Part 1. Corporate governance at Microsoft

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Part 1. Corporate governance at Microsoft

Corporate governance principles and practices

Shareholder outreach and our corporate governance cycle
Microsoft believes that effective corporate governance should include regular, constructive conversations with our shareholders. We actively engage with our shareholders as part of our annual corporate governance cycle described below.

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An important component of transparency is effectively communicating governance policies and practices to all shareholders and other stakeholders. With over 3.4 million Microsoft shareholders, both direct dialogue and ‘one-to- many’ communications are necessary to provide the scale to reach all shareholders. To this end, during the past year Microsoft took the following steps to engage these communities.

Shareholder Outreach – Independent members of our Board and members of senior management conducted outreach to a cross-section of shareholders owning approximately 40% of our outstanding shares. Our CEO, Satya Nadella, remains committed to investing time with our shareholders to increase transparency and better understand their perspectives, including by participating in our quarterly earnings calls and other forums for communication.

Director Video Series – We released the sixth installment of our director video series featuring interviews with members of our Board. The videos provide an informal opportunity for Microsoft’s directors to discuss their approach to serving as a director at Microsoft. The complete series can be viewed on Microsoft’s Investor Relations site at www.microsoft.com/investor/CorporateGovernance/BoardOfDirectors/default.aspx.

Microsoft on the Issues – We continued to make regular policy blog posts on Microsoft on the Issues. Blogs included a synopsis of our commitment to shareholder engagement, including the latest in the series of director interviews, our adoption of proxy access and other topics of importance including citizenship, privacy, cybersecurity, online safety, jobs, and education. We disseminated information posted on the Microsoft on the Issues blog via a number of social media handles, including @MSFTIssues and @MSFTNews.

Corporate Web Site. Our investor relations site incorporates corporate governance and citizenship content, which are important topics to investors.

Corporate governance framework

Corporate governance at Microsoft is designed to promote the long-term interests of our shareholders, maintain internal checks and balances, strengthen management accountability, engender public trust, and foster responsible decision making and accountability.

Our governance framework is designed to ensure our Board has the necessary authority and practices in place to review and evaluate our business operations and to make decisions independent of management. Our goal is to align the interests of directors, management, and shareholders, and comply with or exceed the requirements of the NASDAQ Stock Market (“NASDAQ”) and applicable law. This framework establishes the practices our Board follows with respect to:

  • Board composition and member selection,
  • Board meetings and involvement of senior management,
  • chief executive officer performance evaluation,
  • management succession planning,
  • Board committees, and
  • director compensation.
Corporate governance documents
✔ Amended and Restated Articles of Incorporation✔ Compensation Committee Charter
✔ Bylaws✔Governance and Nominating Committee Charter
✔ Corporate Governance Guidelines✔ Regulatory and Public Policy Committee Charter
✔ Director Independence Guidelines✔ Stock Ownership and Holding Requirements for Microsoft Corporation Executives
✔ Microsoft Finance Code of Professional Conduct✔ Executive Compensation Recovery Policy
✔ Microsoft Standards of Business Conduct✔Compensation Consultant Independence Standards
✔ Audit Committee Charter and Responsibilities

These documents are all available at http://aka.ms/policiesandguidelines.

Independent Chairman of the Board

John Thompson serves as independent Chairman of the Board. The roles of chairman and chief executive officer have been separate since 2000.

The independent directors annually appoint a Chairman of the Board. As Chairman, Mr. Thompson leads the activities of the Board, including:

  • calling meetings of the Board and independent directors,
  • setting the agenda for Board meetings in consultation with the CEO and corporate secretary,
  • chairing executive sessions of the independent directors,
  • engaging with shareholders, and
  • acting as an advisor to Mr. Nadella on strategic aspects of the CEO role with regular consultations on major developments and decisions likely to interest the Board.

He also performs the other duties specified in the Corporate Governance Guidelines or assigned by the Board.

Our Board believes its leadership structure effectively allocates authority, responsibility, and oversight between management and the independent members of our Board. It gives primary responsibility for the operational leadership and strategic direction of the Company to our CEO, while the Chairman facilitates our Board’s independent oversight of management, promotes communication between management and our Board, engages with shareholders, and leads our Board’s consideration of key governance matters. The Board believes its programs for overseeing risk would be effective under a variety of leadership frameworks and therefore do not materially affect how it structures its leadership.

Board independence

  • Substantial majority of independent directors – Nine of our eleven director nominees are independent of the Company and management. We are committed to maintaining a substantial majority of independent directors.
  • Executive sessions of independent directors – At each quarterly Board meeting, time is set aside for the independent directors to meet in executive session without Company management present. Additional executive sessions are held as needed.
  • Independent compensation consultant – The compensation consultant retained by the Compensation Committee is independent of the Company and management as described in our Compensation Consultant Independence Standards.

 

Board committee independence and expertise

  • Committee independence – Only independent directors are members of the Board’s committees.
  • Committee executive sessions of independent directors – At each regularly scheduled meeting, members of the Audit Committee, Compensation Committee, and Regulatory and Public Policy Committee meet in executive session. Additional executive sessions of all Board committees are held as needed.
  • Financial sophistication and expertise – All members of the Audit Committee meet the NASDAQ listing standard of financial sophistication, and Ms. List-Stoll, Mr. Noski and Dr. Panke are “audit committee financial experts” under Securities and Exchange Commission (“SEC”) rules.

 

Shareholder rights

  • Majority voting – We have a majority vote standard for director elections. In an uncontested election, directors are elected by the majority of votes cast.
  • Annual elections – All directors are elected annually. Microsoft does not have a classified board.
  • Proxy access – In August 2015, our Board adopted a “Proxy Access for Director Nominations” bylaw, which permits eligible shareholders to nominate candidates for election to the Microsoft Board. Proxy access candidates will be included in the Company’s proxy statement and ballot. The proxy access bylaw provides that holders:
    • of at least 3 percent of Microsoft’s outstanding shares, which can comprise up to 20 shareholders,
    • holding the shares continuously for at least 3 years,
    • can nominate two individuals or 20 percent of the Board, whichever is greater, for election at an annual shareholders meeting.
  • Confidential voting – We have a confidential voting policy to protect the voting privacy of our individual shareholders.
  • Special meetings – Shareholders representing 25% or more of outstanding shares can call a special shareholders meeting.

 

Risk Oversight

  • Board – The Board oversees risk management at the Company. The Board exercises direct oversight of strategic risks to the Company and other risk areas not delegated to one of its committees.
  • Committees – The Audit Committee reviews and assesses the Company’s processes to manage financial reporting risk and to manage investment, tax, and other financial risks. It also reviews the Company’s policies for risk assessment and steps management has taken to control significant risks, except those delegated by the Board to other committees. The Compensation Committee oversees compensation programs and policies and their effect on risk taking by management. The Regulatory and Public Policy Committee oversees risks related to competition and antitrust, data privacy and cybersecurity, and workforce and immigration laws and regulations.

In each case, management periodically reports to the Board or relevant committee, which provides guidance on risk assessment and mitigation. Each committee charged with risk oversight reports up to the Board on those matters.

Compensation

  • Compensation clawback – We have a strong ‘no-fault’ executive compensation recovery policy that applies to executive officers and our principal accounting officer.
  • Stock ownership – We have stock ownership policies for directors, executive officers, and other senior executives to promote a long-term perspective in managing the enterprise and to help align the interests of our shareholders, executives, and directors.
  • Anti-hedging and pledging policy – We prohibit our directors and executive officers from hedging their ownership of Microsoft stock, including trading in options, puts, calls, or other derivative instruments related to Company stock or debt. Directors and executive officers are prohibited from purchasing Microsoft stock on margin, borrowing against Microsoft stock held in a margin account, or pledging Microsoft stock as collateral for a loan.

 

Director orientation and continuing education

  • Board orientation – Our orientation programs familiarize new directors with Microsoft’s businesses, strategies, and policies, and assist new directors in developing the skills and knowledge required for their service on the Board
    of Directors.
  • Continuing education – Continuing education programs assist directors in maintaining skills and knowledge necessary or appropriate for the performance of their responsibilities. These programs may include internally developed materials and presentations, programs presented by third parties, and financial and administrative support to attend qualifying academic or other independent programs.

 

Board and committee evaluations

Each year, our Board and its committees conduct self-evaluations to assess their effectiveness and adherence to the Corporate Governance Guidelines and committee charters, and to identify opportunities to improve Board and committee performance.

  • Board evaluation – The Governance and Nominating Committee conducts an annual evaluation of the performance
    of the Board and each of its members. The results are reported to the Board. The report includes an assessment of the Board’s compliance with the principles in the Corporate Governance Guidelines, and identification of areas in which the Board could improve its performance.
  • Committee evaluations – Each committee conducts an annual performance evaluation and reports the results to the Board. Each committee’s report includes an assessment of the committee’s compliance with the principles in the Corporate Governance Guidelines and the committee’s charter, as well as identification of areas in which the committee could improve its performance.

 

Citizenship governance

Microsoft’s citizenship mission is to serve globally the needs of communities and fulfill our responsibilities to the public. With our citizenship commitments, we seek to advance our Company mission to empower every person and every organization on the planet to achieve more through our corporate policies and business practices, our products, and our investments in communities. We believe doing so generates long-term value for our business, our shareholders, and communities around the world.

More broadly, citizenship at Microsoft relies on the combined efforts of all our employees, business and operational groups, and global subsidiaries. Together, they help identify emerging issues and societal challenges where Microsoft can add the greatest value, develop and implement new strategies and programs, and monitor our progress. Microsoft celebrated the launch of Windows 10 on July 29, 2015, by committing to Upgrade Your World, a yearlong initiative that celebrates people and organizations doing great things, including a series of partnerships with 10 global and 100 local nonprofit organizations. Find more information at http://aka.ms/windowsupgradeyourworld. Upgrade Your World is just one example of the many ways Microsoft contributes to local communities worldwide, as Microsoft and its employees donate more than $1 billion each year to more than 100,000 nonprofit organizations around the world. In September 2015 we announced a $75 million commitment to TEALS (Technology Education and Literacy in Schools) education though our YouthSpark initiative.

Given the importance of citizenship to Microsoft’s long-term business success, the responsibilities of the Regulatory and Public Policy Committee include reviewing and providing guidance to the Board and management about the Company’s policies and programs that relate to corporate citizenship, including human rights, environmental sustainability, corporate social responsibility, supply chain management, charitable giving, and political activities and expenditures.

For an in-depth review of Microsoft’s approach to corporate citizenship and performance in fiscal year 2015, please visit our 2015 Microsoft Citizenship Report at www.microsoft.com/citizenshipreport.

Political contributions

Microsoft recognizes the increasing interest of U.S. public company shareholders in establishing greater transparency about corporate political contributions. We disclose our political contributions to support candidates and ballot measures and how certain of our trade association membership dues are used for political activities. As part of our commitment to transparency, we developed our Principles and Policies Guiding Microsoft Participation in Public Policy Process in the United States, which focus on ensuring compliance with applicable federal and state laws and are designed to go beyond compliance to implement what we consider leading practices in corporate accountability, transparency, integrity, and responsibility. The policy is available at www.microsoft.com/politicalengagement.

Shareholder communication with directors

Shareholders are invited to contact the Board about corporate governance or the Board of Directors. Inquiries meeting these criteria will be received and processed by management before being forwarded to the Board, a committee of the Board, or a director as designated in your message. Communications relating to other topics, including those that are primarily commercial in nature, will not be forwarded.

micro@ AskBoard@microsoft.com
micromail2 MSC 123/9999
Office of the Corporate Secretary
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399

Concerns about accounting or auditing matters or possible violations of our Standards of Business Conduct should be reported under the procedures outlined in the Microsoft Standards of Business Conduct, which is available on our website at http://aka.ms/buscond.

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