THE ANNUAL PROXY STATEMENT: AN OVERLOOKED TREASURE TROVE FOR THE SAVVY INVESTOR

By: The Sick Economist

Quick Quiz: What is the key difference between a large, well known privately held company, and a large, well known publicly traded company? After all, companies like Space X and Mars Incorporated are almost household names, and they are often in the media. Just like a publicly traded company, they may have a full slate of owners, investors and lenders. Just like a public company, they may well offer products and services that touch the general public in a number of ways. 

One of the biggest differences is: disclosure.

We know that Space X has multiple owners, but we don’t exactly know who, or how much each shareholder owns. We know people who work there get paid a lot, but the compensation information is private, and not available to the general public. One of the biggest differences between a prominent privately held company and a prominent publicly traded company boils down to just one word: disclosure. 

Unlike Space X, we know exactly who owns Tesla, and how much of the company they own. We know exactly how much the executives get paid, and what incentive systems are utilized. Bottom line? We know that Elon Musk is a key player for both Tesla and Space X, and both companies are in the media a lot, but the general public knows a lot more about the details of Tesla’s financing, ownership and operations, because, as a publicly traded company, the firm is legally required to disclose this information. 

But what if I told you that millions of investors don’t know nearly as much as they should?  Or actually that they know too much, while at the same time, the average investor doesn’t know enough of the critical information that they should know?  

Most investors are simply looking in the wrong places, and therefore being fed the wrong information. The annual proxy statement is a key document that every investor should peruse before purchasing shares in a publicly traded company, and a strong understanding of this document helps the investor cut right through the media hype and misdirection. Let’s explore the key attributes of this standardized SEC document, in a bid to become more informed investors.

THE PROBLEM

The core problem is that, human beings with dishonesty in their hearts, will always find some way to scam. In the case of publicly traded companies, it is highly illegal to simply make data up. The wholesale invention of data is fraud. But bending the truth a little, simply emphasizing certain favorable details, while passively obscuring certain less favorable details? Well, that’s legal and as American as Apple Pie. Whatever legal rule is created, inherently dishonest people will always find a way around it. 

In the case of Wall Street, dishonest people don’t want to commit a crime through lack of disclosure. So they often seek to cover up certain critical details by burying them in a landslide of disclosure. The simple law is that publicly traded companies must disclose key data and metrics. So, they do disclose. And disclose, and disclose, and disclose, until critical, unfavorable facts can be harder to find than a diamond in a mountain of coal. 

This barely honest disclosure comes in several forms. The most common is media hype. Clever entrepreneurs and smooth executives know how to manipulate the financial media so that they only report on the good aspects of a certain new product offering or quarterly report. Questionable CFO’s invent non-official “non-GAAP” metrics that the media often embraces because they can be easier, on the surface, to understand than traditional GAAP accounting. 

The tsunami of deception may not get much better when you arrive at the company’s website. Remember, the SEC regulates the data that a publicly traded company must disclose, but nobody regulates the data that a company may disclose if they feel like it. So, on each publicly traded company’s website, typically under the tab labeled “investors,” you will find a mix of relevant, clear, simple information, and ornate, unnecessary dreck designed to obfuscate and bamboozle. The relationship between these two kinds of information could be expressed as a percentage. On the website of a well managed company with honest executives, an investor is likely to find 75% relevant, straightforward data, and 25% puffery. On a website of a company with more questionable management, the percentage will be exactly reversed. Remember, as long as the publicly traded company discloses that legally mandated, formulaic information, somewhere, then they have complied with the law. 

But it’s easy to bury relevant information under pages and pages of corporate speak gooblegook non-sense. Warm, welcoming letters from management, fancy graphics with very official sounding statistics. The aforementioned “Non-GAAP” financial measurement, which CFO’s often make up out of thin air. Amongst hundred and hundreds of pages of disclosure, the honest, direct, unfiltered information is there, somewhere. But where? 

In part two of this post, we will reveal tips on what to look for, pitfalls to avoid, and the implications of the different kinds of ownership and compensation information that you may find in the proxy statement.