I just finished reading Tim Beyers' breakdown of Akamai's (NASDAQ:AKAM) proxy statement, and his excellent analysis got me thinking. Just how important is this annual document?
The simple answer? Very important. It may sound blasphemous, but the proxy can be just as important to shareholders as the 10-K, especially when it comes to evaluating management's integrity. Yes, I hear you screaming at me that nothing's as important as the 10-K. But let me take you through my twisted logic.
As an informed shareholder who is intimately familiar with your investments, annual reports may provide some surprises, but generally require little more than checking financials, comparing statements to last year, and looking for what's changed (which, granted, could be a lot).
The proxy, on the other hand, offers a glimpse into the minds of the directors and management you won't get in the 10-K. The proxy is where you meet the directors and see how the board is structured. And since executive pay is one of the board's responsibilities, you can read about that also -- something I would consider key to evaluating the integrity of these powerful individuals. Let's look at some examples.
In Duke Energy's (NYSE:DUK) 2004 proxy, shareholders learned that recently elected Chairman and CEO Paul Anderson gets no cash salary, receiving "only" $11.2 million in restricted and "phantom" stock. Does this align Anderson with shareholder interests, or does it simply dilute existing shareholders? It's your decision, but one you couldn't make without reading the proxy.
Or perhaps you own shares in storage giant EMC (NYSE:EMC), a generous provider of stock options. You might like to know the board is asking shareholders to increase the number of shares available under its stock option plan by another 50 million, some of which will go to non-employee directors for, I suppose, staying awake at meetings.
Finally, if you want an example of a company where management's interests are truly aligned with shareholders', take a look at Univision's (NYSE:UVN) proxy. Univision's CEO, A. Jerrold Perrenchio, is a majority shareholder, who -- get this -- receives no salary, bonus, or equity-based compensation. His reward, like yours, is tied directly to ownership in the company. How's that for alignment?
There are many wonderful pieces of information in a proxy statement that you won't find elsewhere, and shareholders who ignore it do themselves a great disservice, particularly when it comes to evaluating company management.
Want ideas and advice about how to accumulate more money? Consider adding this to your must-read list.
Fool contributor Chris Mallon doesn't like giving stock options as compensation, and he owns shares of Duke Energy and Univision through his private investment partnership.
