Shareholders, Check Your Bags

If you or a family member own individual shares of common stock, this is the time of the year when your mailbox might start filling up with blue plastic bags. Those bags contain proxy materials, a company’s annual Form 10-K regulatory filing, and (usually) an annual report.

Most people toss the documents without looking at them. That’s not a good idea. If you own stock in a company, why wouldn’t you take the time to look at the information they provide to their shareholders? It’s like buying a car and ignoring the reminders from the dealer about regularly scheduled maintenance.

With the latest round of regulatory reform taking effect, publicly traded companies are subject to new rules that, among other things, liberalize the ability of dissident shareholders to stand for election to the board of directors, and require companies to give shareholders a greater voice in the pay that executives and board members receive. Perhaps most importantly, the company executives work for you. They deserve your close attention. And if they’ve earned your trust, they also deserve your vote.

My firm, Disciplined Growth Investors, can speak from experience about how important shareholder attention can be. We had a ringside seat at one of the closest shareholder votes in recent memory. And it happened just last year.

At the time, we held nearly 3.2 million shares of stock from Plymouth-based mattress maker Select Comfort (Nasdaq: SCSS). Our decision—and that of the shareholders we sided with, of course—swung the vote against a proposal to sell control of the company to a private equity firm. Under the conditions at the time, that deal would have given the buyers an instant paper profit of $100 million and allowed them to buy 50 million shares of new stock at a 75 percent discount to the level at which the stock was trading at the time.

We made our initial investment in Select Comfort in the spring of 2002 at $4 a share. Later that year, we purchased more shares at $6. We added to the position when SCSS was trading at $16 a share, and again in early 2004 at $12 a share, after the stock took a major hit in the wake of some negative press. SCSS then proceeded to trade as high as $28 a share in late 2005. But after one last run-up in mid-2006, it began a long, slow slide—well, a crash, actually—that extended into the depths of the 2008–09 recession. Sales cratered, stores closed, and the company flirted with bankruptcy.