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Proxy Guide: Traps and mistakes

March 25, 2013

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Proxy statements are among the most useful documents companies produce - for reporters and traders.
Reporter tired of looking at documents
Tiring though it may be, the juicy details are certainly in the documents.

The SEC received more than 5,300 definitive proxies in 2012, and triple that many including preliminary, supplementary and related filings. No guide can cover all the eventualities, but here are some common problems and points of confusion you can avoid, with a little effort.

Controlled companies. Some publicly traded companies have one or a small group of dominant shareholders. In those cases, they get more freedom to set executive pay and may not need to have a majority of independent directors. In some cases, they can even issue what amounts to an informational proxy statement that leaves shareholders little say. Chicken producer Pilgrim’s Pride Corp., for example, notes in its proxy that one shareholder owns more than 50% of its stock and can pick most of the board — as well as, “with certain exceptions, determine the outcome of all other matters presented to a vote of the stockholders.” Last year, the majority shareholder picked six directors; other shareholders could vote on two. Still, such proxies contain most of the compensation, governance and background information of other proxies.

Missing information. Check the company’s annual report — the 10-K filing sent to the SEC, not the glossy booklet mailed to shareholders. Technically, much of the information commonly found in the proxy can appear in Section III of the 10-K document, or in an amended filing filed later (coded as a 10-K/A in Edgar).

Evaluating the new guy. It’s easy enough to see if a longtime CEO got a raise or a pay cut. But what if you’re looking at an executive new to the job? Consider comparing his pay to his predecessor’s. New hires often get less than veterans, but there can be exceptions. And big one-time payments — sign-on bonuses, or stock and cash awards meant to replace benefits the executive gave up by leaving the last job — sometimes can make the difference between snaring a top job candidate and losing one.

If one or both of the executives worked only a partial year, it becomes more complicated. You could find full-year pay targets (salary, bonus, stock, etc.) in the proxy’s summary of contract terms for the executive — it can appear pretty much anywhere in the document; try searching for the words “employment agreement.” The Compensation Discussion & Analysis section often also includes full-year figures, for both the prior year and the subsequent one. Then compare the figures that you find to the predecessor’s base salary and targets, pulling them from a previous proxy, if necessary.

Downplayed perks & benefits. Some companies legitimately provide executives with few or no perks. Becton Dickinson & Co., for example, provides most executives only matching retirement contributions and term life insurance. But others claim to abstain, while still providing the CEO or other executives free personal travel on the company’s dime, costly home-security systems or other goodies. They argue that these aren’t perks, perhaps because the executives are required to use them for safety or other official reasons. Drugstore chain CVS Caremark, for example, calls its executive perks “very limited” — but gave one executive a company car and free personal air travel, plus $75,000 in financial planning and an executive assistant for five years when he retired.

Regardless, the cost should still be disclosed under Other Compensation if it exceeds $10,000 in a year. Talk to experts, or readers, to decide whether the benefits are a necessity or another example of corporate largesse.

Comparing apples and oranges. Especially where companies have more freedom to customize tables, read footnotes and column headings carefully. Sometimes you’ll find companies switching gears without much warning, making it tough to get an accurate picture.

IBM, for example, has for at least two years shown a single table listing potential severance, retirement and other termination benefits for top executives. But some of the numbers are lump-sum amounts, while others represent annual payments that actually would repeat for several years at least. Just adding the numbers across the rows of the table drastically understates the potential payouts, since that includes just one year’s worth of the annual payouts. Getting comparable numbers for all IBM’s potential payments required looking at tables elsewhere in the filing.

Apples and oranges: Unless you read the footnotes, it’s impossible to tell that some of these figures represent totals, while others reflect just one year of multi-year payments.

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Stale information. Definitive proxies come out once a year, for the most part, and they largely present information as of the end of the last fiscal year — meaning they’re a few months out of date from the start, and it gets only worse as the year wears on.

Still, much of the time, they represent the best information available. There are exceptions: With a little luck and a lot of work, it’s sometimes possible to piece together changes in executive pay or perks since the last proxy. Doing so is beyond the scope of this primer, but if you have time, check with a compensation expert (or give me a shout).

Stock-holdings data are a little easier. Services such as InsiderScore and FactSet specialize in keeping track of who owns what; they stay on top of the flurry of ownership documents filed throughout the year by companies and individuals. Many of these services are happy to help reporters. Otherwise, you can dig up the most recent Form 4 filing for the executive (or director); it should list how many shares and options the executive held as of the date on the document. Here’s a Form 4 filed by Amazon.com founder and CEO Jeffrey Bezos after he sold about 790,000 shares over two days in late November; the second row of column 5 shows he still owned 87.2 million shares after the second sale. (A footnote indicates that the sales were part of an automated plan he had set up.)

Otherwise, use the information from the proxy, but let readers know what time period it reflects. As a bonus, companies will sometimes cough up more recent information when faced with proxy info that’s months out of date.


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