Updated July 14, 2023
Definition of Proxy Statement
Proxy Statement is an important document filled with the 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 business information and helps shareholders make decisions that will be put for discussion and approval in the Annual Meeting in a more informed way.
A lot of issues can cover 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 Company Top Executives, including Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chairman, etc.
- Appointment of Auditors, including fees payable to them.
It is to note 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 compare 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. At the same time, on the part of the company, it showcases the best corporate governance practices, ethical conduct, and transparent management.
Example of Proxy Statement
One can look at and evaluate many Proxy Statements using the Securities Exchange Commission database, EDGAR (Electronic data gathering, analysis, and Retrieval System). Although the format remains more or less the same, different companies stand out regarding their disclosure and corporate governance due to the quality of information they provide.
Proxy Statement Requirement
Whenever a company plans to conduct its Annual Meeting requiring its shareholders’ approval on important matters, it must file Proxy Statement in Form DEF 14 in advance, which is a regulatory requirement for all listed entities in the United States.
Rules of Proxy Statement
Certain rules must follow while submitting a proxy statement to the securities regulator and shareholders to be informative in nature and substance. Some of them are enumerated as follows:
- It should disclose the matters to discuss in the Annual meeting.
- It should highlight the requisite quorum required and the shareholder’s voting rights on matters.
- It should provide proxy instruction related to voting through online resources or assigning proxy rights to another individual in the predefined proxy form.
Why is it Called Proxy Statement?
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 a Proxy card that 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 different purposes. We enumerate below notable differences:
|
Basis |
Proxy Statement |
Annual Report |
| Purpose | It enabled shareholders to understand the different agendas discussed in the Annual Meeting, the compensation structure of management, related party transactions, etc. | It enables shareholders to understand the business’s financial performance and management’s view on the business and future aspects. |
| Who is entitled | Shareholders of the company mainly use Proxy Statements with voting rights. | Shareholders use Annual Reports, and anyone tracking the company, such as Potential Investors, Financial Institutions, Rating Agencies, Analyst communities, etc. |
| Exchange Filing | Proxy Statement is a file with the Securities and Exchange Commission (SEC) as Form DEF 14A. | The annual Report is filed with the Securities and Exchange Commission (SEC) as Form 10K. |
Uses of Proxy Statement
- It enables shareholders to understand the motive of the management in running business operations. For example, through Proxy Statements, 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 link with an increase in business revenue, is a clear sign that the 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, enabling them to better understand and appreciate the compensation propos to award 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’s performance.
- It discloses information related to 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 must 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, and detect any related party transactions 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 enables them to exercise this right in the most efficient and informative way.
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