How to Read a Proxy

Editor's note: This is the first of a two-part column. Look for the second part tomorrow on RealMoney.

With proxy season approaching, this is a good time to highlight the key items to look for in this important filing. If you've never looked at a proxy before, this document is the official notification to stockholders of matters to be brought to a vote at the annual meeting. But it also contains a trove of other data that you won't always find in the annual report, or 10-K.

For example, the proxy will tell you about the board of directors' background, any relationships the company or its officers may have with customers, executive compensation (including stock options) and how much the independent auditor gets paid for consulting services.

To illustrate, we'll look at Disney's (DIS - commentary - Cramer's Take) most recent proxy (formally called the DEF14A), which was filed with the Securities and Exchange Commission on Jan. 28. A review of Disney's proxy is topical for several reasons. The company's 2003 annual meeting is being held tomorrow in Denver.

Also, according to a recent story in The New York Times, Michael Eisner, Disney's longtime chairman of the board and chief executive, recently fended off a boardroom coup by another board member. At the same time, there's room for improvement at the ABC network, Disney's Treasure Planet and Bad Company movies were flops, and the company is haggling with some of its creative partners. Then there's the stock, which has been the second-worst performer of the 30 Dow Jones Industrial Average components for the last five years.

Independent Directors

Let's start with the board, where I want to know what percentage of directors are "independent." In theory, independent directors are more apt to speak freely, whereas company employees who also sit on the board may be afraid to tell the chief executive that his or her pet project is a bad idea. After the board meeting, Disney will have three board members who are company employees: Michael Eisner, Roy Disney (Walt's nephew and head of animation) and Robert Iger, the company's president and chief operating officer. Thus, it appears that 10 of the 13 directors are independent. So far, so good.

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Hewitt Heiserman has been a financial analyst for 15 years and has worked for Fidelity Investments, Simplex Time Recorder, American Holdco and Breakaway Solutions. He is now writing a book on the Earnings Power Box, an analytical model he created to gauge the quality of a firm's profits. (The Earnings Power Box is a trademark of Hewitt Heiserman.) At the time of publication, Heiserman had no positions in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback and invites you to send it to [e-mail].