John A. Seethoff is Vice President and Deputy General Counsel, Corporate, at Microsoft Corporation. He oversees the company’s corporate governance policies and practices, and supervises securities-law compliance. Before joining Microsoft, he was a partner in the Seattle office of Kilpatrick & Lockhart Preston Gates & Ellis LLP. Mr. Seethoff is a member of the Washington and California bars. He received his B.S. in Accounting from the University of Washington, and his J.D. from the University of California at Los Angeles School of Law.
At the beginning of the new century, Microsoft’s board and top management started to look closely at governance issues. By 2004, the company had created a formal lead independent director function and implemented governance principles that anticipated the current era by several years. Today, Microsoft remains at the forefront of governance practices.
According to John Seethoff, Vice President and Deputy General Counsel at Microsoft, “It has always been our desire to make sure our management practices and business efforts align with the interests of our stakeholders. We continue to evaluate our governance policies and revise them to bolster what we believe is an already strong corporate governance platform.”
We recently interviewed John to see how Microsoft has developed its governance strategy, and what the company is up to today.
A HISTORY OF GOVERNANCE
C-Suite Insight: What overarching principles have you relied on over the years in setting Microsoft’s governance strategy and policies?
John Seethoff: I still remember the original slide deck that was discussed with Steve Ballmer and Bill Gates, which had a quote from Lao Tzu on the front page: “Govern as you would cook a small fish. Don’t overdo it.”
That quote helped inform our thinking. One of our key founding principles is that governance should be structured in a way that is appropriate to Microsoft. What policies and practices embody our values, while helping us reach our business goals? Governance for the sake of governance is not the point.
CSI: How have you channeled that wisdom into specific policies?
Seethoff: The aim is to adopt a system that is flexible: that provides appropriate structure for the company at the time, makes allowances for change over time, and has a long-term perspective that matches our business goals and strategy.
The spirit in which we started was, essentially, the notion that we would consistently assess where we were and what else we might do to maintain accountability to our stakeholders. Implementing the independent director function early on was one result.
Also, in 2003 we were a path breaker in moving away from options as our equity vehicle, moving to stock awards. We showed a commitment to transparency by expensing equity compensation before accounting rules required it.
We were an early adopter of majority voting, the first company to adopt nonannual say on pay, and one of the very earliest adopters of a no-fault clawback. We continue to evaluate our corporate governance framework, and talk with our board about what is right for us and our shareholders.
DODD-FRANK AND MICROSOFT
CSI: As we look at current affairs, compliance with the requirements of Dodd-Frank will be the big issue. It’s still early, but can you tell us how you think Dodd-Frank will affect Microsoft?
Seethoff: I think, partly because of what our board has accomplished over the past decade, Dodd-Frank will have a modest impact on us.
We’ve already started down the say-on-pay path—we held our first vote in 2009. We also have a no-fault clawback that we believe meets the requirements of the statute. We’ll have to see what regulations might come out with regards to implementation, but we think we’ve satisfied the statute.
We have long had a policy for compensation committee consultants that requires strict independence, so that consultants act only for the compensation committee. And we have promptly announced our voting results from our annual shareholder meeting for a number of years. Meeting that requirement was a formalistic step to confirm what we’d already been doing previously.
CSI: As the SEC continues to implement Dodd-Frank, do you foresee any potential challenges?
Seethoff: Yes, there are several challenging areas. It will be interesting to see what happens with proxy access, how that evolves. Proxy access is less likely to affect us and other very large-cap companies. I certainly am sympathetic to the point of view that small and mid-cap companies have about potential risk.
CSI: What about the CEO pay-ratio disclosure? This seems to represent a major challenge for multinational companies.
Seethoff: We have the same concerns that many other large, multinational companies have expressed. It is truly impossible, given the multiplicity of payroll systems and the way that we internally track payroll costs, to come up with a median employee compensation amount, as defined under the SEC rules for calculating total compensation. It’s just unworkable.
CSI: What about the ratio itself?
Seethoff: As it’s currently set up, it wouldn’t be so concerning for us. I know there are other companies where you would get a very high ratio, because the markets in which they have many employees have pay that is low relative to U.S. pay. They would get a skewed median, if you will. In our case, we’re in a high-paying industry, so we’re not as concerned about where the ratio would be, generally speaking.
Our CEO does not receive equity, and his current compensation is about $1.5 million a year. If there were a workable way of calculating median pay, our ratio would be one of the lowest you might find. As a whole, I am confident that one way or another, this issue will be addressed through a statutory amendment or agency rulemaking. The business community is doing a good job of informing legislators and regulators about the challenges there, and needs to continue that effort.
SAY ON PAY AND MICROSOFT
CSI: Can you elaborate a bit on say on pay and Microsoft?
Seethoff: Sure. Our management and board adopted and held a triennial say on pay vote in 2009. We had received two shareholder proposals: one for an annual vote and one for a triennial vote.
In addition to an open and constructive dialogue with the two proponents, we sought input from some of our largest institutional shareholders, governance advocates, and other companies.
Our board approaches compensation as a multiyear program. Our executive compensation structure is designed to consider a variety of factors, many of which have multi-year horizons.
Even though it’s administered annually, the results really play out over a number of years. We believe these elements create multi-year accountability that aligns the interests of our executives with those of our long-term investors.
In our view, a triennial vote really best met the needs of our shareholders as they had expressed them to us, and was consistent with our compensation philosophy. I should emphasize, however, that this is what we think is appropriate for Microsoft. We wouldn’t necessarily say that’s the best or most appropriate approach for every company.
CSI: Let’s go back to how you structure your compensation program, and what you’ve done historically.
Seethoff: In 2003, we moved away from options. We understood at the time that the world had changed, that what we’d seen in terms of option performance through the 80s and 90s wasn’t something that was going to occur in the future. This was particularly true for large-cap companies.
It was important to develop a compensation structure that recognized this, yet continued to provide people rewards for good performance and used a vehicle that provided alignment with shareholders. We moved to restricted stock units after going through a very thoughtful, measured, and detailed analysis of how to provide a comparable target value for all levels of employees.
I think we’ve been successful in doing that. If you look at our equity executive compensation, you’ll see a very high percentage of executive compensation through equity.
In our peer-company comparisons, one sees that we have a higher percentage than the average. And our executive officer stock-ownership policy helps ensure accountability to shareholders, by requiring our executives to have a significant, ongoing stake in the company.
TRANSPARENCY AND MICROSOFT
CSI: Generally speaking, institutional investors and the government now are both looking for transparency even more than the numbers. What are your traditions and thoughts on transparency today?
Seethoff: One of Microsoft’s company values is to be open and respectful. The open part is simply a different way of expressing the concept of transparency. Our aim is to be appropriately transparent, which involves striking the right balance. There is some tension, for example, in what may be confidential proprietary company information or information that is personal to the particular executive and may not be appropriate to share broadly.
If you look at our latest proxy statement, you will find that we also provide an alternative compensation table that shows what our executives received in salary, cash incentives, and equity awards for their performance in a given year. In addition, in our discussion of how our board determined actual incentive award levels, you will find both areas of success and areas where we could have done better. This balanced view helps our investors assess the connection between pay and performance.
BOARDS AND INDEPENDENCE
CSI: What’s your view on how board members should conduct their business?
Seethoff: First, I believe boards should assert leadership for stronger governance. A corollary of that is directors being more public in talking about what they do and what their views are.
There continues to be a lack of understanding about how boards work and the tremendous quality of the vast majority of boards and individual directors. From my discussions with a variety of stakeholders, I believe that directors would serve themselves well by speaking out about their unique perspective, which is separate from management’s.
CSI: What are your views on board-member independence?
Seethoff: I think one could observe that the governance community may have over-optimized for director independence by focusing on categorical independence.
The pendulum may have swung too far in the direction of a formulaic view of independence that is elevating objective attributes of independence over other characteristics that might be used to select perspective directors.
CSI: Relevant experience counts as well.
Seethoff: The focus on independence may have trumped the importance of having industry expertise and business knowledge among directors.
CSI: How does that principle relate specifically to Microsoft?
Seethoff: We’re in so many different businesses, and we compete in so many different markets—from our traditional software products, to hardware and component manufacturing, as well as online services and entertainment—and our customers span all demographics and sizes of organizations around the world. As a consequence, there are experienced executives who might be excellent contributors to our board, but they wouldn’t qualify as independent because of their company’s relationship with Microsoft.
As one focuses on independence, those candidates are then excluded from consideration. We’ve begun seeking input from our large shareholders to evaluate their openness to having one or more directors that have a business affiliation with us.
MICROSOFT AND THE WORLD
CSI: You mention that Microsoft is an IT company. It’s also a major global brand. Is there a contradiction in these two descriptions?
Seethoff: I would say a couple things. The company is an engineering-based company, so it is a technology company. Apple is a technology company as well, Google is a technology company; we’re all technology companies.
But we are also a company that impacts literally billions of people every day. We’re very cognizant of that, and of the opportunity here for peopleto work on technology that has that sort of impact.
This is what really motivates our employees. We aim to lead in every endeavor that we’re involved in; it’s inevitable that we won’t, but that doesn’t mean that we don’t strive to be in that position.