What is a Proxy Statement?

Simply put, it is a document containing all the essential information that the shareholders may need for decision-making before an upcoming shareholder meeting.

  • This statement may include information about the directors’ salaries, information about the bonus to the directors, additional in the number of board of directors, and other declarations that the management of the company makes, etc.The information available in the proxy statement must be filed by the company with the SEC before soliciting the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more vote on the directors’ election and approval of the other corporate action.

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Proxy Statement Example

The information related to the compensation the management is receiving is often of particular interest to the company’s shareholders. Thus the companies must disclose the amount of compensation, and a person is compensated in the statement. For example, the company may disclose that the CFO is given an incentive or bonus based on the increase in the company’s sales revenue. This becomes useful for the company as it will be clear that the CFO concentrates more on the advertisement than the product development or other activities.

source: Apple

Proxy statement examples may include the information about the directors’ salaries, information about the bonus to the directors, additional the number of board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more, and other declarations that the management of the company makes, etc. The information available in this statement must be filed by the company with the SEC before soliciting the shareholders’ vote on the directors’ election and approval of the other corporate action.

Advantages

Due to the proxy statement, you learn more about the company as it provides detailed information about the company. The various kinds of information provided by this statement to the shareholders or the investors include the following:

#1 – Management Profile

The proxy statement may provide information about the employment history of the management. This helps the investors know about the management’s abilities and experience. It helps them to know whether the officer has worked in the industry before or not, whether they are also part of the board at another company, and whether there is any potential conflict of interest in the management. These are the same questions that the proxy can answer and help the investor in decision-making.

#2 – Ownership of insider and Compensation of Executive

It can help the investor know whether the company is running for the sake of the shareholders or in the insiders’ interest. Investors can know about the compensation paid to the management. Investors can look into the options positions of the management as to how much vested interestVested InterestVested interest is defined as a financial concept that talks about the legal rights granted to an individual or a business to possess a pre-determined share of an asset in the future. For example, vested interest arises in retirement funds, contingent equity, property distribution, etc.read more the management has in seeing the rise of shares, or they are only interested in getting a fat paycheck.

#3 – Senior-Level Loan

Sometimes the company provides the loan to the senior-level executives in hundreds or thousands of dollars or even millions of dollars. This loan given by the company is not good for the average shareholders. The reason for the same can be that the company is not compensated adequately for such loans, as the company charges interest rates below the interest rate charged by banks or other institutions in the lending market. Another issue with the company providing loans is that many times companies forgive the loans given entirely because of the employee’s retirement or for other reasons making the shareholders bear the same in the future as such amount may have been paid to the shareholders as a dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more. So directly or indirectly, it is a loss to the company’s shareholders.

#4 – Related Party Transactions

One section of the proxy statement (SEC) also reveals the related party transactionsRelated Party TransactionsRelated party transaction is an arrangement between two related parties for the transfer of resources, services or obligations, irrespective of whether a price is charged or can affect the statement of profit or loss and the financial position of an entity.read more. Investors should know about the sweetheart deals set up by the management for their benefit. The investor should check, for example, whether the company is purchasing its raw material from an organization related to any senior management personnel like a chief executive or other, and if so, whether the transaction is done at arm’s length price or the company is paying more than that price. Too many related party transactions may worry about the shareholders.

#5 – Auditors Change

Another thing mentioned in the proxy statement is a change in the auditing company. It will provide the reason for switching from one auditing company to another, which can be due to the disagreement on accounting or maybe because of the legal changes.

Disadvantages

  • If the company gives too much disclosure or diverts from the core purpose, it could overload the information to the shareholders.When the information is more, it becomes a time-consuming task, and investors, in that case, might not read the whole document.

Important Points

  • Shareholders can vote by mail instead of attending and voting in annual meetings personally.In case the shares are held by the person indirectly, they might not receive the proxy statement. For example, in the case of mutual funds, shareholders own the mutual fund share, not the underlying assetUnderlying AssetUnderlying assets are the actual financial assets on which the financial derivatives rely. Thus, any change in the value of a derivative reflects the price fluctuation of its underlying asset. Such assets comprise stocks, commodities, market indices, bonds, currencies and interest rates.read more.It is possible that the Investors might not receive the proxies if they hold shares in the street name where shares in the street name mean that shares are registered in the name of the investor’s brokerage firm and not in his name. In this case, the brokerage firm will receive a proxy statement, and they will have the right to vote as, in the eyes of the company, they are the investors.

Conclusion

In any company, shareholders have the right to vote in matters like selecting the auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country’s local operating laws.read more, electing the directors, merger, and sale of the company. The public companies have to file the proxy statements to the (SEC) before the company’s annual shareholders meetingShareholders MeetingShareholders Meeting means a meeting of the stockholders of the corporation wherein resolution are placed before the shareholders to discuss and approve the corporate matters and other matters required by the bylaws of the company.read more. It is a useful tool for the shareholders as it informs them what matters regarding which voting is to be done, along with the instructions. As it has background information, it helps shareholders make an informed decision.

This has been a guide to what is Proxy Statement and its definition. Here we explain why it is important to shareholders along with practical examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

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