Notice of Annual Meeting of Shareholders

 

November 7, 2001

 

To the Shareholders:

 

The annual meeting of the shareholders of Microsoft Corporation will be held at the Washington State Convention and Trade Center, 800 Convention Place, Seattle, Washington, on November 7, 2001, at 8:00 a.m. for the following purposes:

 

 

 

 

Only shareholders of record at the close of business on September 10, 2001, are entitled to notice of, and to vote at, this meeting.

 

By order of the Board of Directors

 

 

William H. Neukom

Secretary

 

Redmond, Washington

September 27, 2001

 

Important:

 

Whether or not you expect to attend in person, we urge you to vote your shares at your earliest convenience. This will ensure the presence of a quorum at the meeting. Promptly voting your shares by phone, via the Internet or by signing, dating, and returning the enclosed proxy card will save the Company the expenses and extra work of additional solicitation. An addressed envelope for which no postage is required if mailed in the United States is enclosed if you wish to vote by mail. Sending in your proxy will not prevent you from voting your shares at the meeting if you desire to do so, as your proxy is revocable at your option.

 

2001 Proxy Statement

 

Microsoft Corporation

One Microsoft Way

Redmond, Washington 98052

 

Proxy Statement for Annual Meeting of Shareholders

 

To be held November 7, 2001

 

This Proxy Statement, which was first mailed to shareholders on or about September 27, 2001, is furnished in connection with the solicitation of proxies by the Board of Directors of Microsoft Corporation (the “Company” or “Microsoft”), to be voted at the annual meeting of the shareholders of the Company, which will be held at 8:00 a.m. on November 7, 2001, at the Washington State Convention and Trade Center, 800 Convention Place, Seattle, Washington, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders. Shareholders who execute proxies retain the right to revoke them at any time before the shares are voted by proxy at the meeting. A shareholder may revoke a proxy by delivering a signed statement to the Secretary of the Company at or prior to the annual meeting or by executing another proxy dated as of a later date. The Company will pay the cost of solicitation of proxies.

          Shareholders of record at the close of business on September 10, 2001 will be entitled to vote at the meeting on the basis of one vote for each share held. On September 10, 2001, there were 5,401,944,951 shares of common stock outstanding, held of record by 112,108 shareholders.

 

1.    Election of Directors and Management Information

 

Eight directors are to be elected at the annual meeting to hold office until the next annual meeting of shareholders and until their successors are elected and qualified. It is intended that the accompanying proxy will be voted in favor of the following persons to serve as directors unless the shareholder indicates to the contrary on the proxy. The election of the Company’s Directors requires a plurality of the votes cast in person or by proxy at the meeting. Management expects that each of the nominees will be available for election, but if any of them is unable to serve at the time the election occurs, it is intended that such proxy will be voted for the election of another nominee to be designated by the Board of Directors.

 

Nominees

 

William H. Gates, 45, was a founder of the Company and has served as Chairman of the Board since the Company’s incorporation in 1981. Mr. Gates served as the Company’s Chief Executive Officer from 1981 until January 2000 when he resigned as Chief Executive Officer and assumed the position of Chief Software Architect. Mr. Gates is also a director of ICOS Corporation.

 

Steven A. Ballmer, 45, has been a director of the Company since January 2000, at which time he was also named Chief Executive Officer of the Company. Mr. Ballmer had been President since July 1998, and prior to that, had served as Executive Vice President, Sales and Support since February 1992. He joined Microsoft in 1980.

 

James I. Cash, Ph.D., 53, has been a director of the Company since May 2001. Dr. Cash is The James E. Robison Professor of Business Administration at Harvard Business School where he also serves as Senior Associate Dean and Chairman of HBS Publishing. Professor Cash’s non-academic activities include serving as a trustee for the Massachusetts General Hospital and Partners Healthcare, and as an overseer for The Boston Museum of Science. Dr. Cash is a member of the boards of directors of The Chubb Corporation, General Electric Company, Knight-Ridder, Inc., Winstar Communications, Inc., and Scientific-Atlanta, Inc.

 

msft 1 2001 Proxy Statement

 

Raymond V. Gilmartin, 60, has been a director of the Company since April 2001. Mr. Gilmartin has been the Chairman of the Board, President and Chief Executive Officer of Merck & Company, Inc. since 1994. Prior to joining Merck, Mr. Gilmartin was Chairman, President and Chief Executive Officer of Becton Dickinson and Company. He joined that company in 1976 as Vice President, Corporate Planning, taking on positions of increasing responsibility over the next 18 years. Mr. Gilmartin also serves on the boards of directors of General Mills, Inc. and Public Service Enterprise Group, Inc. He also serves as Chairman of the Council on Competitiveness and Chairman of the board of associates of the Harvard Business School. He is a director of The College Fund/UNCF, and a member of the Business Roundtable and the Business Council. An active participant in health industry affairs, Mr. Gilmartin is Chairman of the Healthcare Institute of New Jersey and a past Chairman of the Pharmaceutical Research & Manufacturers of America, now serving on its executive committee. He is a trustee of the Healthcare Leadership Council, a group dedicated to excellence in America’s health care system, and he is a trustee of Valley Health System, Inc.

 

David F. Marquardt, 52, has served as a director of the Company since 1981. Mr. Marquardt is a founding general partner of August Capital, formed in 1995, and has been a general partner of various Technology Venture Investors entities, which are private venture capital limited partnerships, since August 1980. He is a director of Netopia, Inc., Tumbleweed Communications, Inc., and various privately held companies.

 

Ann McLaughlin Korologos, 59, has been a director of the Company since January 2000. Ms. Korologos is Chairman Emeritus of The Aspen Institute, an international non-profit educational institution. Before taking the position of Chairman Emeritus in August 2000, she had served as Chairman of the Aspen Institute since 1996. From 1993 to 1996, she served as Vice Chairman of The Aspen Institute. Ms. Korologos also serves as Senior Advisor with Benedetto Gartland & Company, Inc., a private investment banking company. Ms. Korologos served as President of the Federal City Council, a non-profit, non-partisan organization comprised of approximately 150 top business and civic leaders dedicated to improving the nation’s capital, from 1990 until 1995. Ms. Korologos served as the United States Secretary of Labor from 1987 to 1989. She currently serves as a member of the Board of Directors of AMR Corporation (and its subsidiary, American Airlines), Fannie Mae, Harman International Industries, Inc., Kellogg Company, Vulcan Materials Company, and Host Marriott Corporation.

 

Wm. G. Reed, Jr., 62, has been a director of the Company since 1987. Mr. Reed served as Chairman of Simpson Timber Company, a forest products company, from 1971 to 1986, and as Chairman of Simpson Investment Company, from 1986 to 1996. In addition to serving on the board of the privately-held Simpson Investment Company, he is a director of PACCAR, Inc., SAFECO Corporation, the Seattle Times Company, and Washington Mutual Savings Bank.

 

Jon A. Shirley, 63, served as President and Chief Operating Officer of Microsoft from 1983 to 1990. He has been a director of the Company since 1983.

 

Information Regarding the Board and its Committees

 

The Company’s Board of Directors has an Audit Committee, a Compensation Committee, and a Finance Committee. There is no nominating committee. Messrs. Cash, Reed, and Shirley serve on the Audit Committee, which meets with financial management, the internal auditors, and the independent auditors to review internal accounting controls and accounting, auditing, and financial reporting matters. Messrs. Gilmartin and Reed and Ms. Korologos serve on the Compensation Committee, which reviews the compensation of the Chief Executive Officer and other officers of the Company, reviews executive bonus plan allocations, and grants stock options to officers and employees of the Company under its stock option plan. Messrs. Marquardt and Shirley serve on the Finance Committee, which reviews and provides guidance to the Board of Directors and management with respect to major financial policies of the Company. The members of each of the committees of the Board of Directors are independent.

 

msft 2 2001 Proxy Statement

           The Compensation Committee and Finance Committee each met four times and the Audit Committee met five times during fiscal 2001. The entire Board of Directors met four times during the last fiscal year. All directors attended 75% or more of the aggregate number of Board meetings and meetings of the committees on which they served.

          Mr. Gates and Ballmer receive no cash compensation for serving as directors, except that they, like all directors, are eligible to receive reimbursement of any expenses incurred in attending Board and committee meetings. Effective January 1, 2001, each director, other than Messrs. Gates and Ballmer, is paid $35,000 annually as compensation for serving on the Board of Directors and the respective committees of the Board on which they serve. Prior to the beginning of calendar year 2001, directors were each paid $8,000 per year, plus $1,000 for each Board meeting and $500 for each committee meeting they attended.

          During fiscal 2001, Messrs. Cash, Gilmartin, Marquardt, Reed, and Shirley and Ms. Korologos each received an option to purchase 10,000 shares of the Company’s common stock. The exercise price of each option was the closing price of Microsoft common shares on the date of grant.

 

msft 3 2001 Proxy Statement

 

Information Regarding Beneficial Ownership of Principal Shareholders, Directors, and Management

 

The following table sets forth information regarding the beneficial ownership of the Company’s common shares by the nominees for directors, the Company’s Chief Executive Officer and the five other highest paid executive officers (the “Named Executive Officers”), and the directors and executive officers as a group.

 

 

 

msft 4 2001 Proxy Statement

 

Information Regarding Executive Officer Compensation

 

Cash Compensation

 

The following table discloses compensation received for the three fiscal years ended June 30, 2001, by the Named Executive Officers.

 

 

msft 5 2001 Proxy Statement

 

Compensation Pursuant to Stock Options

 

The following table sets forth information on option grants in fiscal 2001 to the Named Executive Officers.

 

 

 

msft 6 2001 Proxy Statement

 

 

Robert J. Herbold Employment Agreement

 

Mr. Herbold joined Microsoft in November 1994, and pursuant to his employment agreement, he receives enhanced health and disability benefits during and after his employment. Microsoft also maintains two life insurance policies of $650,000 and $1.35 million to replace policies he had from his previous employer.

          If Mr. Herbold’s employment is terminated for any reason other than “misconduct” or voluntary resignation, Microsoft and Mr. Herbold will negotiate in good faith a reasonable severance package with a minimum of 18 months’ base salary. For severance purposes, misconduct is limited to the commission of a felony or any other intentional misconduct that has a material adverse effect upon the business or reputation of Microsoft.

 

 

msft 7 2001 Proxy Statement

 

Report of The Microsoft Corporation Board of Directors Compensation Committee

 

Microsoft’s employee compensation policy is to offer a package including a competitive salary, an incentive bonus based upon individual performance goals, competitive benefits, and an efficient workplace environment. The Company also encourages broad-based employee ownership of Microsoft stock through a stock option program in which most employees are eligible to participate.

          The Company’s compensation policy for officers is similar to that for other employees, and is designed to promote excellent performance and attainment of corporate and personal goals.

          The Compensation Committee of the Board of Directors (comprised entirely of non-employee directors) reviews and approves individual officer salaries, bonuses, and stock option grants. The Committee also reviews stock option grant programs for non-officer and officer employees.

          Officers of the Company are paid salaries in line with their responsibilities. These salaries are structured so they are comparable with salaries paid by competitors in the computer and other relevant industries. Competitors selected for salary comparison purposes differ from the companies included in the Nasdaq Computer Index, which is used in the Performance Graph that follows this report. Officers also participate in an Executive Bonus Plan. Each officer is eligible to receive a discretionary bonus of up to 100% of base salary based upon individually established performance goals. Officers (and other employees) are also eligible to receive stock option grants, which are intended to promote success by aligning employee financial interests with long-term shareholder value. Stock option grants are based on various subjective factors primarily relating to the responsibilities of the individual officers, and also to their expected future contributions and prior option grants.

          As noted above, the Company’s compensation policy is primarily based upon the practice of pay-for-performance. Section 162(m) of the Internal Revenue Code imposes a limitation on the deductibility of nonperformance-based compensation in excess of $1 million paid to Named Executive Officers. The Committee currently believes that the Company should be able to continue to manage its executive compensation program for Named Executive Officers so as to preserve the related federal income tax deductions, although individual exceptions may occur.

          The Compensation Committee annually reviews and approves the compensation of Steven A. Ballmer, Chief Executive Officer, and William H. Gates, the Chairman of the Board and Chief Software Architect. Messrs. Ballmer and Gates participate in an Executive Bonus Plan in which they are eligible to receive up to 100% of their base salary. Their bonuses are tied to corporate revenue and profit goals, which are reviewed by the Compensation Committee, to provide incentives for superior corporate performance. In addition, Messrs. Ballmer and Gates are significant shareholders in the Company; to the extent their performance translates into an increase in the value of the Company’s stock, all shareholders, including Messrs. Ballmer and Gates, share the benefit.

 

Compensation Committee

 

Raymond V. Gilmartin

 

Ann McLaughlin Korologos

 

Wm. G. Reed, Jr.

 

msft 8 2001 Proxy Statement

 

Performance Graph

 

Note: Microsoft management consistently cautions that the stock price performance shown in the graph below should not be considered indicative of potential future stock price performance.