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See also the following related explanations of Microsoft policies:


Directors & Boards E-Briefing, June 2010 feature




Brad Smith
General Counsel, SVP Legal and Corporate Affairs

Why Microsoft Adopted ‘Say on Pay’

Just as Microsoft believes in constant innovation in our products and services, we believe there is considerable room for innovation in shareholder dialogue.

By Brad Smith

At Microsoft’s annual shareholder meeting in November 2009 more than 3 million stockholders had the opportunity to cast an advisory vote on compensation programs for senior Microsoft executives. This was the first time that Microsoft shareholders could weigh in on the compensation of the company’s top leaders — a practice known informally as shareholder say on pay.

Our say on pay policy was shaped in an environment of economic crisis and low public confidence in the business community. We saw it as an opportunity to express our longstanding commitment to strong corporate governance principles and progressive practices, and to take our own step toward helping restore public confidence in business.

We recognized at the time that policymakers in Washington, D.C., were focusing as well on strengthening corporate governance policies via federal legislation, but we also felt it was important to take the initiative ourselves.

For Microsoft, our say-on-pay policy grew out of extensive study and dialogue with corporate governance advocates, other companies, our largest shareholders, and shareholder proponents of say-on-pay, including the United Brotherhood of Carpenters, Walden Asset Management, and Calvert Investments.

A Comprehensive Approach
It was part of an ongoing comprehensive approach to executive compensation. We have also increased obligations for executives to own company stock, added stronger policies to claw back executive compensation in circumstances that involve restated financial or nonfinancial metrics (even if no improper conduct is involved), and ensured the independence of the consultant to the board’s compensation committee.

While our discussions on say on pay led us to the conclusion that a three-year cycle is optimal for say on pay votes at Microsoft, we acknowledge that there are important constituencies who support an annual say on pay vote. Microsoft will of course comply with any requirements that emerge either through federal legislation or regulatory changes adopted by the Securities and Exchange Commission.

We will continue to look at additional ways to engage with our shareholders on executive compensation. Just as Microsoft believes in constant innovation in our products and services, we believe there is considerable room for innovation in shareholder dialogue.

More broadly, we will keep pursuing opportunities to demonstrate commitment to strong corporate governance principles. As economic uncertainty continues and public confidence in business leadership remains low, scrutiny from elected officials and regulators will only intensify.

Take Proactive Steps Now
If boards of directors want to protect the flexibility they need to serve their shareholders, they will need to take steps to assert their leadership for stronger governance.

With more than 12,000 public companies in the U.S., each with its own growth trajectory, competitive position, and set of strategies and assets, we continue to believe boards need flexibility to adopt governance policies that suit their companies’ particular circumstances.

Ultimately, it will be up to Congress, the President, and federal regulators to determine how much flexibility the business community will retain. Only time will tell. But there is still opportunity for the business community to develop a stronger voice in Washington if it takes proactive and responsible steps now to address reasonable governance needs.

Brad Smith is Microsoft's general counsel and senior vice president, Legal and Corporate Affairs. He leads the company's Department of Legal and Corporate Affairs, which has just over 1,000 employees and is responsible for the company's legal work, its intellectual property portfolio, and its government affairs and philanthropic work. He also serves as Microsoft's corporate secretary and its chief compliance officer.

This article originally appeared in the Governance Year in Review special edition of Directors & Boards published in June 2010.


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