Will Management Ruin This Stock?

Last month I wrote about how crucial management is to Ford's (NYSE: F) turnaround. While that article touched on numerous aspects of CEO Alan Mulally's leadership abilities, it ignored a lot of valuable information from the annual proxy statement, like CEO compensation, the makeup of the board of directors, and Mulally's insider holdings. These facts are crucial to evaluating the management of a company.

Salary plus bonus plus stock plus ...
CEO compensation in the auto industry is a tricky business tied up in the bailout mess and bankruptcy, making it hard to compare Ford with General Motors (NYSE: GM).  Ford didn't seek bankruptcy protection and didn't accept bailout money, which means it isn't subject to government oversight that can regulate CEO pay. That's why I've included companies like AT&T (NYSE: T) and Hewlett-Packard (NYSE: HPQ) with similar revenue numbers. Below, see how Mulally stacks up against an industry competitor and companies with similar revenue.

Sources: Yahoo! Finance and proxy statements. Dollar figures in millions. TTM = trailing 12 months.

Regardless of whether you think all of these packages are too high, Ford seems to be in range with peers that carry similar revenue.

That's teamwork
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.

Ford has 13 board members, not including Mulally, and all of their professional biographical information is laid out clearly in the proxy. The board includes:

• A retired CEO of KPMG
• A president of a marketing company
• The executive chairman of an energy company
• A retired Ford VP (Ford family member)
• A former Ford CEO (Ford family member)
• A former congressman
• A former CFO of Bank of America
• A former CEO of Hallmark Cards
• A former CEO of a large consumer products company
• A former CEO of Tropicana
• A vice president for research emeritus at the University of Michigan
• A former group president at Caterpillar
• A former president at Goldman Sachs, current professor at Tsinghua University in Beijing

It's a long list with a tremendous amount of leadership experience. I have reservations about the size of the board, but I like the mix of academics and CEOs. Of course, when it comes to advocacy, having a former congressman doesn't hurt, either.

Buy what you know
Investors want to see company insiders buying up stock because it measures 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 company to win over investors with the percentage of shares he or she owns. Instead, focus on the dollar value; usually anything around $10 million or more is a good sign of faithful investing.

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

Mulally more than 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 that 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 gurufocus.com.

Caveat emptor
The proxy statement is an often overlooked document that can provide important insight to a company's management, the driving force behind profitable success. Of course, the information must be taken in context. For example, after reviewing the compensation of a company like Ford, check out the same information for industry competitors like GM and companies with similar revenues, like AT&T and HP before making any investment decisions.