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"The importance of the information is inversely proportional to the quality of the paper upon which it is printed." - Peter Lynch

I remember reading this and then looking at a proxy statement that was printed on the cheapest paper I've come across. I think the newspaper is printed on a better grade of paper so I wondered what "magic" this document held.

That mystery elluded me until I stumbled upon a book, Morningstar's, The Five Rules for Successful Stock Investing, by Pat Dorsey.

After reading Chapter 7 Analyzing a Company - Management the "scales fell from my eyes" and I understood the wisdom of Mr. Lynch and now study the humble proxy statement that I used to toss in the trash.

Management, Management, & Management

As BetterInvestors we know that a company is its management. The three most important things about a company are management, management, and management. You get the idea. Management makes a company great.

We judge management's quality by examining its ability to efficiently growth the company by examining its results with the SSG. The SSG, reportedly, contains 80% of what you need to know about the company.

Some people venture into that extra 20% that the SSG doesn't consider. This is the land of financial statment analysis with horizontal, vertical, and ratio analysis, and the humble proxy statement.

Evaluating Management with the Proxy Statement

When considering management, Mr. Dorsey recommends dividing the management analysis process into three parts:

1. Compensation
2. Character
3. Operations

Compensation

How much does management pay itself?

• Raw level of compensation.

• Pay for performance.

• Moving the goalposts.

• Making the company bigger not better.

• Acquisitions that actually work.

• Were executives given loans that were subsequently forgiven?
• Do executives get perks paid for by the company that they should really be paying for themselves?
• Does management hog most of the stock options granted in a given year, or do rank-and-file employees share in the wealth?
• Does management use stock options excessively?
• If a founder or large owner is still involved in the company, does he or she also get a big stock option grant each year?
• Do executives have some skin in the game?

Character

• Compensation by itself is a good litmus test for character.
• Does management use its position to enrich friends and relatives?
• Is the board of directors stacked with management's family members or former managers?
• Is management candid about mistakes?
• How promotional is management?
• Can the CEO retain high quality talent?

Operation - Running the Business

• Performance.
• Follow through.
• Candor.
• Self-confidence.
• Flexibility.