The Proxy Statement
A proxy statement is a form that the Securities and Exchange Commission (SEC) requires shareholders receive prior to annual or special stockholder meetings of companies whose securities are registered under Section 12 of the Securities Exchange Act of 1934. These companies must file this statement with the SEC prior to shareholder voting or approval of other corporate action. These filings can be found on the SEC’s EDGAR search system. In addition to soliciting shareholder approval on corporate events and decisions—such as mergers or acquisitions, disposition of assets, board of director elections, or auditor ratification—the proxy statement contains relevant information for shareholders regarding director and executive compensation, corporate governance policies and procedures, fees paid to the auditor and other shareholder proposals. More recently, the proxy statement has highlighted a company’s ESG initiatives.
This article will discuss what is often included in the proxy statement filings through the lens of Apple, Inc. to highlight some of the key information investors are privy to via the proxy statement.
Definitive Proxy Statement
Form DEF 14A, also known as the definitive proxy statement, is perhaps what most people refer to when they speak of companies’ proxy statements. This form is required under Section 14(a) of the Securities Exchange Act of 1934. For example, Apple’s most recent DEF 14A filing at the time of this article’s publication was filed on January 6, 2022 prior to its shareholder meeting.
Preliminary Proxy Statement
Form PRE 14A is known as the preliminary proxy statement. Just as the word preliminary suggests, the definitive form’s draft is the preliminary form, and it must be submitted to the SEC at least 10 days prior to the delivery of the definitive form to the security holders.
Rule 14a-8 of the SEC indicates when a company must include shareholder proposals in its proxy statement. This section will briefly highlight the requirements for a proposal to be valid. A shareholder must meet certain requirements to submit a proposal including owning $2,000 of the market value of the company for over three years or owning $25,000 of the market value for over a year. A person may only submit one proposal for any given shareholder meeting. A proposal from a shareholder may be excluded by the company. In this scenario, the company has the burden of showing why a proposal should be excluded from the proxy statement to lawfully exclude a shareholder proposal.
The proxy statement is the form that contains the matters to be voted on by a company’s shareholders. At most companies, the day-to-day decisions that impact the company at large are solely in the hands of executives. However, investors also usually have a say in major decisions that a publicly traded company makes whether it is considering an acquisition, admitting someone to the board, or approving a stock compensation plan. Generally, investors who own common shares of the publicly traded company’s stock receive one vote per unit owned. Sometimes, units carry additional voting power.
Investors with voting rights will vote to accept, reject, or abstain from important decisions as part-owners in the company. If, for whatever reason, an investor cannot participate in the vote, the investor may assign another person or entity to vote on his or her behalf. This is known as a proxy vote, which can even be handed off to the company management team if that is the investor’s wish. Oftentimes, individual investors will look to the larger institutional investors to see how they vote given their resources to research the proposed changes to the company.
Binding vs. Non-binding Voting
Proposals included in a company’s proxy statement are usually non-binding. This means that shareholders, by law, do not have the power to require a company’s board members to take actions that prevent the board from acting in the best interest of the company. For example, even if a majority of voting shareholders do not ratify the current auditor, boards still have the ultimate say in whether to ratify that auditor.
Some states may legislate bylaws to make otherwise non-binding matters, binding. For example, in Delaware, voting for director approvals are binding on the company’s board.
ESG stands for Environmental, Social, and Governance as it relates to a company. Oftentimes, ESG is also referred to as sustainable investing, which is something that more investors hope to see become a part of the company’s mission and objectives. In a recent Harvard Business Review article, it reads, “Analysis of interviews with 70 executives in 43 global institutional investing firms suggests that ESG is now a priority for these leaders and that corporations will soon be held accountable by shareholders for their ESG performance” (HBR). The proxy statement is the document where companies report on these sustainable investing issues by disclosing the diversity and makeup of its board, its carbon footprint, and workplace safety to name a few. More recently, the SEC has ramped up its focus on ESG reporting, but the reporting standards are still unclear. The lack of certainty in reporting results in a wide range of ESG reporting methods throughout companies’ definitive proxy statements.
For example, one of Apple’s introductory pages to its 2020 proxy statement is dedicated to the company’s response to COVID-19. Apple said that it was one of the first major companies to lead the response to COVID-19, allowing flexible work arrangements and sourcing over 30 million masks. Beyond extraordinary events like a pandemic, Apple also has a section on its goals for advancing inclusion, diversity, and racial justice, protecting the environment, and investing in communities.
Apple’s most recent proxy statement disclosed the following: “In 2021, in response to stakeholder feedback, Apple extended its commitment to transparency with enhanced reporting including Apple’s first Environment, Social and Governance Report (“ESG Report”), which seeks to provide a broad view of our environmental, social, and governance efforts across the company” (2021 Proxy). A selection of these will be highlighted below.
This is Apple’s disclosure regarding its environmental impacts:
Teams across Apple are always innovating to make our products better for people and the planet—from the energy that powers our operations, to the materials in our devices, to the companies we do business with. We work with local communities to expand our impact, with a focus on equity and opportunity. Apple is already carbon neutral for our operations, and we’ve set a goal to be carbon neutral across our entire supply chain and the lifetime usage of our products by 2030. We’re also committed to one day making our products with only recycled and renewable materials (2021 Proxy).
Apple also disclosed that it reduced carbon emissions 40% from 2015 to 2020, and the iPhone 13 is made up of 98% of recycled rare earth elements. These kinds of ad hoc disclosures beg the question, “who is auditing these numbers?”
This is one of many of Apple’s disclosures regarding its social impacts: “In 2020, Apple allocated more than $400 million toward affordable housing projects and homeowner assistance programs in our home-state of California, marking a major milestone in our multi-year $2.5 billion commitment to combat the housing crisis in the state.” Similarly, Apple disclosed the following about its efforts to help with racial equity:
Racial Equity and Justice Initiative is working to address systemic racism, while supporting opportunities for communities of color. This initiative builds on our longstanding commitment to education. Through our Community Education Initiative, we’re creating opportunities for tens of thousands of educators and students to learn skills like coding and unlock their creativity (2021 Proxy).
This information provides key information that investors look for but are not necessarily included in other SEC-mandated disclosures.
The accompanying chart also appears in Apple’s proxy statement to show the governance of the company. In fact, a significant portion of the proxy statement discusses the composition of the company’s board and to which committee each belongs. Apple disclosed that each of its board members are independent except for Tim Cook, who is the acting CEO and on the board.
Apple subsequently disclosed that 50% of its board leadership is composed of women, and 44% of its directors are from unrepresented communities. Perhaps many of these disclosures come from an increased demand from shareholders.
Executive compensation is another topic heavily discussed on a publicly traded company’s proxy statement. Oftentimes, management’s compensation is tied to meeting key financial metrics, whether that is earnings per share or profit margins.
The accompanying figure is what Apple disclosed on its 2021 proxy statement, which includes salaries, bonuses, stock awards, incentive compensation, and any other compensation.
As mentioned earlier in this article, investors are now pushing for compensation to be more connected with ESG goals including reducing the company’s carbon footprint, enhancing employee wellness, or supporting human rights through tangible metrics. From 2019 to 2021, the number of U.S. companies that tied executive compensation to one or more ESG goals increased from 19% to 25% (Bloomberg).
Say on Pay
The Dodd-Frank Act mandated a process that enables shareholders to approve the compensation packages of the company’s executive officers, known as Say on Pay. Companies are required to hold a vote every six years to determine whether the Say on Pay process should occur every one, two, or three years—most companies hold Say on Pay votes annually.
Section 953(b) of the Dodd-Frank Act also requires companies to calculate the median compensation amount of the entire company’s workforce. The company must then disclose the ratio of the median compensation to the CEO’s compensation in the company’s proxy statement. For example, Apple released that its ratio was $1,447 to 1. This suggests that for every dollar the median employee makes working at Apple, Tim Cook makes $1,447.
The proxy statement also includes the company’s fiscal year. For example, Apple disclosed the following regarding its fiscal year from its recent proxy statement:
“Apple’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. Apple’s 2021 fiscal year included 52 weeks and ended on September 25, 2021. Information presented in this Proxy Statement is based on Apple’s fiscal calendar.”
The Proxy Statement is a fundamental document for any publicly traded company. It provides investors with a great deal of important information that is becoming more relevant. From disclosing ESG related solutions, allowing shareholders to vote on crucial changes within the company, or disclosing executive compensation, the proxy statement has vital information for investors.