What I’m Learning Reading Proxies

It’s proxy-reading season, so I’ve been spending an awful lot of time lately, well, reading proxies. Most money managers have, too, I suspect. The nannies and scolds that make up the proxy advisory business would have you think that people who run money for a living are either too lazy to read proxies before they cast shareholder votes or, even if they do read them, are so hamstrung by conflicts of interest that they can’t possibly be depended on to cast them in their investors’ interest.Baloney. My number one interest-both my fiduciary interest and my self-interest-is that the portfolios I manage are invested in companies that can deliver the highest return that is prudently possible. There are many ways I can help make that happen. I visit many companies in my investment universe regularly, often four times a year. I listen to quarterly earnings calls and read the companies’earnings filings. I even read sell-side research! But I also pay attention to how the company is being governed. One way to do that is to read the company’s proxy carefully. It is a vital, and essential, part of my job.A few impressions on what I’ve read so far this year:

I’m rarely surprised at how much (or how little) stock a given company’s top management holds. To put the matter only slightly over-broadly: managements of well-positioned, well-run firms tend to have a lot of skin in the game, while managements of firms that are less well-positioned and -run don’t. Whether that’s correlation or causality at work,I can’t definitively say. But I have a suspicion.

Companies’ executive pay practices seem to be willfully obscure. Boards of directors of America, a simple plea from an interested investor: pay your CEO one way and one way only, through salary plus bonus. The mix of stock and cash is up to you. But what’s with the golf memberships, car allowances, home security systems, and housing support? One proxy I read says the company is picking up the CEO’s cellphone bill. Look, these people already make a lot of money. I know because I read the proxy. They can pay for all this stuff themselves. If your CEO squawks at the idea of having to pay out of his own pocket what are, after all, personal expenses, bump up his salary to make up the difference. Or maybe consider getting yourself a new CEO.

The proxy advisory business really is a con, in my view. I’m reminded as I read proxy after proxy this time of year that there really is a great variety in American business, even great variety within the industry I invest in, financial services. Companies have different strategies and face different challenges. They serve different customer demographics. CEOs have different temperaments. The variety is endless. The notion that there is a single right answer in questions of governance-like, say, that always and everywhere the CEO’s and chairman’s role should be split-is preposterous, both in theory and in experience. Reasonable people can (and should) be able to disagree on questions put before shareholders. That the ISSs and Glass-Lewises presume to deliver the One True Answer on shareholder proposals is absurd. Besides, it’s not as if they don’t have their own conflicts of interest that might cloud their judgment.

One last thought: reading a proxy is kind of enjoyable, in a weird way. It’s the closest thing there is among official S.E.C. filings to a gossip sheet, after all, right down to related-party transactions. How could it not be fun? Okay, back to the pile. . . .What do you think? Let me know!