Quick, everyone who reads every word of every corporate annual report that comes every spring, raise your hand.
I can't see you, of course, but odds are no one sitting near you has detected any sudden arm waving.
Still, as boring as they are, the annual reports and proxy statements that public companies mail this time of year are worth a close look. That's especially so this year because the stock market plunge of 2000 can reveal whether the people in charge of your investments have earned your allegiance for another year.
You could spend a lifetime learning to analyze reports filed by public companies, but several items are particularly interesting:
l Excuses. Most stocks lost ground in 2000, and it's reasonable to expect a falling tide to lower all ships. But management's explanations for a company's poor stock performance may blame unavoidable external factors, even though a big part of the problem was management bumbling.
Take a close look at management's introductory letter. Fair's fair if a CEO took credit for booming stock prices in the late '90s, when his stock was merely floating on a rising tide, he ought to take a fair share of the blame when things went bad.
To apportion the blame, take a look at how the company's competitors did. Their stocks may have lost money, too, but if their losses were smaller, on a percentage basis, then your stock may have suffered from poor management, not just a lousy market.
l Pay. Has the compensation awarded to your company's executives reflected their performance? Executive compensation skyrocketed in the '90s, mainly because soaring stock prices inflated the value of stock options. In theory, stock options encourage executives to work in shareholders' interest: The higher the stock goes the richer everyone gets executive and ordinary shareholder alike.
But when stock values decline to less than the price at which executives could buy the shares, some companies try to keep managers happy by repricing the options allowing them to buy at lower prices. As a shareholder, you have to decide whether these insiders were worthy of special treatment.
In the most egregious cases, some companies even allowed executives to undo options exercises that led to losses later. For example, an executive would have shown an enormous paper profit if she used options to buy shares at $10 while they're trading at $100.
But if she kept the shares and the price fell to $5, she'd have an enormous loss. Nonetheless, she still would owe tax on the $90 profit realized the day the options were exercised.
Many Internet stocks did suffer losses this deep last year, and some accounting firms have reported that a few companies allowed executives to undo, or nullify, their disastrous options purchases.
But these executives aren't due any sympathy. They could have locked in their profits by selling shares immediately upon exercising the options. Those who didn't were gambling that prices would continue to rise. Why should they be protected from the kinds of losses that their ordinary shareholders suffered?
l Voting with their feet. To come up with cash for tax payments, executives commonly sell some shares of stock that they purchased through options exercises. That seems only prudent.
But what if an executive sells them all? Shareholders might see that as a vote of no confidence in the business.
Company spokespeople often shrug off such stock sales, saying executives want to diversify their holdings. But a close reading of annual reports and proxy statements will tell you whether top executives and board members are building their holdings or cutting back.
An executive whose holdings are growing seems confident about the future. That's especially so if she's buying shares on the open market, at the same prices you'd pay, rather than just accumulating through options exercises.
And what if the top insiders are trimming their holdings? That's a red flag. Perhaps you should get out, too.
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