina Dublon. Former BMW chairman Helmut Panke, meanwhile, has joined Microsoft's Antitrust Compliance Committee. These are all eminently sensible moves that should serve the company well.
To get a glimpse at who Microsoft sees as its real competition, you can view the companies the Compensation Committee considers as peers when it sets the salaries for the top brass. The Dow 30 peer group is a given, of course. Microsoft is a member of that elite cadre, and it rightly should measure itself against the largest and most respected businesses around. The technology group, though, is more interesting. As Microsoft notes, "these are companies operating in our industry that are focused on producing software or hardware or providing online services, and employ work forces with skill sets and professional backgrounds similar to those of Microsoft's work force."
That group includes Google (Nasdaq: GOOG ) but not Yahoo! (Nasdaq: YHOO ) . Is it just a question of scale and leadership, or should the exclusion fuel the fire under the percolating Yahoo! takeover rumors? I'd say the former, because, after all, Intel (Nasdaq: INTC ) is on the list but not AMD (NYSE: AMD ) . Still, it's food for thought.
Moved and seconded?
Two shareholder proposals are on the table, and neither looks likely to pass. One talks about Internet censorship and wants to establish firm procedures and a real commitment to network neutrality, and the other seeks a board committee for human-rights issues. The former is too rigid a framework for a global company like Microsoft, and the latter isn't really needed, because the Corporate Governance committee already handles human-rights issues.
You might want to know how well Microsoft itself thinks it is doing. The executive-compensation discussion can help you there. "We were satisfied with our performance in product acceptance and [in sales, marketing, and service] and [Microsoft business division] financial metrics," it says. "Our performance in customer satisfaction, while steady, and Internet searches, while growing, fell short of our challenging goals, and we were not satisfied with our performance in [entertainment and devices] financial metrics."
As a result, the management team received two-thirds of its target bonus payouts and lost out on more than 450,000 shares of stock among the four named officers. Still, they all made millions, ranging from CEO Steve Ballmer's $1.3 million total compensation (no stock included) to COO Kevin Turner' s $8.5 million. Don't cry for them, Argentina. Or America.
There are no major surprises or shakeups in Mr. Softy's proxy this year, but it's still enlightening reading. It's well written, it's clearly presented, and it gives you a truer sense of the underpinnings of the business than any press release or dry financial statement ever could.
The long-term shareholding rule is a very investor-friendly measure that aligns executive interests with your own, and it's nice to see that only a stellar performance will give management 100% bonus payouts. Too many other companies tend to overpay for mediocrity, but that isn't good enough here -- nor should it be.