FOOL ON THE HILL: An Investment Opinion
No Substitute for the Proxy Statement

There's no better place to find details about management compensation, the repricing of options, and information on the board of directors than a company's annual proxy statement. Long-term investors should make it part of their reading list.

By Richard McCaffery (TMF Gibson)
September 15, 2000

We often stress the importance of reading annual and quarterly reports, press releases, trade magazines, and even discussion boards to keep tabs on our favorite investments. Too often we forget the proxy statement.

I look at it this way. If you're interested in investing, you want to know the company's story, you want to have a feel for it. The proxy statement adds color and depth. It reads like the cast of characters in a movie, only it also reveals how much everyone got paid and why.

The proxy statement is sent to shareholders once a year prior to the annual shareholders meeting. It outlines issues to be dealt with at the upcoming meeting, such as the election of board members. It provides information on management compensation, details on mergers and acquisitions, option packages, and the reappointment of auditors.

In his book Financial Shenanigans, accounting sleuth Howard Schilit quotes Hugo Quackenbush of Charles Schwab (NYSE: SCH) on the importance of the proxy: "[It's] like a soap opera in black and white. Management has to disclose all the stuff they don't want to and investors can get more of the texture and flavor of a company reading the proxy statement than the glossy annual report."

There's truth to that, though it takes a while to know what to look for. It's probably most helpful to long-term investors who, over time, gain a sense of what to expect from management and the board of directors.

Nevertheless, there are a few things you can skim off the top right away and should always look for. For example, is the board independent or is it loaded with family and friends of management? What kind of compensation is provided and how does that compare with industry competitors?

Here are a few examples that will give you a sense what's available.

A glance at the proxy for high-flying network infrastructure company Juniper (Nasdaq: JNPR) tells you that, at the time the proxy was issued, renowned venture capital firm Kleiner Perkins Caufield & Byers owned 29.2 million shares, or 18.7% of the company, making it one of the largest shareholders. As a group, all executives and directors own 35% of Juniper's outstanding shares.

Look at the proxy statements for Coca-Cola (NYSE: KO) and rival Pepsi (NYSE: PEP). Coke's board of directors and executives own 13.1% of the shares, with Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) holding the largest stake at 8.1%. Compensation for key executives at Coke is based on economic profit growth, which measures remaining income after all costs have been covered (including the cost of capital). It also considers unit case volume increases and personal performance. As a rule, profits and volume increases are weighted higher than personal performance.

We hold Coca-Cola in the Rule Maker Portfolio, and it's valuable knowing that the board isn't basing incentives solely on growth in net income and market share, which can destroy value if pursued recklessly. The proxy in this case tells me what motivates certain executives and which levers the board wants pushed to drive value. None of Coke's senior officers received an annual incentive award last year.

Pepsi, which caps executives' salaries at $1 million, awards bonuses for senior officers other than the CEO according to increases in operating profit and net sales volume performance. Part of Coke's incentive plan is set up pretty much the same way, but the Coke plan that I described above, which focuses on the cost of capital, is truly aimed at creating value.

How about Mirage Resorts, the gaming company bought out a few months ago by MGM Grand? It's now called MGM Mirage (NYSE: MGG).

Mirage's proxy statement is packed with interesting details about the acquisition: When MGM's Kirk Kerkorian first contacted Mirage's Steve Wynn; how the price was raised from $17 per share to $21; and a long section on work by investment bank Goldman Sachs (NYSE: GS) to properly value Mirage. Goldman came up with a value between $16.70 to $29.19, which gives you some idea how hard it is to put a precise value on a company.

Also of interest: Steve Wynn's salary and cash bonus for 1999. He received an annual salary of $2.5 million -- which was determined by the board of directors and wasn't based on any specific performance measures -- plus a bonus of $1.25 million in cash (the maximum) based on the recommendation of the bonus committee, which based its decision on the recommendation of the chief executive, Steve Wynn. What was up with that?

Hopefully, this gives you a sense of what's available to investors willing to hunt around a bit. The proxy statement is called the schedule 14A by the Securities and Exchange Commission's EDGAR filing system. To find it, just go to, type in a ticker symbol, and go to town.

Have a great day.