Friday, March 27, 2009

Proxy Panacea

A week ago, as Congress wound down its hue and cry over bonus payments by AIG, nearly 200 companies filed proxy statements with the SEC. The statement to shareholders in anticipation of the annual meeting typically provides the most detail on executive compensation from base salary and benefits to cash and equity bonuses. This is the time of year when most companies file proxies since they typically follow close after the end of the fiscal year.

Most investors probably pay little attention to the proxy, except to tear off the ballot and check off votes for directors. Compensation matters are often discussed in lengthy and dense legal language, discouraging intense scrutiny.

I believe investors need to pay as much attention to executive compensation as to earnings. Throw director qualifications into the hopper as well. Clearly over-paid executives and weak, rubber-stamp boards of directors have contributed to the kind of risky, short-sighted decision making that has brought our financial system to its knees.

Proxy means substitute or surrogate. It might be alright to have a stand-in vote your shares at an annual meeting, but there is no replacement for the accountability that shareholders must bring to bear on senior officers and directors. Management must safe guard the long-term viability of the company and not just run it to fatten their own paychecks.

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