As a former history major with an affinity for newspaper archives and microfiche, studying a company's management pleases me to no end. It gives me the chance to forget hours of soul-crushing mathematical calculations, and hone in on the administrative structure and policies that often make or break a successful business. That's why I love proxy statements.

The SEC has affectionately named the annual proxy the DEF 14, and public companies are required to file it once a year. Inside, you'll find information ranging from shareholder voting procedures to key financial performance factors. It's a treasure trove of information, and, more importantly, for those of us averse to statistical analysis, it's got piles and piles of prose. Though the DEF 14 is packed with information, there are three sections investors should always be familiar with: CEO compensation, the makeup of the board of directors, and insider holdings.

I'll use Altria (NYSE: MO) as an example. You'll find its DEF 14 on its investor relations page, under "SEC filings."

Take me to your leader
For all my talk of prose, I'll start instead with the numbers -- but not the complicated ones.

First stop: the Summary Compensation Table. This chart breaks down exactly how and how much the CEO and other executives at the company are paid. It's relatively straightforward, and there is a nice "Total" column at the end, relieving me of my math duties. Below, see how Altria's CEO Michael Szymanczyk stacks up against industry competitors and companies with similar revenue.

Company

TTM Revenue

Total CEO Compensation in 2010

Compensation as % of Revenue

Altria $16.88 $24,046,719 0.14%
Reynolds American
(NYSE: RAI)
$8.56 $23,813,815 0.28%
Lorillard
(NYSE: LO)
$4.19 $3,720,167 0.09%
Baker Hughes $16.4 $9,443,963 0.06%
Southern $17.31 $16,029,754 0.09%

Source: Yahoo! Finance and annual proxy statements. Revenue in billions.

Remarkably, Reynolds American is paying its CEO about the same dollar amount as Altria, but on half the revenue. Altria's percentage of revenue dedicated to CEO compensation seems a touch high, but it is nowhere near as outlandish as what Reynolds sets aside.

Once you've put your CEO's compensation in perspective, you can begin to peel back the layers. Proxy statements explain how much compensation comes from salary, stock options, and performance incentives. And of course, there is the notorious category known as "other."

Altria provides a separate table to explain "All Other Compensation," and it's arguably more interesting. Here, we find out about company jets and home security systems! Szymanczyk makes use of the company plane for $300,000 a year. He doesn't, however, utilize a company driver or automobile. The footnotes in this section are informative, not only to consider compensation, but also as a window into company culture.

For more insight into the world of CEO compensation, check out fellow Fool Alyce Lomax's analyses here and here.

Take me to your other leaders
A company's board of directors is an integral part of the success of a business, so it's important to pay attention to the size and composition of the board. Seventeen board members? Might be too many. Mostly family members? Probably not a good sign. A diverse lineup of executives with experience relative to the industry and/or a track record of success? That's more like it.

Altria has eight board members, not including Szymanczyk, and all of their professional biographical information is laid out clearly in the proxy. The board includes:

  • An academic with a background in industrial administration
  • A former attorney, current director of a public policy institute
  • The president emeritus of a prestigious university
  • A private equity firm special advisor
  • The CEO of one of the nation's largest energy producers
  • A senior partner at an investment firm
  • An attorney and investment banker
  • A former VP at Procter & Gamble

This is excellent professional diversity for a board this size. It never hurts to have attorneys and public affairs experts on the board of a tobacco company.

Buy what you know
Investors want to see company insiders buying up stock, because it indicates their faith in the business. For small- and mid-cap companies, it's nice to see ownership range from 5% to 45% of shares outstanding. It's hard for the CEO of a large cap to win over investors with the percentage of shares he or she owns. Instead, focus on the dollar value; anything around $10 million or more usually signals faithful investing.

Executive

Shares Owned

Price of Shares

Total Value

Michael Szymanczyk 1,397,159 $27.39 $38,268,185

Source: Proxy statement. Share price is of this writing.

Szymanczyk meets our target of $10 million. The proxy is a great place to look for insider holdings when you initially begin to research a company, but as you continue to follow the company, you will need to look elsewhere to monitor inside buys and sells. Investors can keep tabs on transaction statistics via the Internet on sites like Yahoo! Finance and form4oracle.com.

Caveat emptor
The DEF 14A is an often-overlooked document that can provide important insight into a company's management, the driving force behind profitable success. Of course, the information in the proxy statement must be taken in context. For example, after reviewing the compensation of a company like Altria, check out the same information for industry competitors like Reynolds American, and companies with similar revenue like Southern, before forming any investment decisions.

Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Altria Group. Motley Fool newsletter services have recommended writing puts in Lorillard and buying shares of Procter & Gamble. Hidden Gems is a Motley Fool newsletter that really emphasizes the importance of management. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.