Our Corporate Governance Guidelines provide that a substantial majority of our directors will be independent. Our Board of Directors has adopted director independence guidelines to assist in determining each director’s independence. These guidelines are available on our website at www.microsoft.com/investor/independenceguidelines. The guidelines either meet or exceed the independence requirements of NASDAQ. The guidelines identify categories of relationships the Board has determined would not affect a director’s independence, and therefore are not considered by the Board in determining director independence.
Under the director independence guidelines, the Board of Directors must affirmatively determine a director has no relationship that would interfere with the exercise of independent judgment in carrying out his or her responsibilities as a director. Annually, each director completes a questionnaire that provides information about relationships that might affect the determination of independence. Management provides the Governance and Nominating Committee and Board with relevant known facts and circumstances of any relationship bearing on the independence of a director or nominee that is outside the categories permitted under the director independence guidelines.
Based on the review and recommendation by the Governance and Nominating Committee, the Board of Directors analyzed the independence of each director and determined that Messrs. Morfit, Noski, Scharf, Stanton, and Thompson, Mmes. List-Stoll, Peterson and Warrior, and Drs. Klawe and Panke meet the standards of independence under our Corporate Governance Guidelines, the director independence guidelines, and applicable NASDAQ listing standards, including that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment.
Meetings and meeting attendance
Our Board of Directors holds regularly scheduled quarterly meetings. Typically, committee meetings occur the day before the Board meeting. During one quarter each year, the committee and Board meetings occur on a single day so the evening and following day can be devoted to the Board’s annual retreat, which includes presentations and discussions with senior management about Microsoft’s long-term strategy. Besides the quarterly meetings, typically there are two other regularly scheduled meetings and several special meetings each year. At each quarterly Board meeting, time is set aside for the independent directors to meet without management present. Our Board met eight times during fiscal year 2015.
Each director nominee who is a current director attended at least 75% of the aggregate of all fiscal year 2015 meetings of the Board and each committee on which he or she served. David Marquardt, who retired from the Board at the expiration of his term following the 2014 Annual Meeting, attended less than 75% of meetings during his partial term from July 1 to December 3, 2014.
Directors are expected to attend the Annual Meeting. All of our directors attended the 2014 Annual Meeting, with the exception of Mr. Gates who was unable to attend.
Our Board has four standing committees: an Audit Committee, a Compensation Committee, a Governance and Nominating Committee, and a Regulatory and Public Policy Committee. Each committee has a written charter, which can be found on our website at http://aka.ms/committees. The table below provides current membership for each Board committee.
* Dr. Maria Klawe will not seek re-election at the 2015 Annual Meeting. Dr. Klawe currently serves on the Compensation Committee and Regulatory and Public Policy Committee. Sandra Peterson and Padmasree Warrior are both nominated for election to the Board at the Annual Meeting. The Board will consider committee appointments for Mmes. Peterson and Warrior following election to the Board.
Below is a description of each standing committee. Each committee has authority to engage legal counsel or other advisors or consultants as it deems appropriate to carry out its responsibilities.
The Audit Committee assists our Board of Directors in overseeing the quality and integrity of our accounting, auditing, and reporting practices. The Audit Committee’s role includes:
- overseeing the work of our accounting function and internal control over financial reporting,
- overseeing internal auditing processes,
- inquiring about significant risks, reviewing our policies for enterprise risk assessment and risk management, and assessing the steps management has taken to control these risks,
- overseeing business continuity programs,
- reviewing with management policies, practices, compliance, and risks relating to our investment portfolio,
- overseeing, with the Regulatory and Public Policy Committee, cybersecurity and other risks relevant to our information technology environment, and
- reviewing compliance with significant applicable legal, ethical, and regulatory requirements, including those relating to regulatory matters that may have a material impact on our financial statements or internal control over financial reporting.
The Audit Committee is responsible for the appointment, compensation, retention, and oversight of the independent auditor engaged to issue audit reports on our financial statements and internal control over financial reporting. The Audit Committee relies on the expertise and knowledge of management, the internal auditor, and the independent auditor in carrying out its oversight responsibilities. The Audit Committee Responsibilities Calendar accompanying the Audit Committee Charter describes the Committee’s specific responsibilities.
The Board of Directors has determined that each Committee member has sufficient knowledge in financial and auditing matters to serve on the Audit Committee. In addition, the Board has determined that Ms. List-Stoll, Mr. Noski, and Dr. Panke are “audit committee financial experts” as defined by SEC rules.
The primary responsibilities of the Compensation Committee are to:
- assist our Board of Directors in establishing the annual goals and objectives of the chief executive officer,
- recommend to the independent members of our Board the compensation of the chief executive officer,
- oversee an evaluation of the performance of the Company’s other executive officers and approve their compensation targets and awards,
- oversee and advise our Board on the adoption of policies that govern executive officer compensation programs and other compensation-related polices,
- assist the Board in overseeing plans for executive officer development and succession,
- oversee administration of our equity-based compensation and retirement plans, and
- review and advise our Board and management about policies, programs, and initiatives for diversity and inclusion and workforce management.
Our senior executives for human resources and compensation and benefits support the Compensation Committee in its work. The Compensation Committee delegates to senior management the authority to make equity compensation grants to employees who are not executive officers and to administer the Company’s equity-based compensation plans. The Compensation Committee periodically reviews the compensation paid to non-employee directors, and makes recommendations to our Board of Directors for any adjustments.
The Compensation Committee Charter describes the specific responsibilities and functions of the Committee.
The Compensation Committee retains Semler Brossy Consulting Group, LLC (“Semler Brossy”) to advise the Committee on marketplace trends in executive compensation, management proposals for compensation programs, and executive officer compensation decisions. Semler Brossy also evaluates compensation for the next levels of senior management and equity compensation programs generally. The firm also consults with the Compensation Committee about its recommendations to the Board of Directors on chief executive officer and director compensation.
Semler Brossy is directly accountable to the Compensation Committee. To maintain the independence of the firm’s advice, Semler Brossy does not provide any services for Microsoft other than those described above. The Compensation Committee has adopted Compensation Consultant Independence Standards, which can be viewed at www.microsoft.com/investor/compconsultant. This policy requires that the Compensation Committee annually assess the independence of its compensation consultant. A consultant satisfying the following requirements will be considered independent. The consultant (including each individual employee of the consultant providing services):
- is retained and terminated by, has its compensation fixed by, and reports solely to the Compensation Committee,
- is independent of the Company,
- will not perform any work for Company management except at the request of the Compensation Committee chair and in the capacity of the Committee’s agent, and
- does not provide any unrelated services or products to the Company, its affiliates, or management, except for surveys purchased from the consultant firm.
In assessing the consultant’s independence, the Compensation Committee considers the nature and amount of work performed for the Committee during the year, the nature of any unrelated services performed for the Company, and the fees paid for those services in relation to the firm’s total revenues. The consultant annually prepares for the Compensation Committee an independence letter providing assurances and confirmation of the consultant’s independent status under the policy. The Compensation Committee believes that Semler Brossy has been independent during its service for the Committee.
Governance and Nominating Committee
The principal responsibilities of the Governance and Nominating Committee are to:
- annually establish the process for reviewing the chief executive officer’s performance,
- determine and recommend the slate of director nominees for election to our Board of Directors at the annual shareholders meeting,
- identify, recruit, and recommend candidates for the Board,
- review and make recommendations to the Board about the composition of Board committees,
- annually evaluate the performance and effectiveness of the Board,
- monitor adherence to, review, and recommend changes to our corporate governance framework, and
- review and provide guidance to the Board and management about the framework for the Board’s oversight of and involvement in shareholder engagement.
The Governance and Nominating Committee annually reviews the charters of Board committees and, after consultation with the respective Committees, makes recommendations, if necessary, about changes to the charters. The Governance and Nominating Committee Charter describes the specific responsibilities and functions of the Committee.
Regulatory and Public Policy Committee
The principal responsibilities of the Regulatory and Public Policy Committee are to:
- review and advise the Board of Directors and management about legal, regulatory, and compliance matters concerning competition and antitrust, data privacy, cybersecurity, workforce and immigration laws and regulation,
- with the Audit Committee, review risks relevant to our information system architecture and controls and cybersecurity,
- with the Compensation Committee, review policies, programs, and initiatives for workforce management and diversity and inclusion, and
- review our policies and programs that relate to matters of corporate citizenship, including human rights, corporate social responsibility, environmental sustainability, supply chain management, and political activities and expenditures.
The Regulatory and Public Policy Committee Charter describes the specific responsibilities and functions of the Committee.
The Compensation Committee periodically reviews compensation paid to non-employee directors and makes recommendations for adjustments, as appropriate, to the full Board of Directors. Our objective for compensation to non-employee directors is to pay at or near the median of the Dow 30, to award the majority of compensation in equity, and to make meaningful adjustments every few years, rather than smaller adjustments that are more frequent. The Audit Committee chair retainer increased from $15,000 to $30,000 effective December 3, 2014 in consideration of the time commitment associated with this role. There were no other changes to director compensation for fiscal year 2015.
Non-employee director compensation structure
* In December 2014, Mr. Gates waived his future cash and equity retainers.
The Company pays for reimbursement of reasonable expenses incurred in connection with Board-related activities.
Director retainers are paid quarterly in arrears. Quarterly periods are measured beginning with the Annual Meeting. At the end of each quarterly period, we pay 25% of the total annual retainer to each director. Retainers are pro-rated for directors who join or leave the Board or have a change in Board role during a quarterly period.
Directors may elect to defer and convert to equity all or part of their annual cash retainer, and to defer receipt of all or part of their annual equity retainer under the Deferred Compensation Plan for Non-Employee Directors. Amounts deferred are maintained in bookkeeping accounts that are deemed invested in Microsoft common stock, and dividends paid on the deferred equity are deemed to be invested in our common stock. We calculate the number of shares credited by dividing each quarterly amount deferred by the closing market price of our common stock on the originally scheduled payment date. Accounts in the plan are distributed in shares of Microsoft common stock, with payments either in installments beginning on separation from Board service or in a lump sum amount paid no later than the fifth anniversary after separation from Board service.
Non-executive Chairman compensation
The independent members of the Board appointed John Thompson as independent non-executive Chairman of the Board. Mr. Thompson’s pay reflects the additional time commitment for this role compared to other non-employee directors, which includes: (i) managing meetings of the Board of Directors, leading the work to set the agenda for Board meetings, leading the Board’s annual chief executive officer performance review, and representing the Board at the annual shareholders meeting, (ii) meeting with the Company’s investors, (iii) acting as an advisor to Mr. Nadella on strategic aspects of the chief executive officer role with regular consultations on major developments and decisions that are likely to be of interest to the Board, and (iv) at the request of Mr. Nadella, interacting with external audiences. To compensate Mr. Thompson for the greater responsibilities of the non-executive Chairman role, he receives the annual chairman retainer in lieu of the regular Board retainers.
Director stock ownership policy
To align the interests of our directors and shareholders, our Board of Directors believes that directors should have a significant financial stake in Microsoft. Under the Corporate Governance Guidelines, each director should own Microsoft shares equal in value to a minimum of three times the base annual retainer payable to a director. Each director must retain 50 percent of all net shares (post tax) from the retainer until reaching the minimum share ownership requirement. Stock deferred under the Deferred Compensation Plan for Non-Employee Directors counts toward the minimum ownership requirement. Each of our directors complied with our stock ownership policy at the end of fiscal year 2015.
Fiscal year 2015 director compensation
This table describes the cash and equity portions of the annual retainer paid to each non-employee director in fiscal year 2015.¹
(1) Mr. Nadella received no compensation as a director. He is excluded from the table because we fully describe his compensation in Part 3 – “Named Executive Officer compensation.”
(2) The value of fractional shares is excluded.
(3) Mr. Ballmer retired from the Board on August 19, 2014.
(4) Ms. Dublon retired from the Board on December 3, 2014.
(5) In December 2014, Mr. Gates waived his future cash and equity retainers.
(6) Ms. List-Stoll’s compensation began October 1, 2014 when she joined the Board. She elected to defer a portion of the cash component of her compensation. The stock award value converted into 2,459 shares of our common stock.
(7) Mr. Marquardt retired from the Board on December 3, 2014.
(8) Mr. Noski’s compensation was increased as a result of the Audit Committee chair retainer increase effective December 3, 2014. He elected to defer the stock award component of his compensation. The stock award value converted into 3,328 shares of our common stock.
(9) Mr. Scharf’s compensation began October 1, 2014 when he joined the Board.
(10) Mr. Stanton’s compensation began July 30, 2014 when he joined the Board.
(11) Mr. Thompson elected to defer the stock award component of his compensation. The stock award value converted into 12,763 shares of our common stock.
Certain relationships and related transactions
We are a global company with extensive operations in the United States and many foreign countries. Every year we spend tens of billions of dollars for goods and services purchased from third parties. The authority of our employees to purchase goods and services is widely dispersed. Because of these far-reaching activities, there may be transactions and business arrangements with businesses and other organizations in which one of our directors, executive officers, or nominees for director, or their immediate families, or a greater than 5% owner of our stock, may also be a director, executive officer, or investor, or have some other direct or indirect material interest. We will refer to these relationships generally as related-party transactions.
Related-party transactions have the potential to create actual or perceived conflicts of interest between Microsoft and its directors and executive officers or their immediate family members. The Audit Committee has established a written policy and procedures for review and approval of related-party transactions. If a related-party transaction subject to review directly or indirectly involves a member of the Audit Committee (or an immediate family member or domestic partner), the remaining Committee members will conduct the review. In evaluating a related-party transaction, the Audit Committee considers, among other factors:
- the goods or services provided by or to the related party,
- the nature of the transaction and the costs to be incurred by Microsoft or payments to Microsoft,
- the benefits associated with the transaction and whether comparable or alternative goods or services are available to Microsoft from unrelated parties,
- the business advantage Microsoft would gain by engaging in the transaction,
- the significance of the transaction to Microsoft and to the related party, and
- management’s determination that the transaction is in the best interests of Microsoft.
To receive Audit Committee approval, a related-party transaction must have a Microsoft business purpose and be on terms that are fair and reasonable to Microsoft, and as favorable to Microsoft as would be available from non-related entities in comparable transactions. The Audit Committee also requires that the transaction meet the same Microsoft standards that apply to comparable transactions with unaffiliated entities.