Definition of Proxy Statement
Proxy Statement is an important document that is filled with United States Regulator Securities and Exchange Commission (SEC) by listed Entities before conducting their Annual General Meetings. It is a comprehensive document that covers a wide array of information related to business and helps shareholders to make decisions which will be put for discussion and approval in the Annual Meeting in a more informed way.
A lot of issues can be covered under the Proxy statement. Notable among them include:
- Election of Directors of the Company
- Compensation of Directors of the Company
- Details of any related party transactions conducted by the Company.
- Compensation of Top Executives of the Company including Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chairman, etc.
- Appointment of Auditors, including fees payable to them.
It is to be noted that the above list is non-exhaustive.
Explanation
It is a one-source document for shareholders with voting rights to understand the material matters of the Annual Meeting. It allows them to understand in a better way the top management, the composition of their compensation (fixed or performance-oriented and performance measure) and its growth over the years (which can be compared with the company’s growth), the appointment of auditors and any other relevant matter which is material in nature.
In short, the proper evaluation of Proxy statements enables shareholders to participate actively and exercise their rights in true letter and spirit while on the part of the company, it showcases best corporate governance practice, ethical conduct, and transparent management.
Example of Proxy Statement
One can look and evaluate many Proxy Statements by using the Securities exchange Commission database, which is popularly known as EDGAR (Electronic data gathering, analysis, and Retrieval System). Although the format is more or less the same, the quality of information furnished by different companies makes them stand out in terms of their disclosure and corporate governance.
Proxy Statement Requirement
Whenever a company plans to conduct its Annual Meeting where it requires the approval of its shareholders on important matters, it is required to file Proxy Statement in Form DEF 14 in advance, which is a regulatory requirement for all listed entities in the United States.
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Rules of Proxy Statement
Certain rules need to be followed while submitting a proxy statement with the securities regulator and also to shareholders to be informative in nature and substance. Some of them are enumerated below:
- It should disclose the matters to be discussed in the Annual meeting.
- It should highlight the requisite quorum required and the voting rights of the shareholder on matters.
- It should provide proxy instruction related to voting through online resources or by assigning proxy rights to another individual in the predefined proxy form.
Why It Called Proxy Statement?
The word Proxy means a legal designation given to another person to vote or exercise the right to vote of the shareholder itself. Proxy Statement consists of Proxy card which enables the proxy holders (acting on behalf of Shareholders) to attend and vote on matters listed in the Annual meeting agenda.
Proxy Statement vs Annual Report
The two documents, Proxy Statement and Annual Report, serve a different purpose. Notable differences are enumerated below:
|
Basis |
Proxy Statement |
Annual Report |
| Purpose | It served to enable shareholders to understand the different agendas which will be discussed in the Annual Meeting, the compensation structure of management, related party transactions, etc. | It serves to enable shareholders to understand the financial performance of the business and management view on the business and future aspects. |
| Who is entitled | Proxy Statement is mainly used by Shareholders of the company with voting rights. | Annual Reports are used not just by shareholders but also by anyone tracking the company, such as Potential Investors, Financial Institutions, Rating Agencies, Analyst community, etc. |
| Exchange Filing | Proxy Statement is a file with the Securities and Exchange Commission (SEC) as Form DEF 14A. | Annual Report is a file with the Securities and Exchange Commission (SEC) as Form 10K. |
Uses of Proxy Statement
Uses are given below:
- It enables shareholders to understand the motive of the management in running business operations. For example, through Proxy Statement, shareholders can see the compensation structure of Top Management, which helps them to understand their priorities. Management compensation structure comprising the majority of variable pay, which is linked with an increase in business revenue, is a clear sign that focus will be on increasing revenues through higher spending, lower margins, etc.
- It allows shareholders to gauge the management, their education, and professional background and roles and responsibilities, which enable them to better understand and appreciate the compensation proposed to be awarded to them.
Benefits of Proxy Statement
It offers multiple benefits to Shareholders as well as to potential shareholders. Some of them are:
- It enables shareholders to better prepare themselves for the discussion points in the Annual Meeting and exercise their voting rights most efficiently.
- It enables shareholders and other potential shareholders to evaluate management compensation vis-a-vis the company performance.
- It discloses information related to related party transactions, which shareholders can analyze to ensure that company resources are not utilized for personal gain, and an arm’s length relationship is exercised in conducting related party transactions.
Conclusion
Proxy Statement is a written document with the regulatory requirement for listed Companies. In the United States of America, companies need to file Form DEF 14A in advance before their Annual Meeting with the securities regulator of the United States in a predefined format. Apart from being a regulatory requirement, the Proxy Statement is a useful source of information for investors, potential investors, and shareholder activists to gauge the management, identify their motives for performance which are linked to their monetary compensation, detect any related party transaction and evaluate the corporate governance of the business. The biggest right of a shareholder is the right to vote in the material matters of the company, and the Proxy statement stands to enable them in exercising this right in the most efficient and informative way.
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