Proxy Statement

Proxy Statement is a document containing the information the Securities and Exchange Commission asks the companies to provide to their shareholders that are material and relevant for making an informed decision by the shareholders of the company. It is to be filed before the meeting of shareholders by the publicly traded companies.

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.

A proxy statement is a document issued by a public company to address the shareholders and inform them about the details of shareholders’ meetings. Moreover, the details of the agenda of the meeting and if a voting procedure has to be followed are mentioned in the statement.  Shareholders who cannot attend the meeting in person can send their votes through the mail.

The information available in the proxy 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.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 asset.

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.

In any company, shareholders have the right to vote in matters like selecting the auditors, 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 meeting. 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.

Let us understand why companies issue their annual proxy statement in detail with the help of a couple of examples.

Example #1

XYZ limited is a publicly listed company that manufactures electric and electronic appliances. They hold shareholders’ meetings every year to inform their investors about the plans for the next financial year, to review the performance of the current year, administrative, and other changes.

In 2023, the tenure for one of the independent directors of the company came to an end. To ensure shareholders’ confidence, a vote of confidence was scheduled on the meeting. The shareholders who cannot attend the meeting in person were requested to send their vote of confidence through the mail.

Example #2

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 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 directors, 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.

The annual proxy statement gives investors a clear idea about the financials, performances, and upcoming plans of the company. Let us understand the advantages of such information through the explanation below.

#1 - Management Profile

source: Apple

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

source: Apple

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 interest 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 dividend. 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 transactions. 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.

Despite having a significant number of advantages apart from the requirement from the SEC, there are a couple of factors that prove to be a hassle or hurdle for investors and company. Let us understand the disadvantages through the points below.

• 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.

This has been a guide to what is Proxy Statement. Here we explain Proxy Statement's examples, advantages, and disadvantages in detail. You can learn more about accounting from the following articles –

• Acquisitions Examples
• What is a Stock Certificate?
• Shares Premium
• What is the Statement of Financial Position?