For my nephew’s 13th birthday, I transferred some stock to a UTMA account for him under a dividend reinvestment plan (DRIP), and have been using the investment as a teaching opportunity. Every time I receive a statement or other investment correspondence, I send it to him with a short note explaining what it is and what it means to him and his investment. As I was drafting my last email to him about the proxy statement we received, I realized that others trying to teach kids about investing might also appreciate reading my notes. So I edited it slightly to make it a bit more cohesive for people with no background knowledge, and I offer it to you…
I received a message from Fortune Brands (Ticker: FO) and since you are also an owner, I wanted to share it with you.
In a small corporation like mine (I own an IT consultancy), I am the sole owner, president, and most of the workforce. However, public companies like Fortune Brands are owned by thousands or even millions of individual investors like you and me. As owners, we are in control of the company., but there are too many of us for all of us to participate in the daily operations; that would be crazy. Instead, we exercise our control by electing a board of directors to provide direction and guidance to the company. The board of directors hires a CEO for the company and some of the other top officials, and those officials run the day-to-day operations of the business.
You and I do not participate in decisions about manufacturing, sales, shipping/receiving, hiring/firing employees, payroll and benefits, business hours, or office location; We leave that to the officers of the company, who are selected by the board of directors. directors that you and I choose. Since we do not get involved in the daily routine, the company produces annual and quarterly status reports for us on its activities, successes and failures. An annual proxy statement solicits our votes for the board of directors and our opinion on a few additional limited important issues. We can cast our votes by mail or online, or we can attend the meeting in person in Illinois at the end of April.
I am attaching the company’s 2010 Proxy Statement (omitted from this article), which contains information about the upcoming shareholders’ meeting. It’s going to look very confusing, but don’t worry, I don’t need you to read it all, I just wanted to show you something on one page…
Board members are term limited, so we are voting to replace those expiring this year. Knowing who to vote for can sometimes be a difficult matter. Different people approach this in different ways. All of the candidates offered to us have been selected by our current board of directors, so they are people our board thinks we will like and would be a good fit with the other board members. For many owners, that’s good enough, and they just follow the board’s recommendation, especially if they’re happy with the way the business has been running. Other owners can do a little research on the resumes and past experiences of the various candidates before deciding.
I approach it in a different way: I want the board members to have my interest at heart, and that is that I want my investment to increase in value. To make sure they have the same interest, I look for candidates who, themselves, have large investments in company stock. If you open the attached PDF file and turn to page 60 (sorry readers, imagine that), you will find a table titled “Certain Information About Securities Holdings” that reveals this information. The table shows the number of shares owned by each officer and director of the company, and by multiplying these numbers by the share price, I know how much money each of them has invested in the company. I only vote for those with considerable investments. Today it was all, but I always check because I have occasionally seen candidates who own little or even no shares of the company.
In addition to the election of directors, the proxy statement continues to solicit our votes on several other issues, such as approval of an auditor, approval of a change in voting requirements, and approval of a plan to pay directors with additional actions. I like the way the board has been handling things, so I voted for all of your requests.
There is also one last special item on the list. As owners of the company, you and I have the right to propose our own issues for a vote by the other shareholders. The last item on the list is one of those proposals from another shareholder. He wants us to make a rule that whenever 10% of the shareholders feel convinced of something they can call a “special meeting” of all the shareholders, instead of waiting for this annual ordinary meeting to discuss and vote on the matter. It’s the kind of thing you’d like to be able to do yourself, but it could start to get costly and disruptive for the company to have to send announcements, book auditoriums, and arrange flights and accommodations for executives every time a vocal minority wanted to talk about an insignificant topic. . I voted against.
As custodian of their shares, they sent me a single proxy statement for the total of their shares and mine, so I already voted for both. In the future, when you are old enough to control your own investments, the responsibility to vote on these issues will remain with you. If you have questions, I’m always happy to help.