How to read annual reports and proxy votes

When you own a share (even one share) you become a part owner. This ownership comes with rights, including the right to obtain Annual report And to Proxy voting On company decisions.

Annual reports tell you what happened during the past fiscal year. Proxies tell you what will happen and give you an opinion before you make those decisions. Just as we saw in last week’s proxy vote on Elon Musk’s pay at Tesla.

Understanding both documents helps you spot red flags, compare management promises with performance, and use your vote to push for stronger accountability or better long-term results.

Annual report

Many people assume that an annual report and a 10K are the same thing, but in reality they are not. The annual report is usually a nice, glossy book that the company presents to shareholders. Inside, half of it is usually dedicated to company information and trends, and the other half is dedicated to financial data. This half is the 10-K, the financial report filed with the Securities and Exchange Commission each year. Most companies bundle them together, but some don’t, so be aware.

When I receive my annual reports, I look at the following, and you may like this too.

The most prominent features of the company

I like to read company highlights and see where the companies I invest in are trying to compete. Companies typically highlight growth strategies, new products being developed, and more on these pages. Reading them can give you a real idea of ​​how your investment is performing, because you can see first-hand the products your company is developing and the markets you intend to enter and/or grow in.

Consolidated statement of earnings

A consolidated earnings statement is just what it sounds like – it’s where and how a company made its money. It also shows you how much the company is spending on major initiatives. In this statement, see the following:

• Net sales growth (must be constantly growing)
• Cost of goods sold (is it growing faster or slower than sales?)
• R&D spending (Is the company actively developing new products?)
• Overhead costs (sometimes called administrative or general costs – are they rising faster than sales growth?)
• EBIT (Earnings Before Interest and Taxes) – Growth over time is good

How a company makes its money says a lot about how it continues to make its money. Thus, how a company spends its money says more about how it continues to spend its money. So keep that in mind when looking at the earnings statement.

Balance sheet

The balance sheet is the best place to see how much debt a company owes. And I care about debt because too much of it is a bad thing (just like personal finance!). Here are some things I look at on the balance sheet:

• Short-term loans (increase or decrease?)
• Total current liabilities (I like to see liabilities lower usually)
• Long-term debt (I would like to see this flat or decreasing, but given historically low interest rates, this could be useful for other types of financing at the moment)
• Post-employment liabilities (this is the pension funding line, and it’s also where a lot of companies get into trouble, so pay attention here)

The bottom line on the balance sheet: Current assets should be much larger than current liabilities. As I mentioned above, long-term debt can be a good thing right now, but you should also pay close attention to your retirement obligations.

Notes to the consolidated financial statements

The notes accompanying the consolidated financial statements are pure gold. These notes highlight everything you might want to know about the company and how it handles things financially. Some things I like to be aware of:

• Greater concentrations of risks for the business
• How to recognize revenue (varies by industry, but important to know)
• How to calculate pension benefits and liabilities (look at growth, plan assets, and return on plan assets)
• Updates on long-term investments (more important for some companies versus others)
• Updates regarding potential liabilities arising from lawsuits
• Look at debt rates and lines of credit
• The results of any restructuring plans

Other fun things to check out

Finally, just for fun, I would also check how much the company actually paid in taxes. I find this interesting, especially how they are able to make up so much income. I also like to look at executive compensation. Not just how much each person makes, but the bizarre perks they sometimes demand as part of their compensation (like magazine subscriptions).

Proxy voting

Proxy voting is your right as a shareholder to vote on various company activities. Some votes are binding, meaning that a majority shareholder decision makes the outcome effective. Others are non-binding, meaning they merely solicit the opinions of the company’s shareholders. These voices are sometimes put into practice by company CEOs, since they listen to shareholders as owners.

For most types of shares, one share equals one vote. However, there are corporate structures where a certain class of shares gets a larger number of votes (for example, Class A shares get 10 votes per share, and Class B shares get 1 vote per share). These structures are usually designed to keep the founders or original owners in control of the company.

Also, as a contributor, you can submit your own proposals to a vote, if you get enough ratification signatures to get them on the proxy. Many large companies usually have a number of shareholder proposals, and there are some individuals, known as activist shareholders, who simply buy company shares to get certain proposals on the agenda. These have become more common in recent years, and I will provide some examples below.

With any provision in a proxy, the company’s current board of directors will make recommendations on what shareholders should vote for or against. It is very common to see boards wanting shareholders to vote in favor of binding votes, and against any shareholder proposals.

Here are some common binding votes that most shareholders will vote on:

• Election of the Board of Directors (these are the individuals who will represent your interests in the company throughout the year)
• Approval of the accounting office that will review the company’s financial statements
• In certain circumstances, shareholders may have to vote for the following:
  • Company division or merger

Here are some popular non-committal sounds that have become popular over the past few years:

• “Say on pay” initiatives, where shareholders can vote on executive compensation to prevent huge sums of money for poor performance and golden parachutes
• Lobbying disclosures, where shareholders can vote for companies to either disclose lobbying practices, or stop them all together
• Environmental, social and governance initiatives

Shareholder proposals have also become popular recently. Many are non-binding, but some are. Here are some examples from different companies:

• Green energy initiatives or sustainability requirements
• Ban on animal testing
• Different types of incentive compensation plans
• Different board structures with more independent directors

The great thing about being a shareholder is that you get to choose the course of your company, so be sure to read these and vote accordingly.

Shareholders meeting

The stockholder meeting is where all items in the proxy statement are resolved and voted on. As a contributor, you can attend, but you usually must RSVP in advance. Many companies make the shareholder meeting part meeting and part trade show. As such, they like to showcase their products, hold sessions for investors to interact with company leadership, and more. However, at the end of the day, the meeting aims to vote on the results of the proposals and set the agenda for the next year for the company.

How to cast your vote

1. View your inbox or mailbox To obtain notice from your company or broker.
2. Review both the annual report and proxy statement.
3. Voting online (usually through a secure link such as ProxyVote.com) or by phone/mail.
4. Confirm receipt of your vote If the platform provides acknowledgment.
5. Keep your affirmation Until after the meeting if questions arise.

You can still attend a shareholder meeting, but most individual investors vote by proxy.

Bottom line

As a shareholder, you have a stake in how the company is run and this ownership comes with information and influence.

Reading the annual report helps you understand management’s performance; Your proxy vote tells management what you expect next.

Whether you own stocks directly or through a brokerage account, take a few minutes each spring to review, question and vote. It is one of the most direct ways in which individual investors can shape corporate accountability.

Readers, do you read your company’s annual reports? Do you vote your proxy? Have you ever attended a shareholders meeting?