Proxy Statement

What it is:

A proxy statement is the common name for the Securities and Exchange Commission (SEC) Form 14-A. It is the document containing the voting ballot and material information related to the propositions to be determined.

How it works/Example:

Shareholders in corporations have the right to vote on matters such as electing directors, selecting an auditor, approving a merger, or selling the company. The SEC requires public companies to file proxy statements prior to the companies' annual shareholder meetings.  The objective is to inform shareholders of the meeting, what matters are up for a vote, and instructions for voting. The proxy statement contains background information so that shareholders can make informed voting decisions. Proxy statements often reveal the relationships between board members and management (i.e., family ties, prior professional relationships, etc.)

Shareholders can vote by mailing their ballots instead of attending the company's annual meeting or vote in person. In many cases, shareholders don't actually receive a proxy statement in the mail if they own shares indirectly, as is the case with mutual funds (in that situation, shareholders own shares of the mutual fund rather than shares of the underlying assets).

Investors who hold shares in street name (that is, the shares are registered to the investor's brokerage firm rather than in his or her own name) also might not receive proxies. In these cases, the fund manager or brokerage firm is the actual shareholder in the eyes of the company, so they receive the proxy statement and have the right to vote the shares. These representatives are responsible for voting the shares in the best interest of their investors.  In many cases, mutual funds are sizeable shareholders, so their votes may have a significant impact on the company.

Why it Matters:

One of the most basic rights of shareholders is the right to vote. The proxy statement and the voting process it is associated with are manifestations of this most fundamental right. Shareholders are the owners of a company, and they can use their votes to influence the company, sometimes against management's wishes. These are called callable preferred stock fights.

One type of information that is often of particular interest is management compensation data. Companies must disclose how much particular executives are making and how those executives are compensated in the proxy statement. For example, a proxy statement may disclose that a CEO is bonused a certain amount when the company achieves a certain percentage of customer growth.  This is useful to shareholders because it might explain why the CEO is focused on advertising campaigns rather than infrastructure or product development.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.