Proxy season is here: Read statements carefully

In wake of Enron case, many are disclosing more than they must

Dollars & Sense

April 07, 2002|By Jeff Brown | Jeff Brown,KNIGHT RIDDER/TRIBUNE

Do you own individual stocks? Then polish those reading glasses, stock up on coffee and adopt a firm-jawed "show me" attitude - because the annual proxy season is off and running.

Not many companies play as fast and loose with the truth as Enron and Arthur Andersen did. But writing the annual proxy statement, detailing issues on which shareholders are to vote at the annual meeting, is something of an art form.

Too often, the goal is to use lengthy and deadly dull corporate filings to highlight management's successes and downplay or ignore its failures. Before you decide how to vote, or whether to keep the stock or dump it, you need to decide whether you're getting the whole story and whether you like what you see.

Proxy statements, like annual reports and other corporate disclosures, follow requirements set by the Securities and Exchange Commission. Keep in mind, though, that the requirements are minimums; generally, a company is free to tell shareholders more than required.

In the wake of the Enron scandal, many companies have chosen to disclose more in their annual statements than they have to. Many are offering unprecedented detail on their dealings with subsidiaries, limited partnerships and other "special purpose entities." Enron had used such deals to conceal its enormous debts, allowing it to claim, falsely, that it was making stupendous profits.

If you own stock in a company that uses special entities but won't give details, consider it a warning sign - people who act like they have something to hide often do. This is especially so this year, because a secretive corporation is resisting the trend toward openness.

The proxy statement does not deal so much with business results as with the way the company is run - primarily with who's in charge and how the executives are paid.

There are a number of items shareholders should watch for, including some on which they can vote.

Typically, shareholders are asked to vote on the board of directors' recommendation for a firm to audit the company's books - the role that Arthur Andersen had at Enron. Most shareholder advocates agree it's important that the auditor be truly independent - free of conflicts of interest that could cause it to pull its punches (as Andersen did) if it sees something wrong.

This can be tough to judge, but alarm bells should start ringing if you see that the auditor is also making a lot of money providing the company with unrelated consulting services. More than half of Andersen's billings to Enron were for consulting rather than auditing, giving Andersen extra reason to keep on Enron's good side.

Also, be sure that the board of directors is free of conflicts of interest that could undermine its role, which is to represent shareholders, not management.

A majority of the board should be composed of people who are not employees or officers of the company. They shouldn't be related to insiders. They shouldn't be making money by, for example, serving as consultants to the company. They shouldn't be officers or directors of other companies or organizations that deal with the company.

In the same vein, directors should not be paid excessively, and their pay should be linked to the company's performance - to rising profits or stock price, for instance.

Executives and directors should not be eligible for "golden parachutes" - big boosts in compensation - if the company is taken over.

Typically, you'll find that the number of nominees for board positions equals the number of open slots; it's better to have more candidates than positions so shareholders have a real choice.

The committees that nominate candidates for board openings and set pay for executives should be made up entirely of outsiders.

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