FLEX your muscle

May 18, 2008 (Albuquerque Journal - McClatchy-Tribune Information Services via COMTEX) -- -- Every year, by law, publicly traded companies fill investors' mailboxes -- both electronic and snail mail -- with hundreds of pages of almost unreadable text known as a proxy statement and a ballot that almost nobody casts.

Ignore the proxy statement at your peril. It is one way to learn if the company you invested in is as devoted as you are to making you rich.

Proxy season for most retail investors (as opposed to the big institutional investors such as pension and endowment funds) passes with as much notice as Arbor Day. There are two big reasons, said Robert W. Dannhauser, senior policy analyst for the CFA Institute's Centre for Financial Market Integrity.

The proxy statement language is problem one, he said. It begins, "Dear Shareholder," then it invites you to attend the company's annual meeting where directors will be elected to the company's board, an auditor will be appointed, other businesses will be transacted if someone brings something up that is germane, maybe the articles of incorporation will be amended. You are cordially invited to cast your vote in person or vote by proxy by sending your ballot to management, which will cast your vote for you.

Hard as it may be to believe, the statement gets even more boring from there. The changes in the articles of incorporation will be presented. The stock incentive plan will be described in grueling detail. The board's audit, compensation and governance committees will describe their past year's work.

"It is written by lawyers to cover all possible contingencies," Dannhauser said in a telephone interview from his New York office. "It's not all that interesting. It's easy to toss aside."

The other problem is a simple matter of arithmetic. You have as many votes to cast in person or by proxy as you have shares. Your 100 shares of General Electric don't seem terribly potent considering there are almost 10 billion GE shares outstanding, 59 percent of which are owned by institutions. Vanguard Group alone holds more than 301 million shares, and it is only the third largest holder. GE's chairman himself owns 1.4 million shares.

"Most people view it as an exercise in futility at times," Dannhauser said. "What does my vote count for when it's up against the big pension funds who vote beside me?"

It is also not entirely clear to some investors how their vote relates to the company's future performance, even though the directors who win board seats are supposed to represent sharehold- ers' interests to the company's management, Dannhauser said.

According to Broadridge Financial Solutions Inc., which helps companies handle the proxy process, only a little more than 30 percent of the shares held by retail investors are voted.

Dannhauser said that, despite most retail investors' minuscule holdings, companies pay attention to the votes different types of shareholders cast, rather the way politicians pay attention to how an urban voter differs from a rural voter.

"If you vote your 1,000 shares in a certain way and a number of fellow investors vote the same way, that's sending a message to the board and by extension to management that is not impossible but is difficult to ignore," Dannhauser said.

Once in a while, though not often, shareholder indifference is so rampant it is possible so few shares are voted that the company is in danger of not having the quorum required to do business. The annual meetings are very expensive to put together, Dannhauser said, in part because of the proxy material the law requires every shareholder to receive.

In that unlikely event, you can expect to receive a phone call from a proxy service like Broadridge pleading with you to cast your vote. If a company you own is involved in some sort of proxy fight, kicked off by a hostile takeover, for example, your phone will ring the way it did during the 2006 election cycle as both sides in the fight woo you.

Whether you vote or not, the proxy statement is well-worth the tedium of reading. "Take a look at the material and start making connections between what it exposed to you as an investor and what you expect out of the board," Dannhauser said.

You will find biographies of the people nominated for board seats. If many of them are also officers of the company, you might ask if the slate is going to represent the shareholders or management at board meetings. If they have been directors since World War I and the share price hasn't budged since then, it might be time for some new blood.

The executive compensation section is always a fun read. Berkshire Hathaway's proxy reveals that Warren Buffett, who has made many shareholders a lot of money over the years, was paid a $175,000 salary in 2007 and nothing else.

On the other hand, Angelo Mozilo, the board chairman who flew Countrywide Financial into the ground thanks to its subprime mortgage business, was paid more than $48 million in total compensation, almost $2.9 million of it in salary alone. In the past 52 weeks, a share of Countrywide went from a high of $42.24 to a recent close of about $5.

You can also read why Countrywide directors settled on $48 million for Mozilo even as the market settled on $5 for you. It's in the often inscrutable section where compensation packages are discussed.

Business relationships you should know about are in the proxy statement. If your board has decided to lend money to your CEO, or your chairwoman's husband owns the company's headquarters building, you'll find it in the proxy statement. It's another way of seeing where the board's loyalty lies.

The idea is to make sure that the interests of the directors and managers align with your interests. If interests do not align, you can always cast the ultimate vote: Sell your shares. Auditor election

You will always be asked to approve selection of an auditor. It is unlikely that you will have a strong opinion about which firm audits the company's books. Most people ratify management's selection from among the handful of large, global accounting firms.

Bylaw changes

When the board wants to change company bylaws, the proxy statement will contain pages of legalese. Many changes don't mean much to the average investor, but sometimes directors ask for permission to do something important, like enact a poison pill designed to make a hostile takeover of the company next to impossible.

Shareholder proposals

Sometimes shareholders get a proposal on the ballot, and often management and the directors oppose it. Proposals might require the company to limit executives' compensation, demand reforms in corporate governance or target a specific cause. Proposals to limit dealings with China and Sudan have been offered recently.

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