UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Northrop Grumman Corporation
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March 31, 201730, 2018
On behalf of the Board of Directors and management team, we cordially invite you to attend Northrop Grumman Corporation’s 20172018 Annual Meeting of Shareholders. This year’s meeting will be held on Wednesday, May 17, 201716, 2018 at our principal executive office located at 2980 Fairview Park Drive, Falls Church, Virginia 22042 beginning at 8:00 a.m., Eastern Daylight Time.
We look forward to meeting those of you who are able to attend the meeting. For those who are unable to attend, live coverage of the meeting will be available on the Northrop Grumman website atwww.northropgrumman.com.
At this meeting, shareholders will vote on matters set forth in the accompanying Notice of 20172018 Annual Meeting of Shareholders and Proxy Statement. We will also provide a report on our Company and will entertain questions of general interest to the shareholders.
We’reWe are very pleased to report another year of outstanding performance for our shareholders, customers and employees. Excellent results from all three of our businesses combined to generate higher operating income, and before the impacts of the Tax Cuts and Jobs Act and our related discretionary pension contribution, higher earnings and cash generation than in 2016. Our capital deployment strategy continues to serve us and our shareholders well. Our robust capital expenditures reflect the quality of our opportunities and support our foundation for long-term profitable growth. In addition to strong financial results, which included higher sales, operating income, net earningsthese investments, we also took an important step to broaden our portfolio by reaching an agreement to acquire Orbital ATK. For our shareholders, we raised our quarterly dividend 11% and earnings perreduced our weighted-average diluted shares outstanding by 3%. In 2017, we returned more than $1 billion to our shareholders through dividends and share we executed well on our programs and captured important new competitive business. We ended 2016 with a $45.3 billion backlog, 26% higher than the prior year.repurchases. Total shareholder return was 25.2%,33.9% in 2017, another year of strong performance relative to our peers and the S&P 500. We also generated substantial cash. After increased capital investments to support our long-term growth strategy, we returned $2.2 billion to our shareholders through share repurchases and dividends.
In addition to strong financial and operational achievements, we also increasedcontinue to strengthen our focus on corporate citizenship and sustainability.sustainability efforts. For the fifthsixth consecutive year, Northrop Grumman earned a leadership score in CDP’s 20162017 climate change program, andprogram; we were again included in the 2016 Dow Jones Sustainability Index for North America. Both achievements validate our focus on value-creating environmental, socialAmerica, and governance practices.DiversityInc named us one of their Top 50 Companies for Diversity for the eighth consecutive year.
In 2016,2017, as in prior years, we actively engaged with our shareholders on a variety of corporate governance matters, including our strategy for long-term value creation and further aligning our governance, compensation and governancesustainability practices to support long-term profitable growth and value creation.
Your vote is important. Your proxy or voting instruction card includes specific information regarding the several ways to vote your shares. We encourage you to vote as soon as possible, even if you plan to attend the meeting. You may vote over the internet, by telephone or mobile device, by mailing a proxy or voting instruction card or in person at the Annual Meeting.
Thank you for your support and continued interest in Northrop Grumman Corporation.
Wes Bush
Chairman and Chief Executive Officer | Donald E. Felsinger
Lead Independent Director |
NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT |
Notice of Meeting of Shareholders
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Wednesday, May 17, 201716, 2018
8:00 a.m., Eastern Daylight Time
Northrop Grumman Corporation, Principal Executive Office
2980 Fairview Park Drive, Falls Church, Virginia 22042
The 2018 Annual Meeting of Shareholders (Annual Meeting) of Northrop Grumman Corporation (Company) will be held on Wednesday, May 17, 201716, 2018 at 8:00 a.m., Eastern Daylight Time, at our principal executive office located at 2980 Fairview Park Drive, Falls Church, Virginia 22042.
Shareholders of record at the close of business on March 21, 201720, 2018 are entitled to vote at the Annual Meeting. The following items are on the agenda:
1. | The election of the |
2. | A proposal to approve, on an advisory basis, the compensation of our named executive officers; |
3. |
A proposal to ratify the appointment of Deloitte & Touche LLP as our independent auditor for the year ending December 31, |
4. | A shareholder proposal to modify the ownership threshold for shareholders to call a special meeting; and |
5. | Any other business as may properly come before the Annual Meeting or any adjournment or postponement thereof. |
All shareholders are invited to attend the Annual Meeting. To be admitted you will need proof of stock ownership and a form of photo identification. If your broker holds your shares in “street name,” you will also need proof of beneficial ownership of Northrop Grumman common stock.
We encourage all shareholders to vote on the matters described in the accompanying Proxy Statement. Please see the section entitled “Questions and Answers About the Annual Meeting” on page 6669 for information about voting over the internet, by telephone or mobile device, by mailing a proxy or mailvoting instruction card or by attending in person at the Annual Meeting.
By order of the Board of Directors,
Jennifer C. McGarey
Corporate Vice President and Secretary
March 31, 201730, 2018
Important Notice Regarding the Availability of Proxy Materials for the Shareholders Meeting to be held on May
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This summary highlights information contained elsewhere in this Proxy Statement, reflecting business, compensation and corporate governance highlights. For additional information about these topics, please refer to the discussions contained in this Proxy Statement and in our Annual Report on Form10-K for the year ended December 31, 2016 (20162017 (2017 Form10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC) on January 30, 2017.29, 2018. This Proxy Statement contains certainnon-GAAP (accounting principles generally accepted in the United States of America) financial measures, which we haveare identified with asterisks. For more information, including definitions, reconciliations to the most directly comparable GAAP measure and why we believe these measures may be useful to investors, see “Appendix A - Use ofNon-GAAP Financial Measures.” We intend to mail a Notice of Internet Availability of Proxy Materials to shareholders of record and to make this Proxy Statement and accompanying materials available on the internet on or about March 31, 2017.30, 2018.
2016 2017 Performance Highlights (page 35)34)
Our focus on performance, portfolio and capital deployment and portfolio continues to drive shareholder value and strengthen our foundation for long-term profitable growth and create value creation for our shareholders, customers and employees.
In 2016,2017 was another year of strong operational performance for our company. All three of our sectors generated excellent results that contributed to a 5% sales increase and effective cash deployment combinedan 11.5% segment operating margin rate*. Excluding the impacts of 2017 tax reform and the related discretionary contribution we made to generate 17%our pension plans, diluted earnings per share (EPS) growth and 25.2%EPS grew by 9% to $13.28*. As a result of our strong performance our 2017 total shareholder return (TSR). Our 2016 TSR represents our eighth was 33.9% versus 21.8% for the S&P 500, the ninth consecutive year of outperformance versusthat our TSR has outperformed the S&P 500. We continued to position the Company to achieve long-term growth and meet our customers’ ever-changing needs by realigning our businesses into three sectors. All three of our businesses posted higher sales, while growing or maintaining strong operating income and generating solid cash flow. Our 12.0% segment operating margin rate* and 11.7% pension-adjusted operating margin rate* represent continued strong operational execution on our growing portfolio of programs. We achieved these results while investing approximately $700 million in internal research and development.
Our operations continued to generate strong cash flow. Before our discretionary pension contribution, cash provided $2.8by operations totaled $2.9 billion in cash, and after $920 million in capital expenditures, our free cash flow* totaled nearly $1.9more than $2 billion. Our strong cash generation enabled us to continue deploying cash for the benefit of our customers, shareholders and employees. In 2017 our capital expenditures totaled $928 million and we invested $639 million in R&D. Our capital expenditures were increasedcontinue to be elevated as we expand our workforce, ramp up on large new programs, complete expenditures related to our Centers of Excellence, and pursue attractive new business opportunities. We ended 2016 with $45.3 billion in total backlog, 26% higher than last year.
While we increase investmentinvest to strengthen the foundation for long-term profitable growth and drive affordability for our customers,customers. In addition to these investments in our capital deployment strategy continuesbusiness, we also reached an agreement to call for returningacquire Orbital ATK, which will enhance our position in the space, missile and missile defense market domains.
We continued to return cash to shareholders. 2017 share repurchases totaled $393 million, and dividends totaled $689 million, including an 11% increase in May, our shareholders. In 2016, we increased our quarterly dividend 12.5%, our 13th14th consecutive annual increase, and we repurchased 7.3 million shares of our common stock. In total, we returned $2.2 billion to our shareholders through share repurchases and dividends. Atyear-end, $2.7 billion remained under our share repurchase authorization.increase.
33.9% Total Shareholder Return |
to
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Internal R&D spending of
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* This metric is anon-GAAP financial measure. For more information, see “Appendix A - Use ofNon-GAAP Financial Measures.”
2016
NOTICE OF 2018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|1
PROXY STATEMENT SUMMARY |
2017 Executive Compensation Highlights (page 34)33)
We are committed to performance-based executive compensation programs that align with shareholders’ interests and our strategy of investing for and delivering long-term profitable growth. In 2016,2017, we refined the metrics and weightings of our annual and long-term incentives to ensurecontinue to drive strong alignment with achieving performance, while investingensuring we invest for long-term profitable growth. While elements of the plans were refined to better align with achieving long-term profitable growth core elements ensuringand maintain alignment with our shareholders’ interest were unchanged.interests.
NOTICE OF 2017 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|1
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Due to ourWhile we sustained strong financial performance in 2016,2017, our 20162017 Annual Incentive Plan (AIP) payout increaseddeclined to 131%, from 160% from 120% in 2015.2016. Our Long-Term Incentive Plan (LTIP) payout is 150% compared to 148% in 2016 for named executive officers (NEOs). We ranked in the 78th89th percentile for three-year TSR performance relative to the 2015 Performance Peer Group identified on page 3938 and ranked in the 98th96th percentile for three-year TSR performance relative to the S&P Industrials. Our Long-Term Incentive Plan (LTIP) payout was 148% compared to 150% in 2015 for named executive officers (NEOs). Following are some governance principles of our 20162017 executive compensation programs:
70% of Annual
Based | Stock Ownership Guidelines for CEO 7x Other NEOs 3x |
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Holding Period Vested Shares | Recoupment on Incentive Payouts | No Individual Control Agreements |
Board Nominees (pages6-12)
Director | Committee Memberships | Other Public Company | ||||||||||||||
Name | Age (1) | since | Professional Background | Audit | Comp | Gov | Policy | Boards | ||||||||
Wesley G. Bush | 55 | 2009 | Chairman, CEO and President, Northrop Grumman Corporation | — | — | — | — | 1 | ||||||||
Marianne C. Brown | 58 | 2015 | Chief Operating Officer, Institutional and Wholesale Business, Fidelity National Information Services, Inc. |
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Victor H. Fazio | 74 | 2000 | Senior Advisor, Akin Gump Strauss Hauer & Feld LLP; Former Member of Congress, including House leadership and Appropriations Committee |
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Donald E. Felsinger | 69 | 2007 | Former Chairman and CEO, Sempra Energy |
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Ann M. Fudge | 65 | 2016 | Former Chairman and Chief Executive Officer, Young & Rubicam Brands |
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Bruce S. Gordon | 71 | 2008 | Former President, Retail Markets Group, Verizon Communications Inc.; Former President and CEO, NAACP |
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William H. Hernandez | 68 | 2013 | Former Senior Vice President and CFO, PPG Industries, Inc. |
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Madeleine A. Kleiner | 65 | 2008 | Former Executive Vice President and General Counsel, Hilton Hotels Corporation |
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Karl J. Krapek | 68 | 2008 | Former President and COO, United Technologies Corporation |
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Gary Roughead | 65 | 2012 | Retired Admiral, United States Navy and Former Chief of Naval Operations |
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Thomas M. Schoewe | 64 | 2011 | Former Executive Vice President and CFO, Wal-Mart Stores, Inc. |
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James S. Turley | 61 | 2015 | Former Chairman and Chief Executive Officer, Ernst & Young |
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Mark A. Welsh III | 63 | 2016 | Dean of the Bush School of Government and Public Service, Texas A&M University; Retired General, United States Air Force and Former Chief of Staff, United States Air Force |
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Wesley G. Bush |
56 |
2009 |
Chairman and CEO, Northrop Grumman Corporation |
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Marianne C. Brown |
59 |
2015 |
Co-Chief Operating Officer, Global Financial Solutions, Fidelity National Information Services, Inc. |
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Donald E. Felsinger |
70 |
2007 |
Lead Independent Director, Northrop Grumman Corporation; Former Chairman and CEO, Sempra Energy |
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Ann M. Fudge |
66 |
2016 |
Former Chairman and Chief Executive Officer, Young & Rubicam Brands |
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Bruce S. Gordon |
72 |
2008 |
Former President, Retail Markets Group, Verizon Communications Inc.; Former President and CEO, NAACP |
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William H. Hernandez |
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2013 |
Former Senior Vice President and CFO, PPG Industries, Inc. |
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Madeleine A. Kleiner |
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2008 |
Former Executive Vice President and General Counsel, Hilton Hotels Corporation |
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Karl J. Krapek |
69 |
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Former President and COO, United Technologies Corporation |
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Gary Roughead |
66 |
2012 |
Retired Admiral, United States Navy and Former Chief of Naval Operations |
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Thomas M. Schoewe |
65 |
2011 |
Former Executive Vice President and CFO,Wal-Mart Stores, Inc. |
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James S. Turley |
62 |
2015 |
Former Chairman and Chief Executive Officer, Ernst & Young |
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Mark A. Welsh III |
64 |
2016 |
Dean of the Bush School of Government and Public Service, Texas A&M University; Retired General, United States Air Force and Former Chief of Staff, United States Air Force |
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(1) | Age as of March |
= Chair30, 2018. = Chair = Member
In accordance with our retirement policy, General Richard B. Myers,Victor H. Fazio, a director who served during 2016,2017, will not stand forre-election at the 20172018 Annual Meeting as he will have attained his 75th birthday prior to the Annual Meeting.
2 | NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
PROXY STATEMENT SUMMARY
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Board of DirectorsNominee Highlights
The charts below reflect the tenure, independence and broad experience of our current directors.board nominees.
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NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT | 3
PROXY STATEMENT SUMMARY
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Governance Highlights (pages13-22)
We are committed to high standards of corporate governance and have a robust corporate governance program intended to promote the long-term success of our Company. Some highlights of our corporate governance practices are listed below.
Board Structure and Governance | ✓ The Board is approximately
✓ Each of the Audit, Compensation, Governance and PolicyCommittees is comprised entirely of independent directors.
✓ Our policylimits the number of boards on which our directors serve (no more than three other public company boards without special approval) toavoid overboarding.
✓ The independent directorsregularly hold both executive sessions led by our Chairpersonand independent sessionsled by our Lead Independent Director.
✓ OurLead Independent Director,appointed annually by the independent directors, is empoweredwith a robust set of responsibilities and provides additional independent oversight of senior management and Board leadership.
✓ All directors areelected annually based on amajority voting standardin uncontested elections, with adirector resignation policyif a director fails to receive a majority of votes cast “for” his or her election.
✓ The Board
✓ The Board and each Committee annually conduct athorough self-assessment process focused on Board or Committee performance, respectively.In addition,each director completes an individual director evaluation for each of the other directors and receives feedback on his or her own performance.
✓
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Shareholder Rights | ✓
✓ Shareholders holding at least 25% of our common
✓ Shareholders holding at least 25% of our common stock have the right to takeaction by written consent.
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Corporate Responsibility and Sustainability | ✓ We have astrong ethics programwith standards of business conduct that help guide and promote good governance, responsible business practices and the highest standards of integrity throughout the Company.
✓ We publish anannual corporate responsibility report highlighting aspects of our social, environmental and governance performance andengage an independent external review panelto provide feedback and advice on our report.
✓ Weintegrate environmental sustainabilityinto our organizational culture, minimizing our environmental footprint and driving affordability. Our executive officers are accountable for achieving environmental sustainability goals, which areone of our sixnon-financial corporate performance metrics.
✓ We disclose ourpolitical contributions policy and various trade association memberships on our website.
✓ We have a robustrecoupment policy which provides the Board of Directors with the ability to recoup the incentive compensation of elected officers under certain circumstances. | |||
Stock Ownership | ✓ We have stock ownership guidelines of7x base salary for the CEOand3x base salary for other named executive officers,as well asstock holding requirements of three years from the vesting date.
✓ We have stock ownership guidelines of5x the annual cash retainer for ournon-employee directors.
✓ Weprohibit hedging and pledging of our common stock by directors and executive officers.
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4 | NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
PROXY STATEMENT SUMMARY
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Shareholder Engagement
We regularly engage with our shareholders to understand their perspectives on our Company, including our strategies, performance, issues of governance and corporate responsibility, and executive compensation. This ongoing dialogue, in which both members of management and directors participate, has helped inform the Board’s decision-making and ensure our interests remain well-aligned with those of our shareholders.
Since our 2017 annual meeting, we have offered to engage on governance-related topics with shareholders representing approximately 60% of our outstanding shares. We have met with shareholders representing more than 30% of our outstanding shares to learn their perspectives on the Company and governance-related topics. While a number of our shareholders did not request meetings, we believe it is a best practice to offer engagement to shareholders representing a majority of our shares outstanding. These efforts are in addition to normal course outreach conducted by our Investor Relations team and members of senior management with portfolio managers and analysts, which are primarily focused on strategy and Company performance. We also meet with shareholders at investor conferences held throughout the year.
The Company has a substantial record of adopting provisions or modifying practices with the benefit of, and to reflect, shareholder input. Examples include providing forprovisions regarding proxy access, the right of shareholders to call a special meeting and the right of shareholders to act by written consent, as well as the use of full value shares and performance-based long-term incentives for our executives.
As discussed later in this Proxy Statement, the Board of Directors adopted a proxy access bylaw in December 2015, and modified the bylaw in February 2016, to reflect substantial input received from our shareholders on the issue. As detailed in the Bylaws, up to 20 shareholders holding 3% of our shares for three years may nominate up to the greater of two or 20% of our directors. Nominees may receive compensation from third parties for their candidacy up to the total annual compensation paid to directors of the Company, as well as reimbursement for reasonable expenses, provided it is disclosed in the Proxy Statement for the meeting at which such nominee’s nomination is to be considered. The Board adopted the Company’s proxy access bylaw after considerable deliberation and with the benefit of shareholder input. We believe that our proxy access bylaw reflects the input we received and promotes the best interests of the Company and our shareholders.
Annual Shareholders’ Meeting
| Record Date: You can vote if you were a shareholder of record at the close of business on March | |
2980 Fairview Park Drive Falls Church, Virginia 22042 | Admission: You will need proof of stock ownership and a form of photo identification. |
Voting Matters and Board Recommendations
Board Vote Recommendation | Page Reference | ||||||||
Proposal One: Election of Directors | FOR each Director Nominee | 6 | |||||||
Proposal Two: Advisory Vote on Compensation of Named Executive Officers | |||||||||
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Proposal | FOR | 64 | |||||||
Proposal Four: Shareholder Proposal to Modify Ownership Threshold for Shareholders to Call a Special Meeting | AGAINST | 67 |
NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT | 5
ELECTION OF DIRECTORS |
2017 2018 Nominees for Director
Our Board has nominated 1312 directors for election at the Annual Meeting. Each of the director nominees has consented to serve, and we do not know of any reason why any of them would be unable to serve, if elected. If a nominee becomes unavailable or unable to serve before the Annual Meeting (for example, due to serious illness), the Board may determine to leave the position vacant, reduce the number of authorized directors or designate a substitute nominee. If any nominee becomes unavailable for election to the Board, an event which is not anticipated, the proxyholders will have full discretion and authority to vote, or refrain from voting, for any other nominee in accordance with their judgment.
The following pages contain biographical and other information about each of the nominees. In addition, we have provided information regarding some of the particular experiences, qualifications, attributes and skills that led the Board to conclude that each nominee should serve as a director.
Unless instructed otherwise, the proxyholders will vote the proxies received by them “for”“FOR” the election of the director nominees listed below.
WESLEY G. BUSH, | ||
| Chairman and Chief Executive Officer,
Director since 2009 |
Mr. Wesley G. Bush was elected Chief Executive Officer and President of the Company effective January 1, 2010 and Chairman of the Board of Directors effective July 19, 2011. Mr. Bush served as President and Chief Operating Officer of the Company from March 2007 through December 2009, as President and Chief Financial Officer from May 2006 through March 2007, and as Corporate Vice President and Chief Financial Officer from March 2005 to May 2006. Following the acquisition of TRW Inc. (TRW) by the Company, he was named Corporate Vice President and President of the Space Technology sector. Mr. Bush joined TRW in 1987 and during his career with that company held various leadership positions, including President and CEO of TRW Aeronautical Systems. He is a director of Norfolk Southern Corporation. He serves on the boards of severalnon-profit organizations, including the Aerospace Industries Association, the Business-Higher Education Forum, Conservation International, INOVA Health Systems, the Naval Academy Foundation and the Congressional Medal of Honor Foundation.
Attributes, Skills and Qualifications
Mr. Wesley G. Bush has served as Chief Executive Officer of the Company since January 2010. He was elected to the Board of Directors in 2009 and elected Chairman of the Board of Directors in July 2011. Mr. Bush served as Chief Executive Officer and President of the Company from January 2010 through December 31, 2017, as President and Chief Operating Officer of the Company from March 2007 through December 2009, as President and Chief Financial Officer from May 2006 through March 2007, and as Corporate Vice President and Chief Financial Officer from March 2005 to May 2006. Following the acquisition of TRW Inc. (TRW) by the Company, he was named Corporate Vice President and President of the Space Technology sector. Mr. Bush joined TRW in 1987 and during his career with that company held various leadership positions, including President and CEO of TRW Aeronautical Systems. He is a director of Norfolk Southern Corporation. He serves on the boards of severalnon-profit organizations, including the Aerospace Industries Association, the Business-Higher Education Forum, Conservation International, INOVA Health Systems, the Naval Academy Foundation and the USO. Attributes, Skills and Qualifications · Significant business experience with over 35 years in the aerospace and defense industry · Prior leadership positions within Northrop Grumman (including as President, Chief Operating Officer, Chief Financial Officer and Sector President) · Extensive international business experience · Extensive leadership roles in community service |
6 | NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
ELECTION OF DIRECTORS |
MARIANNE C. BROWN, | ||
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Director since 2015
Member of the Audit Committee and Policy Committee |
Ms. Marianne C. Brown has served as Chief Operating Officer, Institutional and Wholesale Business, of Fidelity National Information Services, Inc. since December 2015, when it acquired SunGard Financial Systems. Prior to that, Ms. Brown was Chief Operating Officer of SunGard Financial Systems, a software and IT services provider, from February 2014 to November 2015. Prior to that, Ms. Brown was the CEO and president of Omgeo, a global financial services technology company, from March 2006 to February 2014. Before joining Omgeo, she was the CEO of the Securities Industry Automation Corporation. Ms. Brown began her career at Automatic Data Processing (ADP) and progressed through a series of positions of increasing responsibility culminating in her role as general manager of ADP’s Brokerage Processing Services business, which was subsequently spun off to become Broadridge Financial Solutions. Ms. Brown is a board member of Careers for People with Disabilities and is a Senior Advisor to Pro Mujer.
Attributes, Skills and Qualifications
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Mr. Victor H. Fazio was named Senior Advisor at Akin Gump Strauss Hauer & Feld LLP in May 2005 after serving as senior partner at Clark & Weinstock since 1999. Prior to that, Mr. Fazio was a Member of Congress for 20 years representing California’s third congressional district. During that time, he served as a member of the Armed Services, Budget and Ethics Committees and was a member of the House Appropriations Committee where he served as Subcommittee Chair or ranking member for 18 years. Mr. Fazio was a member of the elected leadership in the House from 1989 to 1998, including four years as Chair of his Party’s Caucus, the third ranking position. From 1975 to 1978, Mr. Fazio served in the California Assembly and was a member of the staff of the California Assembly Speaker from 1971 to 1975. He is a member of the board of directors of various private companies andnon-profit organizations, including the United States Association of Former Members of Congress, the Campaign Finance Institute, the Committee for a Responsible Federal Budget, the Center for Strategic and Budgetary Assessments, The Information Technology and Innovation Foundation, the Convergence Center for Policy Resolution Leadership Council, the Prevent Cancer Foundation and the National Parks Conservation Association.
Attributes, Skills and Qualifications
NOTICE OF 2017 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|7
Ms. Marianne C. Brown has served as Attributes, Skills and Qualifications
· Significant experience in IT goods and services and business management · Community and philanthropic leader |
DONALD E. FELSINGER, | ||
| Lead Independent Director of the Board of Directors, Northrop Grumman Corporation.
Former Chairman and Chief Executive Officer, Sempra Energy, an energy services holding company.
Director since 2007
Member of the Compensation Committee and Governance Committee |
Mr. Donald E. Felsinger is the former Chairman and Chief Executive Officer of Sempra Energy. From July 2011 through his retirement in November 2012, he served as Executive Chairman of the Board of Directors of Sempra Energy, and from February 2006 through June 2011, he was Sempra’s Chairman and CEO. Prior to that, Mr. Felsinger was President and Chief Operating Officer of Sempra Energy from January 2005 to February 2006 and a member of the Board of Directors. From 1998 through 2004, he was Group President and Chief Executive Officer of Sempra Global. Prior to the merger that formed Sempra Energy, he served as President and Chief Operating Officer of Enova Corporation, the parent company of San Diego Gas & Electric (SDG&E). Prior positions included President and Chief Executive Officer of SDG&E, Executive Vice President of Enova Corporation and Executive Vice President of SDG&E. Mr. Felsinger serves on the boards of Archer-Daniels-Midland (Lead Independent Director) and Gannett Co., Inc. Attributes, Skills and Qualifications · Extensive business experience as Chief Executive Officer, a board member and Chairman of other Fortune 500 companies in regulated industries · Significant experience in corporate governance and strategy, and as Lead Independent Director of a Fortune 250 company · In-depth knowledge of executive compensation and benefits |
PROPOSAL ONE: ELECTION OF DIRECTORS |
ANN M. FUDGE, | ||
| Former Chairman and Chief Executive Officer, Young & Rubicam Brands, a marketing communications company.
Director since 2016
Member of the Audit Committee and Policy Committee |
Ms. Ann M. Fudge served as Chairman and Chief Executive Officer of Young & Rubicam Brands at WPP Group PLC from May 2003 to December 2006. Prior to that, she served in various leadership positions at Kraft Foods from 1986 to 2001, including President of Beverages, Desserts and Post Divisions, and President of Maxwell House Coffee and Kraft General Foods. From 1977 to 1986, Ms. Fudge held a variety of marketing positions at General Mills. She is a director of Unilever NV and Novartis AG, and served as a director of General Electric Company and Infosys Limited during the last five years. Ms. Fudge previously served as a director of Marriott International and Honeywell International. Ms. Fudge also serves as a trustee of WGBH Public Media and the Brookings Institution. Ms. Fudge also serves on the Advisory Board of the Smithsonian Museum of African American History and Culture, and as Chair of the U.S. Programs Advisory Panel of the Gates Foundation. Ms. Fudge previously served on the Simpson-Bowles Commission and the U.S. State Department Foreign Affairs Policy Board.
Attributes, Skills and Qualifications
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Ms. Ann M. Fudge served as Chairman and Chief Executive Officer of Young & Rubicam Brands at WPP Group PLC from May 2003 to December 2006. Prior to that, she served in various leadership positions at Kraft Foods from 1986 to 2001, including President of Beverages, Desserts and Post Divisions, and President of Maxwell House Coffee and Kraft General Foods. From 1977 to 1986, Ms. Fudge held a variety of marketing positions at General Mills. She is a director of Unilever NV and Novartis AG, and served as a director of General Electric Company and Infosys Limited during the last five years. Ms. Fudge also serves as a trustee of WGBH Public Media and the Brookings Institution. Ms. Fudge also serves on the Advisory Board of the Smithsonian Museum of African American History and Culture, and as Chair of the U.S. Programs Advisory Panel of the Gates Foundation.
· Substantial international experience through service as an executive and director of a large multinational company and a director of other large multinational companies · Significant public company board experience |
BRUCE S. GORDON, | ||
| Former President, Retail Markets Group, Verizon Communications Inc., a telecommunications company, and Former President & CEO, NAACP.
Director since 2008
Member of the Compensation Committee and Policy Committee (Chair) |
Mr. Bruce S. Gordon served as President and Chief Executive Officer of the National Association for the Advancement of Colored People from June 2005 to March 2007. In 2003, Mr. Gordon retired from Verizon Communications Inc., where he had served as President, Retail Markets Group since 2000. Prior to that, Mr. Gordon served as Group President of the Enterprise Business Unit, President of Consumer Services, Vice President of Marketing and Sales and Vice President of Sales for Bell Atlantic Corporation (Verizon’s predecessor). He is a member of the board of directors of the Newport Festival Foundation and a member of the Executive Leadership Council. Mr. Gordon is a director of CBS Corporation, and served as theNon-Executive Chair of The ADT Corporation during the last five years. He currently serves as a diversity consultant to several Fortune 500 companies. Attributes, Skills and Qualifications · Extensive leadership and business skills acquired from his experience with corporate andnon-profit enterprises · National leader on issues of diversity and inclusion · Significant board experience, including asnon-executive chair |
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PROPOSAL ONE: ELECTION OF DIRECTORS |
WILLIAM H. HERNANDEZ, | ||
Former Senior Vice President and Chief Financial Officer, PPG Industries, Inc., a manufacturer of chemical and industrial products.
Director since 2013
Member of the Audit Committee (Chair) and Governance Committee |
Mr. William H. Hernandez served as Senior Vice President, Finance, and Chief Financial Officer of PPG Industries, Inc. (PPG), from 1995 until his retirement in 2009. Prior to that, he was PPG’s corporate controller from 1990 to 1994. Mr. Hernandez previously held a number of positions with Borg-Warner Corporation and Ford Motor Company. Mr. Hernandez is a certified management accountant and has taught finance and management courses at Marietta College. He is a member of the board of directors of Albemarle Corporation, Black Box Corporation and USG Corporation and served as director of Eastman Kodak during the last five years.
Attributes, Skills and Qualifications
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Mr. William H. Hernandez served as Senior Vice President, Finance, and Chief Financial Officer of PPG Industries, Inc. (PPG), from 1995 until his retirement in 2009. Prior to that, he was PPG’s corporate controller from 1990 to 1994. Mr. Hernandez previously held a number of positions with Borg-Warner Corporation and Ford Motor Company. Mr. Hernandez is a certified management accountant and has taught finance and management courses at Marietta College. He is a member of the board of directors of Albemarle Corporation and USG Corporation and served as director of Black Box Corporation and Eastman Kodak during the last five years.
· Significant experience in areas of risk management · Audit committee financial expert |
MADELEINE A. KLEINER, | ||
| Former Executive Vice President and General Counsel, Hilton Hotels Corporation, a hotel and resort company.
Director since 2008
Member of the Audit Committee and Governance Committee (Chair) |
Ms. Madeleine A. Kleiner served as Executive Vice President, General Counsel and Corporate Secretary for Hilton Hotels Corporation from January 2001 until February 2008. From 1999 through 2001, she served as a director of a number of Merrill Lynch mutual funds operating under the Hotchkis and Wiley name. Ms. Kleiner served as Senior Executive Vice President, Chief Administrative Officer and General Counsel of H.F. Ahmanson & Company and its subsidiary, Home Savings of America, until the company was acquired in 1998, and prior to that was a partner at the law firm of Gibson, Dunn and Crutcher where she advised corporations and their boards primarily in the areas of mergers and acquisitions, corporate governance and securities transactions and compliance. Ms. Kleiner currently serves on the board of directors of Jack in the Box Inc. Ms. Kleiner is a member of the board of the New Village Charter School.
Attributes, Skills and Qualifications
Ms. Madeleine A. Kleiner served as Executive Vice President, General Counsel and Corporate Secretary for Hilton Hotels Corporation from January 2001 until February 2008. From 1999 through 2001, she served as a director of a number of Merrill Lynch mutual funds operating under the Hotchkis and Wiley name. Ms. Kleiner served as Senior Executive Vice President, Chief Administrative Officer and General Counsel of H.F. Ahmanson & Company and its subsidiary, Home Savings of America, until the company was acquired in 1998, and prior to that was a partner at the law firm of Gibson, Dunn and Crutcher where she advised corporations and their boards primarily in the areas of mergers and acquisitions, corporate governance and securities transactions and compliance. Ms. Kleiner currently serves on the board of directors of Jack in the Box Inc. Ms. Kleiner is a member of the board of the New Village Charter School. Attributes, Skills and Qualifications · Expertise in corporate governance, Sarbanes-Oxley controls, risk management, securities transactions and mergers and acquisitions · Significant experience from past roles as general counsel for two public companies, outside counsel to numerous public companies and through service on another public company board · Audit committee financial expert |
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PROPOSAL ONE: ELECTION OF DIRECTORS |
KARL J. KRAPEK, | ||
| Former President and Chief Operating Officer, United Technologies Corporation, an aerospace and building systems company.
Director since 2008
Member of the Compensation Committee (Chair) and Governance Committee |
Mr. Karl J. Krapek served as President and Chief Operating Officer of United Technologies Corporation from 1999 until his retirement in January 2002. At United Technologies Corporation, he served for 20 years in various leadership positions, including Executive Vice President and director in 1997, President and Chief Executive Officer of Pratt & Whitney in 1992, Chairman, President and Chief Executive Officer of Carrier Corporation in 1990 and President of Otis Elevator Company in 1989. Prior to joining United Technologies Corporation, he was Manager of Car Assembly Operations for the Pontiac Motor Car Division of General Motors Corporation. In 2002, Mr. Krapek became aco-founder of The Keystone Companies, which develops residential and commercial real estate. He chairs the Strategic Planning Committee for the board of directors at Trinity Health East. Mr. Krapek is the lead independent director of Prudential Financial, Inc. He was also a director of The Connecticut Bank and Trust Company and Visteon Corporation during the past five years.
Attributes, Skills and Qualifications
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Mr. Karl J. Krapek served as President and Chief Operating Officer of United Technologies Corporation from 1999 until his retirement in January 2002. At United Technologies Corporation, he served for 20 years in various leadership positions, including Executive Vice President and director in 1997, President and Chief Executive Officer of Pratt & Whitney in 1992, Chairman, President and Chief Executive Officer of Carrier Corporation in 1990 and President of Otis Elevator Company in 1989. Prior to joining United Technologies Corporation, he was Manager of Car Assembly Operations for the Pontiac Motor Car Division of General Motors Corporation. In 2002, Mr. Krapek became a Attributes, Skills and Qualifications
· Deep operational experience in aerospace and defense, domestic and international business operations and technology and lean manufacturing · Significant public company board experience, including serving as Lead Independent Director |
GARY ROUGHEAD, | ||
| Admiral, United States Navy (Ret.) and Former Chief of Naval Operations.
Director since 2012
Member of the Compensation Committee and Governance Committee |
Admiral Gary Roughead retired from his position as the 29th Chief of Naval Operations in September 2011, after serving in that position for four years. The Chief of Naval Operations is the senior military position in the United States Navy. As Chief of Naval Operations, Admiral Roughead stabilized and accelerated ship and aircraft procurement plans and the Navy’s capability and capacity in ballistic missile defense and unmanned air and underwater systems. He restructured the Navy to address the challenges and opportunities in cyber operations. Prior to becoming the Chief of Naval Operations, he held six operational commands (including commanding both the Atlantic and Pacific Fleets). Admiral Roughead is a Robert and Marion Oster Distinguished Military Fellow at the Hoover Institution. He also serves as a trustee of the Dodge and Cox Funds. He is a director of the Center for a New American Security, and serves on the Board of Managers of the Johns Hopkins University Applied Physics Lab.
Attributes, Skills and Qualifications
Admiral Gary Roughead retired from his position as the 29th Chief of Naval Operations in September 2011, after serving in that position for four years. The Chief of Naval Operations is the senior military position in the United States Navy. As Chief of Naval Operations, Admiral Roughead stabilized and accelerated ship and aircraft procurement plans and the Navy’s capability and capacity in ballistic missile defense and unmanned air and underwater systems. He restructured the Navy to address the challenges and opportunities in cyber operations. Prior to becoming the Chief of Naval Operations, he held six operational commands (including commanding both the Atlantic and Pacific Fleets). Admiral Roughead is a Robert and Marion Oster Distinguished Military Fellow at the Hoover Institution. He is a director of Maersk Lines, Ltd. He also serves as a trustee of the Dodge and Cox Funds. He is a director of the Center for a New American Security, and serves on the Board of Managers of the Johns Hopkins University Applied Physics Lab. Attributes, Skills and Qualifications · Extensive career as a senior military officer with the United States Navy, including numerous operational commands, as well as leadership positions, most recently as the 29th Chief of Naval Operations · Significant expertise in national security, information warfare, cyber operations and global security issues · Broad experience in leadership and matters of global relations, particularly in the Pacific region, Europe and the Middle East |
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PROPOSAL ONE: ELECTION OF DIRECTORS |
THOMAS M. SCHOEWE, | ||
| Former Executive Vice President and Chief Financial Officer,Wal-Mart Stores, Inc., an operator of retail stores.
Director since 2011
Member of the Compensation Committee and Policy Committee |
Mr. Thomas M. Schoewe was Executive Vice President and Chief Financial Officer ofWal-Mart Stores Inc. from 2000 to 2011. Prior to his employment withWal-Mart, he held several roles at the Black and Decker Corporation, including Senior Vice President and Chief Financial Officer from 1996 to 1999, Vice President and Chief Financial Officer from 1993 to 1999, Vice President of Finance from 1989 to 1993 and Vice President of Business Planning and Analysis from 1986 to 1989. Before joining Black and Decker, Mr. Schoewe worked for Beatrice Companies, where he was Chief Financial Officer and Controller of one of its subsidiaries, Beatrice Consumer Durables Inc. Mr. Schoewe serves on the Boards of Directors of General Motors Corporation and Kohlberg Kravis Roberts and Company. He also served as a director of PulteGroup Inc. during the last five years.
Attributes, Skills and Qualifications
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Mr. Thomas M. Schoewe was Executive Vice President and Chief Financial Officer of Attributes, Skills and Qualifications
· Significant international experience through his service as an executive of large public companies with substantial international operations · Experience atWal-Mart and Black and Decker on large-scale transformational enterprise information technology implementations · Extensive experience as a member of the audit and risk committees of other public companies |
JAMES S. TURLEY, | ||
| Former Chairman and Chief Executive Officer, Ernst & Young, a professional services organization.
Director since 2015
Member of the Audit Committee and Governance Committee |
Mr. James S. Turley served as Chairman and Chief Executive Officer of Ernst & Young from 2001 until his retirement in 2013. Mr. Turley joined Ernst & Young in 1977 and held various positions there until being named regional managing partner for the Upper Midwest in 1994, and for New York in 1998. He was named Deputy Chairman in 2000. He currently serves on the Boards of Directors for Citigroup, Emerson Electric Company and Intrexon Corporation. He also serves on the Board of Directors of the Boy Scouts of America and the Committee for Economic Development and is Chair of the Theatre Forward.
Mr. James S. Turley served as Chairman and Chief Executive Officer of Ernst & Young from 2001 until his retirement in 2013. Mr. Turley joined Ernst & Young in 1977 and held various positions there until being named regional managing partner for the Upper Midwest in 1994, and for New York in 1998. He was named Deputy Chairman in 2000. He currently serves on the Boards of Directors of Citigroup, Emerson Electric Company and Intrexon Corporation. He also serves on the Board of Directors of the Boy Scouts of America. Mr. Turley is a board member of Kohler Co. and serves asNon-Executive Chair of Sita Capital Partners LLP. Attributes, Skills and Qualifications · Extensive experience and expertise in areas of finance, accounting and business management acquired over36-year career at Ernst & Young, including serving as Chairman and Chief Executive Officer of Ernst & Young · Significant experience in areas of risk management · Extensive experience as a member of the audit committee of other public companies · Audit committee financial expert |
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PROPOSAL ONE: ELECTION OF DIRECTORS |
MARK A. WELSH III, | ||
| Dean of the Bush School of Government and Public Service, Texas A&M University; General, United States Air Force (Ret.); Former Chief of Staff, United States Air Force.
Director since 2016
Member of the Audit Committee and Policy Committee |
General Mark A. Welsh III was appointed as the new Dean of the Bush School of Government and Public Service effective August 15, 2016. Prior to his current position, General Welsh served as Chief of Staff of the United States Air Force, the senior uniformed Air Force officer responsible for the organization, training and equipping of active-duty, Guard, Reserve and civilian forces serving in the United States and overseas. During his long career, General Welsh also served as a member of the Joint Chiefs of Staff, Commander of the United States Air Forces in Europe and Commander of NATO’s Air Command, Associate Director for Military Affairs at the Central Intelligence Agency and Commandant of the United States Air Force Academy.
Attributes, Skills and Qualifications
General Mark A. Welsh III was appointed as the new Dean of the Bush School of Government and Public Service effective August 15, 2016. Prior to his current position, General Welsh served as Chief of Staff of the United States Air Force, the senior uniformed Air Force officer responsible for the organization, training and equipping of active-duty, Guard, Reserve and civilian forces serving in the United States and overseas. During his long career, General Welsh also served as a member of the Joint Chiefs of Staff, Commander of the United States Air Forces in Europe and Commander of NATO’s Air Command, Associate Director for Military Affairs at the Central Intelligence Agency and Commandant of the United States Air Force Academy. General Welsh is a member of the Board of Managers of Peak NanoSystems, LLC. He is also a director of the Air Force Association. Attributes, Skills and Qualifications · Extensive career as a senior military officer and member of the Joint Chiefs of Staff, having held leadership positions at the highest levels of the United States Air Force · Extensive experience andin-depth knowledge of issues related to global security and the intelligence community · Broad leadership experience and international experience, particularly in Europe |
Vote Required
To be elected, a nominee must receive more votes cast “for” than votes cast “against” his or her election. Abstentions and brokernon-votes will have no effect on this proposal. If a nominee is notre-elected, he or she will remain in office until a successor is elected or until his or her earlier resignation or removal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE |
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We are committed to maintaining high standards of corporate governance, consistent with our core values of sustainable performance, ethics and compliance. With strong oversight from the Board, our corporate governance regime is intended to promote the long-term success of our Company
Our Company has adoptedPrinciples of Corporate Governance andStandards of Business Conduct to
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Our Principles of Corporate Governance outline the role and responsibilities of our Board and the high standards our directors maintain. They set forth additional independence requirements for our directors and provide guidelines for Board leadership and Board and Committee membership, among other items. The Board reviews these principles at least annually and considers opportunities for improvement and modification.
Our Standards of Business Conduct reflect and reinforce our commitment to integrity and ethics in all we do. They apply to our directors, officers and all employees.
Among other things, our Standards of Business Conduct:
· | require high ethical standards in all aspects of our business; |
· | require strict adherence to all applicable laws and regulations; |
· | reflect our commitment to maintaining a culture that values diversity and inclusion; |
· | reinforce the need for avoiding actual or apparent conflicts of interest and require the responsible use of Company resources; |
· | reinforce our commitment to being a responsible corporate citizen; |
· | reflect our commitment to our work environment and the global communities where we live, work and serve; |
· | require the consistent production of quality results; and |
· | call upon all employees freely to seek guidance regarding business conduct and to raise any issues of concern (including on an anonymous basis). |
We report amendments to provisions of our Standards of Business Conduct on our website. We disclose in a Form8-K waivers of the provisions of our Standards of Business Conduct that apply to our directors or our executive officers (that is, Corporate Vice Presidents who are members of the Corporate Policy Council and our Chief Accounting Officer). There were no waivers from any provisions of our Standards of Business Conduct or amendments applicable to any director or executive officer in 2016.2017.
The primary responsibility of our Board is to foster the long-term success of the Company, promoting the interests of our shareholders. Our directors exercise their business judgment in a manner they reasonably believe to be in the best interests of the Company and our shareholders and in a manner consistent with their fiduciary responsibilities. The responsibilities of the Board include, but are not limited to, the following:
· | oversee our long-term business strategies, operations and performance; |
· | select the Chief Executive Officer and elect officers of the Company; |
· | oversee our risk management activities; |
· | oversee senior executive succession planning; |
· | elect directors to fill vacant positions between Annual Meetings; |
· | review and approve executive compensation; |
· | review and approve significant corporate actions; |
· | oversee and evaluate management and Board performance; |
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CORPORATE GOVERNANCE
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· | oversee our ethics and compliance programs; |
· | ensure effective corporate governance practices; and |
· | provide advice to management. |
Board’s Role in Risk Oversight
As noted above, the Board is responsible for overseeing our risk management activities, among other duties. Each of our Board committees assists the Board in this role.
· | The Audit Committee focuses on risks that could impact our financial performance. The Audit Committee periodically receives a report from the Chief Financial Officer and members of the Finance Department addressing our financial risk management processes, systems and internal controls, the nature of the material financial risks the Company faces and how the Company responds to and mitigates these risks. The Audit Committee periodically receives a report from our General Counsel on legal and other compliance risks and how the Company is addressing and mitigating those risks. The Audit Committee receives an annual report from our Chief Compliance Officer on the Company’s compliance program overall. The Audit Committee also receives quarterly reports from the Vice President, Global Corporate Responsibility on trends in ethics reporting. |
· | The Compensation Committee reviews at least annually a risk assessment of the Company’s compensation programs and, together with its independent compensation consultant, evaluates the mix ofat-risk compensation linked to stock appreciation. |
· | The Policy Committee assists the Board in identifying and evaluating global security, political and budgetary issues and trends that could impact the Company’s business. The Policy Committee periodically receives a report from the Vice President, Global Corporate Responsibility on the Company’s ethics and corporate responsibility programs. |
· | The Governance Committee regularly reviews the Company’s corporate governance policies and practices, and considers issues of succession and composition of the Board, recommending proposed changes to the full Board for approval. |
The Board and its Committees provide oversight of the Company’s risk management processes, including the Enterprise Risk Management Council (ERMC). The ERMC is comprised of all members of the Corporate Policy Council, the Chief Accounting Officer, Chief Compliance Officer, Secretary, head of Internal Audit and Treasurer. The ERMC seeks to ensure that the Company has identified the most significant risks and implemented effective mitigation plans for each. The full Board has responsibility for oversight of cyber and other security risks, and receives periodic briefings from our Vice President and Chief Information Security Officer.
Chairperson of the Board
Our Bylaws provide that our directors will designate a Chairperson of the Board from among its members. The Chairperson presides at all Board and shareholder meetings. The Chairperson interacts directly with all members of the Board and assists the Board to fulfill its responsibilities. The Principles of Corporate Governance provide that the Board believes it is in the best interests of the Company and the shareholders for the Board to have flexibility to determine the best director to serve as Chairperson of the Board at the time, based on consideration of all relevant factors. As discussed below, the Board believes that the appropriate leadership structure at this time is for Mr. Bush, our Chief Executive Officer, and President, to serve as Chairman. Mr. Bush has served as Chairman since July 2011.
The Board believes that having the Chief Executive Officer serve as Chairman best positions the Company to be innovative, compete successfully and advance shareholder interests in today’s environment. The Board believes that Mr. Bush’s deep understanding of the Company’s business,day-to-day operations, growth opportunities, challenges and risk management practices gained through various leadership positions enables him to provide strong and effective leadership to the Board and to ensure that the Board is informed of important issues facing the Company. The Board consists entirely of independent directors other than Mr. Bush and it continues to exercise a strong, independent oversight function, with fully independent Board Committees and a strong Lead Independent Director with clearly articulated responsibilities. The Board evaluates the leadership structure of the Board on an ongoing basis to ensure that it continues to best meet the needs of the Company.
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Lead Independent Director
If the Chairperson is not independent, the independent directors will designate annually from among them a Lead Independent Director. Following our 20162017 Annual Meeting, the independent directors designated Mr. Felsinger as Lead Independent Director.
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CORPORATE GOVERNANCE |
Our Principles of Corporate Governance set forth specific duties and responsibilities of the Lead Independent Director, which include the following:
· | preside at meetings of the Board at which the Chairperson is not present, including executive sessions of the independent directors, and advise the Chairperson and CEO on decisions reached and suggestions made; |
· | advise the Chairperson on and approve meeting agendas and information sent to the Board; |
· | advise the Chairperson on and approve the schedule of Board meetings, assuring there is sufficient time for discussion of all agenda items; |
· | provide the Chairperson with input as to the preparation of Board and committee meeting agendas, taking into account the requests of the other Board and committee members; |
· | interview, along with the Chairperson and the Chairperson of the Governance Committee, Board candidates and make recommendations to the Governance Committee and the Board; |
· | call meetings of the independent directors; |
· | serve as liaison between the Chairperson and the independent directors; and |
· | if requested by major shareholders, ensure that he or she is available for consultation and direct communication. |
Committees of the Board of Directors
The Board has four standing committees: the Audit Committee, the Compensation Committee, the Governance Committee and the Policy Committee. The membership of these committees is typically determined at the organizational meeting of the Board held in conjunction with the Annual Meeting.annual meeting. All the committees are composed entirely of independent directors. The primary responsibilities of each of the committees are summarized below, together with a table listing the membership and chairperson of each committee. The charters for each standing committee can be found on the Investor Relations section of our website (www.northropgrumman.com).
Audit Committee | ||
Roles and Responsibilities | Committee Members | |
Assist the Board in overseeing (1) the integrity of the Company’s financial statements and the Company’s accounting and financial reporting processes; (2) the Company’s overall compliance with legal and regulatory requirements; (3) financial risk assessment and management; (4) the qualifications, performance and independence of the Company’s independent auditor; (5) the performance of the Company’s internal audit function; and (6) the Company’s system of disclosure controls and procedures and internal control over financial reporting, by:
| William H. Hernandez (chair) Marianne C. Brown Victor H. Fazio Ann M. Fudge Madeleine A. Kleiner James S. Turley Mark A. Welsh III
Number of meetings in
Independence, Financial Literacy and Audit Committee Financial Experts
All members are independent and financially literate
Ms. Kleiner and Messrs. Hernandez and Turley each qualifies as an Audit Committee Financial Expert |
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CORPORATE GOVERNANCE
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Compensation Committee | ||
Roles and Responsibilities | Committee Members | |
Assist the Board in overseeing the Company’s compensation policies and practices by:
| Karl J. Krapek (chair) Donald E. Felsinger Bruce S. Gordon
Gary Roughead Thomas M. Schoewe
Number of meetings in
Independence
All members are independent |
Governance Committee | ||
Roles and Responsibilities | Committee Members | |
Assist the Board in overseeing the Company’s corporate governance practices by:
| Madeleine A. Kleiner (chair) Donald E. Felsinger William H. Hernandez Karl J. Krapek Gary Roughead James S. Turley
Number of meetings in
Independence
All members are independent |
Policy Committee | ||
Roles and Responsibilities | Committee Members | |
Assist the Board in overseeing policy, government relations and corporate responsibility by:
| Bruce S. Gordon (chair) Marianne C. Brown Victor H. Fazio Ann M. Fudge
Thomas M. Schoewe Mark A. Welsh III
Number of meetings in
Independence
All members are independent |
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CORPORATE GOVERNANCE
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Board Meetings and Executive Sessions
The Board meets no fewer than eightnine times each year (including via telephonic meetings). Special meetings of the Board may be called from time to time as appropriate. On an annual basis, the Board holds an extended meeting to review our long-term strategy.
The Board holds its meetings at Company locations other than our corporate headquarters on a regular basis to provide the directors with a first-hand view of different elements of our business and an opportunity to interact with local management.
The Board meets in executive session (with the directors only and then with the independent directors only) following eachin-person Board meeting and on other occasions as needed. Thenon-executive Chairperson or the Lead Independent Director presides over the executive sessions of the independent directors. The Audit Committee meets in executive session at eachin-person Audit Committee meeting, and regularly requests separate executive sessions with representatives of our independent auditor and our senior management, including our Chief Financial Officer, General Counsel and our Vice President, Internal Audit. The Compensation Committee also meets in executive session from time to time and regularly receives a report from the Compensation Committee’s independent compensation consultant. The Governance and Policy Committees also meet in executive session as they deem necessary.
During 2016,2017, the Board held 914 meetings. Each incumbent director serving in 20162017 attended 75% or more of the total number of Board and committee meetings he or she was eligible to attend. Board members are expected to attend the Annual Meeting, except where the failure to attend is due to unavoidable circumstances. TwelveAll of the 13our then-serving directors who were members of the Board in May 2016 attended the 20162017 Annual Meeting.
The Board has established an objective that at least 75% of our directors be independent directors. The Board and the Governance Committee annually review the relevant relationships or arrangements between the Company and our directors or parties related to the directors in determining whether such directors are independent. No director is considered independent unless the Board has determined that the director meets the independence requirements under applicable New York Stock Exchange (NYSE) and SEC rules and under our categorical independence standards, which are described in our Principles of Corporate Governance. For a director to be considered independent, the Board must determine that a director has no material relationship with the Company other than as a director.
Our Principles of Corporate Governance provide that a director may be found not to qualify as an independent director if the director:
· | has within the prior three years been a director, executive officer or trustee of a charitable organization that received annual contributions from the Company exceeding the greater of $1 million or 2% of the charitable organization’s annual gross revenues, where the gifts were not normal matching charitable gifts, did not go through normal corporate charitable donation approval processes or were made “on behalf of” a director; |
· | has, or has an immediate family member who has, within the prior three years been employed by, a partner in or otherwise affiliated with any law firm or investment bank in which the director’s or the immediate family member’s compensation was contingent on the services performed for the Company or in which the director or the immediate family member personally performed services for the Company and the annual fees paid by the Company during the preceding fiscal year exceeded the greater of $1 million or 2% of the gross annual revenues of such firm; or |
· | has, or has an immediate family member who has, within the prior three years owned, either directly or indirectly as a partner, shareholder or officer of another company, more than 5% of the equity of an organization that has a material business relationship with (including significant purchasers of goods or services), or more than 5% ownership in, the Company. |
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Independence Determination
In connection with their annual independence review, the Board and Governance Committee considered the following relationships with organizations to which we have made payments in the usual course of our business in 2016.2017.
· | Mr. Fazio’s service as a member of the board of directors of the Center for Strategic and Budgetary Assessments; |
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· | Mr. Felsinger’s service as a member of the board of directors of Archer-Daniels-Midland; | |
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· | Mr. Gordon’s service as a member of the board of directors of CBS Corporation; |
· | Mr. Hernandez’s service as a member of the board of directors of Black Box Corporation; |
· | Admiral Roughead’s service as a member of the board of directors of the Center For a New American Security and a member of the board of managers of Johns Hopkins University Applied Physics Lab; and |
· | Mr. Turley’s service as a member of the board of directors of Citigroup. |
The Board of Directors considered that Mr. Fazio, Ms. Fudge, Mr. Gordon, Mr. Hernandez, Ms. Kleiner, General Myers, Admiral RougheadMr. Krapek, Mr. Turley and General Welsh serve as members of the boards of, or are otherwise affiliated with, organizations to which the Company and/or the Northrop Grumman Foundation (Foundation) made contributions during 20162017 in the usual course of our charitable contributions program, as well as in connection with our matching gifts program (which limits the contributions to $10,000 per year per director). The amounts paid were below the applicable thresholds under NYSE rules and our Principles of Corporate Governance. In addition, the Board considered that Mr. Fazio’s daughter began employment withis employed by us in January 2017 in anon-executive position. Her compensation is below the threshold required for disclosure by the SEC, and the Board determined that her employment does not interfere with Mr. Fazio’s independence.
Following its review and the recommendation of the Governance Committee, the Board affirmatively determined that all of the directors, except Mr. Bush, are independent. The independent directors constitute approximately 93%92% of the members of our Board. The Board previously determined that General Richard B. Myers, who served as a director until his retirement from the Board effective the date of the 2017 Annual Meeting, was independent during the time he was a director.
Our Bylaws and Certificate of Incorporation provide for the annual election of directors. Each director will hold office until the next annual meeting of shareholders or until his or her earlier resignation or removal. Generally, in order to be elected, a director must receive more votes cast “for” than “against” his or her election, unless one or more shareholders provide notice of an intention to nominate one or more candidates to compete with the Board’s nominees for election in accordance with the procedures set forth in the Company’s corporate governance documents.
Board Composition and Director Nominations
The Governance Committee actively considers the composition of the Board to ensure it is well positioned to serve the best interests of the Company and our shareholders. The Governance Committee regularly assesses what skills and experiences can best contribute to the effective operation of the Board, particularly in light of potential retirements and the evolving needs of the Company. The Governance Committee identifies director candidates from a wide range of sources and may employ a third-party search firm to assist in the process.
The Governance Committee evaluates potential director candidates on the basis of the candidate’s background, qualifications and experience. The Governance Committee carefully considers whether each potential candidate would be able to fulfill his or her duties to the Company consistent with Delaware law and the Company’s governing documents, including the Principles of Corporate Governance. The Committee recommends to the full Board nominees for election.
Shareholders may recommend director candidates for consideration by the Governance Committee pursuant to our Principles of Corporate Governance. The Governance Committee considers such director candidates recommended by shareholders similarly to other potential director candidates brought to the attention of the Governance Committee. Shareholder recommendations for director candidates under our Principles of Corporate Governance must be addressed to the Governance Committee in care of the Corporate Secretary. In addition, and as discussed immediately below, shareholders may also directly nominate director candidates in accordance with our Bylaws.
18 |NOTICE OF 2018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
CORPORATE GOVERNANCE |
The Board carefully considered and adopted a strong and balanced proxy access framework
For more than a year, the Board carefully considered the issue of proxy access. The Board and management engaged extensively with shareholders and monitored developments and best practices regarding proxy access. Management solicited and received input from shareholders, our customers and other stakeholders. The Board amended our Bylaws to provide our shareholders the right to proxy access, reflecting this extensive consideration and input.
18 |NOTICE OF 2017 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
|
Under the Company’s proxy access bylaws, a shareholder, or a group of up to 20 shareholders, that has maintained continuous ownership of 3% or more of the Company’s outstanding common stock for at least three years may include in the Company’s proxy materials director nominees constituting up to the greater of two nominees or nominees constituting 20% of the number of directors in office. Director nominees may receive compensation from third parties for their candidacy, up to the total annual compensation paid to directors of the Company, as well as reimbursement for reasonable expenses, provided there is full disclosure of such compensation. Under the Company’s proxy access bylaw provisions, directors are treated similarly, whether nominated through proxy access or otherwise, and held to the same high fiduciary standards to serve all shareholders.
The Company’s Bylaws provide our shareholders with broad and meaningful access to the Company’s proxy materials while enhancing transparency, protecting the interests of all shareholders and ensuring good governance. The terms of the Company’s proxy access bylaw provisions are also broadly consistent with the terms of proxy access bylaws adopted by other Fortune 500 companies, reflecting best practices.
The Governance Committee is responsible for establishing the criteria for Board membership. In nominating directors, the Governance Committee bears in mind that the foremost responsibility of a director is to represent the interests of our shareholders as a whole. The activities and associations of candidates are reviewed for any legal impediment, conflict of interest or other consideration that might prevent or interfere with service on our Board.
In evaluating candidates, the Governance Committee considers:
· | the personal integrity and the professional reputation of the individual; |
· | the education, professional background and particular skills and experience most beneficial to service on our Board; |
· | how the nominee brings diversity, experience and skills valuable to the Company and Board at the time; and |
· | whether a director candidate is willing to submit to and obtain a background check necessary for obtaining and retaining a top secret security clearance. |
In evaluating director candidates, the Governance Committee aims to foster diversity of thought on our Board. The Governance Committee seeks to achieve diversity, including in race and gender, as well as in perspective, professional experience, education, skill and other qualities that contribute to our Board and the long-term interests of our Company and shareholders.
Director Orientation and Continuing Education
All new directors to the Board receivein-person orientation and training that is individually tailored, taking into account the director’s experience, background, education and committee assignments. The orientation program is led by members of senior management and covers a review of our strategy and operating plans, financial statements, corporate governance and key policies and practices, as well as the roles and responsibilities of our directors.
All directors receive regularin-person training on Company policies and procedures. Members of senior management regularly review with the Board the operating plan for each of our business sectors and the Company as a whole. The Board also conducts periodic site visits to our facilities as part of its regularly scheduled Board meetings. These visits allow directors to interact with a broader group of our executives and employees and gain firsthand insights into our operations.
Directors may also attend outside director and other continuing education programs to assist them in staying current on developments in corporate governance, our industry, the global environment and issues critical to the operation of public company boards.
NOTICE OF 2018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|19
CORPORATE GOVERNANCE |
Board Membership and External Relationships
Directors are required to ensure that their other commitments, including for example, other board memberships, employment, partnerships and consulting arrangements, do not interfere with their duties and responsibilities as members of the Board. Directors must provide notice to the General Counsel prior to accepting an invitation to serve on the board of any other organization, and the General Counsel will advise the Chairperson of the Governance Committee (or the Chairperson of the Board, if notice is from the
NOTICE OF 2017 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|19
|
Chairperson of the Governance Committee). A director should not accept service on such other board until being advised by the Chairperson of the Governance Committee (or Chairperson of the Board, as appropriate) that such engagement will not unacceptably create conflicts of interest or regulatory issues, conflict with Company policies or otherwise interfere with the director’s duties and responsibilities as a member of the Board. Directors are also required promptly to inform the General Counsel if an actual or potential conflict of interest arises, or they are concerned that a conflict may arise or circumstances could otherwise interfere with their duties and responsibilities as a director. Directors should seek to avoid even an appearance of a conflict of interest.
Directors may not serve on more than three other boards of publicly traded companies in addition to our Board without the written approval of the Chairperson of the Governance Committee (or Chairperson of the Board, as appropriate). A director who is a full-time employee of our Company may not serve on the board of more than two other public companies unless approved by the Board. When a director’s principal occupation or business association changes substantially during his or her tenure as a director, the Board expects the director to tender his or her resignation for consideration by the Governance Committee, which subsequently will recommend to the Board what action to take.
We have a retirement policy whereby a director will retire at the Annual Meetingannual meeting following his or her 75th birthday, unless the Board determines, based on special circumstances, that it is in the Company’s best interest to request that the director serve beyond such date.
Effect of Failure to Receive the Required Vote or Obtain and Retain Security Clearance
Each director is required to tender a resignation that will be effective upon (i) the failure to receive the required vote at any future meeting at which such director facesre-election, the failure to obtain top secret security clearance within 12 months of appointmentelection or electionappointment to the Board or the failure to retain a top secret security clearance once obtained and (ii) the Board’s acceptance of such resignation. If an incumbent director fails to receive the required vote forre-election or fails to obtain and retain a top secret security clearance, the Governance Committee will consider whether the Board should accept the director’s resignation and will submit a recommendation for prompt consideration by the Board. The Board will decide whether to accept or reject a resignation within 90 days, unless the Board determines that compelling circumstances require additional time. The Governance Committee and the Board may consider any factor they deem relevant in deciding whether to accept a resignation, including, without limitation, any harm to our Company that may result from accepting or rejecting the resignation, and the underlying reasons for the action at issue.
Board and Committee Self-Evaluation
The Board and each Committee conduct annually a thorough self-assessment process. The self-assessment of the Board is overseen by the Governance Committee. As part of this assessment, the Lead Independent Director and Chairperson of the Governance Committee facilitate a broad discussion of Board performance, held in executive session. Among other topics, the Board considers:
· | the Board’s effectiveness in evaluating and monitoring the Company’s business plan, long-term strategy and risks; |
· | whether strategic and critical issues are being addressed by the Board in a timely manner; |
· | whether the Board’s expectations and concerns are openly communicated to and discussed with the Chief Executive Officer; |
· | whether there is adequate contact between the Board and members of senior management; |
· | whether the directors collectively operate effectively as a Board; |
· | whether the individual directors have the appropriate mix of attributes and skills to fulfill their duties as directors of the Company; |
· | whether there are adequate opportunities to raise questions and comments on issues, both inside and outside of Board meetings; |
20 |NOTICE OF 2018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
CORPORATE GOVERNANCE |
· | whether the Board has focused adequately on succession planning; and |
· | whether the Board is adequately responsive to shareholder communication. |
Following this review, the Board discusses the results and identifies opportunities for improvement, including any necessary steps to implement such improvements.
Also as part of the annual self-assessment process, each director completes an individual director evaluation for each of the other directors. These assessments include, among other topics, each director’s:
· | understanding of the Company’s overall business and risk profile and its significant financial opportunities and plans; |
20 |NOTICE OF 2017 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
· | engagement during meetings and other board functions; | |
|
· | analysis of benefits and risks of courses of action considered by the Board; and |
· | appropriate respect for the views of other Board members. |
The Lead Independent Director or the Chairperson of the Governance Committee meets with each director individually to discuss the results of his or her assessment, including comments provided by other directors. The Lead Independent Director or the Chairperson of the Governance Committee reports generally on the overall results of these discussions to the Board in executive session. These evaluations assist the Governance Committee with its recommendation for directors to be renominated for election to the Board of Directors.
In addition, each of the Committees conducts an annual self-assessment. During an executive session led by the Committee chairperson, the Committee discusses, among other topics: whether the quality of participation and discussion at the Committee meetings is effective in facilitating the Committee’s obligations under its charter; the opportunity to engage in strategic discussion; and whether the Committee is covering the right topics in the right amount of detail. Following this discussion, the Committee develops and implements a list of action items, as appropriate.
The Board believes that providing for continuity of leadership is critical to the success of our Company. Therefore, processes are in place:
· | to evaluate the Chief Executive Officer annually based on a specific set of performance objectives; |
· | for the Chief Executive Officer annually to provide an assessment of persons considered potential successors to various senior management positions and discuss the results of these reviews with the Board; and |
· | to support continuity of top leadership and Chief Executive Officer succession, including through annual reports to the Board. |
Departure and Election of Directors
On March 17, 2016, Ann M. Fudge was elected toGeneral Richard B. Myers, a director who served during 2017, did not stand forre-election at the Board.
On December 8, 2016, General Mark A. Welsh III was elected to2017 Annual Meeting and retired from the Board.Board effective the date of the 2017 Annual Meeting.
In accordance with the retirement policy described above, General Myers,Mr. Fazio, a director who served during 2016,2017, will not stand forre-election at the 20172018 Annual Meeting as he will have attained his 75th birthday prior to the Annual Meeting. Upon General Myers’Mr. Fazio’s retirement, the Board intends to reduce the number of members on the Board from 1413 to 1312 members.
Communications with the Board of Directors
Any interested person may communicate with any of our directors, our Board as a group, ournon-employee directors as a group or our Lead Independent Director through the Corporate Secretary by writing to the following address:Office of the Corporate Secretary, Northrop Grumman Corporation, 2980 Fairview Park Drive, Falls Church, Virginia 22042. The Corporate Secretary will forward correspondence to the director or directors to whom it is addressed, except for job inquiries, surveys, business solicitations or advertisements and other inappropriate material. The Corporate Secretary may forward certain correspondence elsewhere within our Company for review and possible response.
NOTICE OF 2018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|21
CORPORATE GOVERNANCE |
Interested persons may also report any concerns relating to accounting matters, internal accounting controls or auditing matters tonon-management directors (including anonymously) by writing directly to the Chairperson of the Audit Committee,Northrop Grumman Board of Directors c/o Corporate Ethics Office, 2980 Fairview Park Drive, Falls Church, Virginia 22042.
Corporate Responsibility and Sustainability
Corporate responsibility and sustainability play an important role inare critical to our business and operating strategies and long-term value creation for our shareholders, customers and employees. We believe thatOur strong culture — founded in ethics, integrity, diversity and inclusion, and focused on performance, accountability, effective governance and responsible citizenship — enables our success. Strong environmental, social and governance (ESG) programs and practices are critical to attractinghelp us attract and maintain the best talent, executing on our programs, maintaining a robust supplier base, and
NOTICE OF 2017 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|21
|
innovating to provide technically advanced and affordable productsperform for our customers. We are focused on creating a diversecustomers and inclusive workforce dedicated tocreate value for our core values, including integrity in all we do. We have built effective partnerships with our suppliers and utilize transparent corporate governance and leadership practices. We also champion corporate citizenship programs to advance education, support military service members and their families and collaborate with members of our communities. As explained in the Compensation Discussion and Analysis on page 42, our employee compensation program incorporates certain ESG metrics, including engagement and inclusion, diversity, safety and environmental sustainability.shareholders.
The Policy Committee of our Board provides leadership and oversight of our ESG practices, including (1) providingpractices. The Committee provides oversight of our policies and programs related to both corporate responsibility; (2) reviewingresponsibility and sustainability, and regularly reviews our community relations activities; and (3) reviewing, monitoring and providing oversight of our environmental sustainability program.activities, among other responsibilities. We engage with a variety of stakeholders and regularly obtain feedback on our ESG performance.
Effective ESG practices require transparency and accountability. We publish a Corporate Responsibility ReportIn 2017, we published our ninth annual corporate responsibility report (CRR) annually, using. Using the GRI G4 Sustainability Reporting Guidelines, of Global Reporting Initiative, a third party organization that has developed a widely used ESG reporting framework. Our CRR highlights, among other things,we continued to report to our commitment to diversity, quality, governance, ethics and compliance, innovation, environmental, health and safety, our people and corporate citizenship. For the last five years, an independent external review panel has provided feedback and advicestakeholders on our CRR.progress in meeting various environmental, social and governance performance indicators. You may view a copy of our annual CRR atcrreport.northropgrumman.com.
In 2016, we reduced greenhouse gas emissions, water usage and solid waste; in each case, exceeding our previously stated 2016 goals. For the fifthseventh consecutive year, we earned a leadership scoreincorporatednon-financial sustainability performance metrics into our annual incentive compensation program. See page 41 in CDP’s 2016 climate change program,the Compensation Discussion and Analysis section.
We are proud that our corporate responsibility and sustainability programs received various notable recognitions in 2016 we were named to the Dow Jones Sustainability Index for North America.2017. They include:
· | earning a leadership score ofA- in CDP’s 2017 climate change program for the sixth consecutive year; |
· | earning an A rating from MSCI for environmental, social and governance management and performance; |
· | being named to the Dow Jones Sustainability North America Index for the second consecutive year; and |
· | being named one of DiversityInc’s Top 50 Companies for Diversity for the eighth year in a row. |
22 | NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
|
The Compensation Committee, with the assistance of its independent compensation consultant, is responsible for reviewing and recommending for approval the compensation of thenon-employee directors. At the request of the Compensation Committee, the independent compensation consultant prepares annually a comprehensive benchmarking of ournon-employee director compensation program against the compensation programs offered by our Target Industry Peer Group (the same peer companies.group against which executive compensation is compared). Consistent with this benchmarking, the overarching approach fornon-employee director compensation is to target the 50th percentile of the Target Industry Peer Group.
In May 2016,2017, the Compensation Committee recommended to the Board, and the Board approved, the currentnon-employee director fee structure, effective May 18, 2016.17, 2017. The table below lists the annual fees payable to ournon-employee directors from January 1, 20162017 to May 17, 201616, 2017 under the prior fee structure and the annual fees payable under the current fee structure effective May 18, 2016.17, 2017.
Compensation Element | Amount ($) (1/1/16 - 5/17/16) | Amount ($) (5/18/16 - 12/31/16) |
Amount ($) (1/1/17 - 5/16/17)
|
Amount ($) (5/17/17 - 12/31/17)
| ||||||||||||||
Annual Cash Retainer | 122,500 | 122,500 |
|
122,500
|
|
|
122,500
|
| ||||||||||
Lead Independent Director Retainer | 27,500 | 35,000 |
|
35,000
|
|
|
35,000
|
| ||||||||||
Audit Committee Retainer | 10,000 | 10,000 |
|
10,000
|
|
|
10,000
|
| ||||||||||
Audit Committee Chair Retainer | 20,000 | 20,000 |
|
20,000
|
|
|
20,000
|
| ||||||||||
Compensation Committee Chair Retainer | 20,000 | 20,000 |
|
20,000
|
|
|
20,000
|
| ||||||||||
Governance Committee Chair Retainer | 15,000 | 15,000 |
|
15,000
|
|
|
15,000
|
| ||||||||||
Policy Committee Chair Retainer | 7,500 | 7,500 |
|
7,500
|
|
|
7,500
|
| ||||||||||
Annual Equity Grant (1) | 140,000 | 145,000 |
|
145,000
|
|
|
150,000
|
|
(1) | The annual equity grant is deferred into a stock unit account pursuant to the 2011 Long-Term Incentive Stock Plan (2011 Plan) as described below. The Northrop Grumman Equity Grant Program forNon-Employee Directors (Director Program) sets forth the terms and conditions of the equity awards granted tonon-employee directors under the 2011 Plan. |
Retainer fees are paid on a quarterly basis at the end of each quarter. To encourage directors to have a direct and material investment in shares of our common stock,non-employee directors are awarded an annual equity grant of $145,000$150,000 in the form of deferred stock units (Automatic Stock Units).
The Director Program was amended and restated effective January 1, 2016 (the Amended Director Program). InDirectors received an annual equity grant of Automatic Stock Units on May 18, 2016, directors received two stock unit grants - aone-time transitional grantwhich vested on January 1, 2016 (the Transition Stock Units)May 18, 2017, and an annual equity grant of Automatic Stock Units on May 18, 2016. The Transition Stock Units vested on May 18, 2016, and the Automatic Stock Units17, 2017, which will vest on the one year anniversary of the grant date. Under the Amended Director Program, directors may elect to have all or any portion of their Transition Stock Units and Automatic Stock Units paid on (A) the earlier of (i) the beginning of a specified calendar year after the vesting date or (ii) their separation from service as a member of the Board, or (B) the vesting date. Directors may elect to defer to a later year all or a portion of their remaining cash retainer or committee retainer fees into a stock unit account as Elective Stock Units or in alternative investment options as discussed above.options. Elective Stock Units are awarded on a calendar quarterly basis. Directors may elect to have all or a portion of their Elective Stock Units paid on the earlier of (i) the beginning of a specified calendar year or (ii) their separation from service as a member of the Board. Stock units awarded under the Amended Director Program will be paid out in an equivalent number of shares of Northrop Grummanour common stock. Deferral elections are made prior to the beginning of the year for which the retainer fees will be paid. Directors are credited with dividend equivalents in connection with the accumulated stock units until the shares of common stock related to such stock units are issued.
Non-employee directors are eligible to participate in our Matching Gifts Program for Education. Under this program, the Northrop Grumman Foundation matches director contributions, up to $10,000 per year per director, to eligible educational programs in accordance with the program.
Stock Ownership Requirements and Anti-Hedging and Pledging Policy
Non-employee directors are required to own common stock of the Company in an amount equal to five times the annual cash retainer, with such ownership to be achieved within five years of the director’s election to the Board. Deferred stock units and Company stock owned outright by the director count towards this requirement.
Company policy prohibits members of the Board of Directors from pledging or engaging in hedging transactions with respect to any of their Company stock, continuing to align the interests of our Board of Directors with those of our shareholders. None of the shares of Company common stock held by our directors are pledged or subject to any hedging transaction.
NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT | 23
COMPENSATION OF DIRECTORS
|
2016 2017 Director Compensation
The table below provides information on the compensation of ournon-employee directors for the year ended December 31, 2016.2017.
Name | Fees Earned or Paid in Cash ($) (1) | Stock Awards ($) (2) | All Other Compensation ($) (3) | Total ($) |
Fees Earned or
|
Stock Awards (2)
|
All Other
|
Total ($)
| ||||||||||||||||||||||||||||
Marianne C. Brown | 132,500 | 198,223 | 42 | 330,765 |
|
132,500
|
|
|
150,000
|
|
|
177
|
|
|
282,677
|
| ||||||||||||||||||||
Victor H. Fazio | 132,500 | 198,223 | 23,024 | 353,747 |
|
132,500
|
|
|
150,000
|
|
|
25,690
|
|
|
308,190
|
| ||||||||||||||||||||
Donald E. Felsinger | 154,657 | 198,223 | 13,724 | 366,604 |
|
157,500
|
|
|
150,000
|
|
|
17,307
|
|
|
324,807
|
| ||||||||||||||||||||
Ann M. Fudge | 103,132 | 145,000 | 10,009 | 258,141 |
|
132,500
|
|
|
150,000
|
|
|
8,073
|
|
|
290,573
|
| ||||||||||||||||||||
Bruce S. Gordon | 130,000 | 198,223 | 15,515 | 343,738 |
|
130,000
|
|
|
150,000
|
|
|
17,086
|
|
|
297,086
|
| ||||||||||||||||||||
William H. Hernandez | 152,500 | 198,223 | 3,724 | 354,447 |
|
152,500
|
|
|
150,000
|
|
|
447
|
|
|
302,947
|
| ||||||||||||||||||||
Madeleine A. Kleiner | 147,500 | 198,223 | 15,284 | 361,007 |
|
147,500
|
|
|
150,000
|
|
|
17,022
|
|
|
314,522
|
| ||||||||||||||||||||
Karl J. Krapek | 142,500 | 198,223 | 13,288 | 354,011 |
|
142,500
|
|
|
150,000
|
|
|
19,287
|
|
|
311,787
|
| ||||||||||||||||||||
Richard B. Myers | 122,500 | 198,223 | 19,125 | 339,848 | ||||||||||||||||||||||||||||||||
Richard B. Myers (4)
|
|
30,625
|
|
|
—
|
|
|
2,517
|
|
|
33,142
|
| ||||||||||||||||||||||||
Gary Roughead | 126,291 | 198,223 | 998 | 325,512 |
|
122,500
|
|
|
150,000
|
|
|
1,500
|
|
|
274,000
|
| ||||||||||||||||||||
Thomas M. Schoewe | 122,500 | 198,223 | 1,407 | 322,130 |
|
122,500
|
|
|
150,000
|
|
|
2,027
|
|
|
274,527
|
| ||||||||||||||||||||
James S. Turley | 132,500 | 198,223 | 44 | 330,767 |
|
132,500
|
|
|
150,000
|
|
|
155
|
|
|
282,655
|
| ||||||||||||||||||||
Mark A. Welsh III | 8,641 | 63,959 | — | 72,600 |
|
132,500
|
|
|
150,000
|
|
|
13
|
|
|
282,513
|
|
(1) | Amounts reflect the annual cash retainer paid to each director, including any applicable annual committee and committee chair retainers and any applicable Lead Independent Director or Chairperson retainer. As described above, a director may elect to defer all or a portion of his or her annual cash retainer into a deferred stock unit account. Amounts deferred as Elective Stock Units or deferred into alternative investment options are reflected in this column. |
(2) | Amounts represent the target value of Automatic Stock Units |
(3) | Amounts reflect (i) the estimated dollar value of additional stock units credited to eachnon-employee director as a result of dividend equivalents earned, directly or indirectly, on reinvested dividend equivalents as such amounts are not assumed in the grant date fair value of the Automatic Stock Units |
(4) |
24 | NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
COMPENSATION OF DIRECTORS
|
Deferred Stock Units
As of December 31, 2016,2017, thenon-employee directors had the following aggregate number of deferred stock units accumulated in their deferral accounts for all years of service as a director, including additional stock units credited as a result of dividend equivalents earned on the stock units.
Name | Automatic Stock Units | Elective Stock Units | Total |
Automatic Stock Units
|
Elective Stock Units
|
Total
| |||||||||||||||||||||
Marianne C. Brown | 1,611 | 617 | 2,228 |
|
2,250
|
|
|
1,121
|
|
|
3,371
|
| |||||||||||||||
Victor H. Fazio | 11,903 | 7,500 | 19,403 |
|
12,694
|
|
|
7,611
|
|
|
20,305
|
| |||||||||||||||
Donald E. Felsinger | 18,784 | 14,450 | 33,234 |
|
19,677
|
|
|
14,663
|
|
|
34,340
|
| |||||||||||||||
Ann M. Fudge | 686 | 468 | 1,154 |
|
1,312
|
|
|
474
|
|
|
1,786
|
| |||||||||||||||
Bruce S. Gordon | 15,481 | — | 15,481 |
|
16,325
|
|
|
—
|
|
|
16,325
|
| |||||||||||||||
William H. Hernandez | 3,189 | — | 3,189 |
|
3,851
|
|
|
—
|
|
|
3,851
|
| |||||||||||||||
Madeleine A. Kleiner | 15,195 | — | 15,195 |
|
15,339
|
|
|
—
|
|
|
15,339
|
| |||||||||||||||
Karl J. Krapek | 15,523 | 6,752 | 22,275 |
|
16,368
|
|
|
5,840
|
|
|
22,208
|
| |||||||||||||||
Richard B. Myers | 19,598 | — | 19,598 | ||||||||||||||||||||||||
Richard B. Myers (1)
|
|
—
|
|
|
—
|
|
|
—
|
| ||||||||||||||||||
Gary Roughead | 6,336 | — | 6,336 |
|
7,045
|
|
|
—
|
|
|
7,045
|
| |||||||||||||||
Thomas M. Schoewe | 7,515 | — | 7,515 |
|
8,241
|
|
|
—
|
|
|
8,241
|
| |||||||||||||||
James S. Turley | 1,678 | — | 1,678 |
|
2,319
|
|
|
—
|
|
|
2,319
|
| |||||||||||||||
Mark A. Welsh III | 270 | — | 270 |
|
889
|
|
|
—
|
|
|
889
|
|
(1) |
Director Equity Plan
Under the Northrop GrummanNon-Employee Directors Equity Participation Plan (Director Equity Plan),non-employee directors had an amount equal to 50% of their annual retainer credited to an equity participation account and converted into stock units based on the then fair market value (as defined in the Director Equity Plan) of our common stock. No new participants have been added to the Director Equity Plan since May 31, 2005, and no new annual accruals have been credited to the then-existing participants in the Director Equity Plan since that time. However, directors that served on the Board in and before 2005 continue to be credited with dividend equivalents on the cumulative stock units held in their equity participation accounts until the director terminates service on the Board. Mr. Fazio is the only director that earns dividend equivalents under the Director Equity Plan. No other current director participates in the Director Equity Plan.
Generally, if a participatingnon-employee director terminates service on the Board after completion of at least three consecutive years of service or retires from the Board as a result of a total disability or a debilitating illness as defined in the Director Equity Plan, the participant will be entitled to receive the full balance of the participant’s equity participant account in annual installments. Upon a change in control of the Company, as defined in the Director Equity Plan, the participant will immediately be entitled to receive the full balance of the equity participation account under the Director Equity Plan regardless of the number of years of consecutive service, although payment of his or her benefits will not commence until the termination of his or her service.
NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT | 25
TRANSACTIONS WITH RELATED PERSONS AND CONTROL PERSONS
|
The Company has a written policy approved by the Board, for the review, approval and ratification of transactions between our Company and our directors, executive officers and other related persons (Related Person Transactions Policy). A copy of the policy is available on the Investor Relations section of our website (www.northropgrumman.com). The policy provides for all related person transactions to be reviewed in advance and approved or ratified, as applicable, by the Board of Directors, the Governance Committee or the Chairperson of the Governance Committee. A related person transaction may be approved if, after reviewing the relevant facts and circumstances, the reviewing party concludes that approving the related person transaction is in the best interests of the Company and its shareholders.
The policy defines a related person transaction as any transaction in which the Company was, is or will be a participant, where the amount involved exceeds $120,000, and in which a related person had, has or is expected to have a direct or indirect material interest. A “related person” includes:
· | any of our directors or executive officers; |
· | any person who is known to be the beneficial owner of more than 5% of our common stock; |
· | an immediate family member of any such persons; or |
· | any firm, corporation, or other entity controlled by any such persons. |
The Corporate Secretary may determine that, based on facts and circumstances, a transaction in an amount less than $120,000 should nonetheless be deemed a related person transaction. If this occurs, the transaction would be submitted for review and approval or ratification in accordance with the policy. Under exceptional circumstances, if a related person transaction has not been approved in advance, the Governance Committee will recommend to the Board of Directors such action as the Governance Committee deems appropriate, including ratification, amendment or termination of the transaction.
The policy requires each director and executive officer to complete an annual questionnaire to identify his or her related interests and to notify the Corporate Secretary of any changes in their information.
In 2016,2017, none of our directors or executive officers was a participant in or had a relationship regarded as a related person transaction, as considered under our Related Person Transactions Policy and applicable regulations of the SEC and the NYSE listing standards.
Compensation Committee Interlocks and Insider Participation
During 2016,2017, Messrs. Felsinger, Gordon, Krapek, Myers, Roughead and Schoewe served as members of the Compensation Committee. During 2016,2017, no member of the Compensation Committee had a relationship with the Company or any of our subsidiaries, other than as directors and shareholders, and no member was an officer or employee of the Company or any of our subsidiaries, a participant in a related person transaction or an executive officer of another entity, where one of our executive officers serves on the board of directors that would constitute a related person transaction or raise concerns of a Compensation Committee interlock.
Our Bylaws require us generally to indemnify our directors and executive officers to the fullest extent permitted by Delaware law. Additionally, as permitted by Delaware law, we have entered into indemnification agreements with each of our directors and elected officers. Under the indemnification agreements, we have agreed to hold harmless and indemnify each indemnitee, generally to the fullest extent permitted by Delaware law, against expenses, liabilities and loss incurred in connection with threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative to which the indemnitee is made a party by reason of the fact that the indemnitee is or was a director or officer of the Company or any other entity at our request, provided however, that the indemnitee acted in good faith and in a manner reasonably believed to be in the best interests of our Company.
26 | NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
|
Section 16(a) of the Securities Exchange Act of 1934, as amended (Exchange Act), requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC.
Based on our review of Forms 3, 4 and 5 we have received or have filed on behalf of our executive officers and directors, and of written representations from those persons that they were not required to file a Form 5, we believe that all required filings, other than one delayed filing for Mrs. Fudge (which resulted from an administrative error by a third party) were made on a timely basis during the year ended December 31, 2016.2017.
NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT | 27
VOTING SECURITIES AND PRINCIPAL HOLDERS
|
Stock Ownership of Certain Beneficial Owners
The following entities beneficially owned, to the best of our knowledge, more than five percent of the outstanding common stock as of December 31, 2016.2017. All information shown is based on information reported by the filer on a Schedule 13G filed with the SEC on the dates indicated in the footnotes below.
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership of Common Stock | Percent of Class |
Amount and Nature of Beneficial Ownership of Common Stock
|
Percent of Class
| ||||||||||||||
BlackRock, Inc.
55 East 52nd Street, New York, NY 10055 | 12,711,186 | (1) | 7.2% |
|
13,545,765 |
(1) |
|
7.8% |
| |||||||||
State Street Corporation
One Lincoln Street, Boston, MA 02111 | 19,930,441 | (2) | 11.3% |
|
19,261,080 |
(2) |
|
11.1% |
| |||||||||
The Vanguard Group
100 Vanguard Blvd., Malvern, PA 19355 | 12,232,415 | (3) | 6.9% |
|
13,248,398 |
(3) |
|
7.6% |
|
(1) | This information was provided by BlackRock, Inc. (BlackRock) in a Schedule 13G/A filed with the SEC on January |
(2) | This information was provided by State Street Corporation (State Street) in a Schedule 13G filed with the SEC on February 14, |
(3) | This information was provided by The Vanguard Group (Vanguard) in a Schedule 13G/A filed with the SEC on February |
28 | NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
VOTING SECURITIES AND PRINCIPAL HOLDERS
|
Stock Ownership of Officers and Directors
The following table shows beneficial ownership of our common stock as of March 21, 201720, 2018 by each of our current directors, our named executive officers and all directors and executive officers as a group. As of March 21, 2017,20, 2018, there were 174,811,781174,383,808 shares of our common stock outstanding. None of the persons named below beneficially owns in excess of 1% of our outstanding common stock. Unless otherwise indicated, each individual has sole investment power and sole voting power with respect to the shares owned by such person.
Shares of Common Stock Beneficially Owned | Share Equivalents (1) | Total |
Shares of Common Stock
|
Share
|
Total
| ||||||||||||||||||||||
Non-Employee Directors | |||||||||||||||||||||||||||
Marianne C. Brown | — | 2,228 | 2,228 |
|
—
|
|
|
3,371
|
|
|
3,371
|
| |||||||||||||||
Victor H. Fazio | 18,295 | (2) | 19,403 | 37,698 |
|
18,368
|
(2)
|
|
20,305
|
|
|
38,673
|
| ||||||||||||||
Donald E. Felsinger | — | 33,234 | 33,234 |
|
—
|
|
|
34,340
|
|
|
34,340
|
| |||||||||||||||
Ann M. Fudge | 77 | 1,154 | 1,231 |
|
93
|
|
|
1,786
|
|
|
1,879
|
| |||||||||||||||
Bruce S. Gordon | — | 15,481 | 15,481 |
|
—
|
|
|
16,325
|
|
|
16,325
|
| |||||||||||||||
William H. Hernandez | 1,000 | 3,189 | 4,189 |
|
1,000
|
|
|
3,851
|
|
|
4,851
|
| |||||||||||||||
Madeleine A. Kleiner | 283 | 15,195 | 15,478 |
|
971
|
|
|
15,339
|
|
|
16,310
|
| |||||||||||||||
Karl J. Krapek | 7,125 | 20,754 | 27,879 |
|
8,194
|
|
|
21,139
|
|
|
29,333
|
| |||||||||||||||
Richard B. Myers | — | 19,598 | 19,598 | ||||||||||||||||||||||||
Gary Roughead | — | 6,336 | 6,336 |
|
—
|
|
|
7,045
|
|
|
7,045
|
| |||||||||||||||
Thomas M. Schoewe | 3,160 | 7,515 | 10,675 |
|
3,160
|
|
|
8,241
|
|
|
11,401
|
| |||||||||||||||
James S. Turley | — | 1,678 | 1,678 |
|
—
|
|
|
2,319
|
|
|
2,319
|
| |||||||||||||||
Mark A. Welsh III (4) | — | 270 | 270 | ||||||||||||||||||||||||
Mark A. Welsh III
|
|
—
|
|
|
889
|
|
|
889
|
| ||||||||||||||||||
Named Executive Officers | |||||||||||||||||||||||||||
Wesley G. Bush (5) | 420,989 | (6) | 5,488 | 426,477 | |||||||||||||||||||||||
Wesley G. Bush (3)
|
|
430,162
|
(4)
|
|
5,560
|
|
|
435,722
|
| ||||||||||||||||||
Kenneth L. Bedingfield | 22,231 | — | 22,231 |
|
34,340
|
|
|
—
|
|
|
34,340
|
| |||||||||||||||
Gloria A. Flach | 79,000 | — | 79,000 | ||||||||||||||||||||||||
Gloria A. Flach (5)
|
|
87,668
|
|
|
—
|
|
|
87,668
|
| ||||||||||||||||||
Janis G. Pamiljans
|
|
6,677
|
|
|
6,224
|
|
|
12,901
|
| ||||||||||||||||||
Kathy J. Warden | 83,629 | — | 83,629 |
|
88,011
|
|
|
—
|
|
|
88,011
|
| |||||||||||||||
Thomas E. Vice | 102,284 | — | 102,284 | ||||||||||||||||||||||||
Other Executive Officers | 301,559 | 2,235 | 303,794 |
|
245,957
|
|
|
9,176
|
|
|
255,133
|
| |||||||||||||||
All Directors and Executive Officers as a Group (27 persons) | 1,039,632 | 153,758 | 1,193,390 (7) |
|
924,601
|
|
|
155,910
|
|
|
1,080,511
|
(6)
|
(1) | Share equivalents for directors representnon-voting deferred stock units acquired under the 2011 Plan, some of which are paid out in shares of common stock at the conclusion of a director-specified deferral period, and others are paid out upon termination of the director’s service on the Board. Certain of the NEOs hold share equivalents with pass-through voting rights in the Northrop Grumman Savings Plan or the Northrop Grumman Financial Security and Savings Program. |
(2) | Includes |
(3) |
Mr. Bush is also Chairman of the Board. |
Includes 259,053 shares held in the W.G. and N.F. Bush Family Trust, 63,980 shares held in the Bush Trust Number 4 Trust, and 63,979 shares held in the Wesley G. Bush Revocable Trust, each of which Mr. Bush and his wife serve as trustees. |
Ms. Flach retired from the Company on December 31, 2017. |
(6) | Total represents |
NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT | 29
EQUITY COMPENSATION PLAN INFORMATION
|
We currently maintain threetwo equity compensation plans: the 2011 Plan the 2001 Long-Term Incentive Stock Plan (2001 Plan) and the 1993 Stock Plan forNon-Employee Directors, as amended (1993 Directors Plan). Each of these plans has been approved by our shareholders.
The following table sets forth the number of shares of our common stock subject to be issued upon payout of outstanding stock options and other rights, the weighted-average exercise price of the outstanding stock optionsawards and the number of shares remaining available for future award grants under these equity compensation plans as of December 31, 2016.2017.
Plan category | Number of shares of common stock to be issued upon exercise of outstanding options and payout of outstanding awards (1) (#) | Weighted-average exercise price of outstanding options (2) ($) | Number of shares of common stock |
Number of shares of
|
Weighted-average
|
Number of shares of common stock issuance under equity compensation plans (excluding shares reflected in the first column) (3) (#)
| |||||||||||||||||||||||||
Equity compensation plans approved by shareholders | 2,553,260 | 63 | 6,811,608 |
|
1,989,372
|
|
|
N/A
|
|
|
6,295,076
|
| |||||||||||||||||||
Equity compensation plans not approved by shareholders | N/A | N/A | N/A |
|
N/A
|
|
|
N/A
|
|
|
N/A
|
| |||||||||||||||||||
Total | 2,553,260 | 63 | 6,811,608 | (4) |
|
1,989,372
|
|
|
N/A
|
|
|
6,295,076
|
(4) �� |
(1) |
(2) |
(3) | Of the aggregate number of shares that remained available for future issuance, |
(4) | After giving effect to our February |
30 | NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
ADVISORY VOTE ON COMPENSATION OF NAMED EXECUTIVE OFFICERS |
WeConsistent with Section 14A of the Exchange Act, we are providing our shareholders with the opportunity to cast anon-binding, advisory vote on the compensation of our NEOs. This advisory vote, commonly known as“say-on-pay,” gives our shareholders the opportunity to express their view on our 20162017 executive compensation programs and policies for our NEOs. The vote does not address any specific item of compensation and is not binding on the Board; however, as an expression of our shareholders’ views, the Compensation Committee seriously considers the vote when making future executive compensation decisions. The Board has adopted a policy of providing for annual advisory votes on the compensation of our NEOs.
We believe our compensation programs reflect responsible, measured practices that effectively incentivize our executives to dedicate themselves fully to value creation for our shareholders, customers and employees. Our pay practices are aligned with our shareholders’ interests and with leading industry practice and are governed by a set of strong policies and practices.policies. Examples include:
· | Double-trigger provisions for change in control situations, and no excise taxgross-ups for payments upon termination after a change in control; |
· | A recoupment policy applicable to cash and equity incentive compensation payments; |
· | Stock ownership guidelines of 7x base salary for the CEO and 3x base salary for other NEOs, and stock holding requirements of three years from the vesting date for equity awards; and |
· | Prohibitions on hedging or pledging of Company stock. |
For a more extensive list of our best practices, refer to page 3433 of this Proxy Statement. In addition, our Compensation Discussion and Analysis (CD&A) provides a detailed discussion of our performance-based approach to executive compensation. We encourage you to read the CD&A, the rest of this Proxy Statement and our 20162017Form 10-K, which describes our business and 20162017 results in more detail.
Recommendation
The compensation of our executives is aligned to performance, is sensitive to shareholder returns, appropriately motivates and retains our executives, and is a competitive advantage in attracting and retaining the high caliber talent necessary to drive our business forward and build sustainable value for our shareholders. Accordingly, the Board recommends that shareholders approve the following resolution:
“RESOLVED, that, as an advisory matter, the shareholders of Northrop Grumman Corporation approve the compensation paid to the Company’s named executive officers as disclosed in this Proxy Statement pursuant to Item 402 of RegulationS-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion.”
Vote Required
Approval of this proposal requires that the votes cast “for” the proposal exceed the votes cast “against” the proposal. Abstentions and brokernon-votes will have no effect on this proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL TWO. |
NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT | 31
|
We are providing our shareholders with the opportunity to cast anon-binding, advisory vote on the preferred frequency of future advisory votes on the compensation of our named executive officers in accordance with Section 14A of the Exchange Act. Shareholders may indicate whether they would prefer that we conduct future advisory votes on the compensation of our named executive officers every one year, every two years or every three years.
After careful consideration, the Board has concluded that an advisory vote on the compensation of our named executive officers that occurs every year is the most appropriate alternative for the Company and therefore the Board recommends that you vote for every “one year” as the preferred frequency.
An annual advisory vote on the compensation of our named executive officers will allow our shareholders to provide direct input on the Company’s executive compensation philosophy, policies and practices as disclosed in the proxy statement each year, which is consistent with our efforts to engage in an ongoing dialogue with our shareholders on executive compensation and corporate governance matters. We believe an annual advisory vote on the compensation of our named executive officers will benefit shareholder communication by providing a clear, simple means for the Company to obtain information on investor sentiment about our executive compensation philosophy. We currently provide for an annual advisory vote on the compensation of our named executive officers.
This vote is advisory, which means that the vote is not binding on the Company, the Board or the Compensation Committee. Notwithstanding the advisory nature of the vote, the Board values the opinions of shareholders and will review and consider seriously the outcome of this vote in determining how frequently the Company conducts an advisory vote on the compensation of our named executive officers.
Shareholders may cast a vote on the preferred voting frequency by selecting every one year, every two years or every three years or abstaining when voting in response to the resolution set forth below:
“RESOLVED, that the shareholders determine, on an advisory basis, whether the preferred frequency of an advisory vote on the compensation of the Company’s named executive officers as set forth in the Company’s proxy statement should be every one year, every two years or every three years.”
Vote Required
Approval of this advisory proposal requires that the votes cast for one of the three frequency alternatives exceed the votes cast against that frequency alternative. For this purpose, when considering whether a particular frequency alternative is adopted by shareholders, votes cast for one of the other two frequency alternatives will be deemed votes cast against the frequency alternative under consideration. This means that a particular frequency alternative will be adopted by shareholders only if it receives more affirmative votes than the total affirmative votes of the two other alternatives combined. Abstentions and brokernon-votes will not have any effect on this proposal. If the resolution is not adopted by the required vote of the shareholders, the Compensation Committee and the Board will nonetheless consider the votes cast for each frequency alternative presented in determining the frequency for future advisory votes on the compensation of our named executive officers.
|
32 |NOTICE OF 2017 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT
|
Compensation Discussion and Analysis
In this CD&A, we provide an overview of our executive compensation programs and the underlying philosophy used to develop the programs. This section detailsWe describe the material components of our executive compensation programs for our 2016 named executive officers (NEOs)2017 NEOs and explainsexplain how and why theour Board’s Compensation Committee of the Board arrived at certain specific compensation policies and decisions involving the NEOs. In this Proxy Statement, references are madedecisions. We refer to certainnon-GAAP (accounting principles generally accepted in the United States of America) financial measures, which we haveare identified with asterisks. For more information, including definitions, reconciliations to the most directly comparable GAAP measure and why we believe these measures may be useful to investors, see “Appendix A - Use ofNon-GAAP Financial Measures.” The 20162017 NEO compensation of our NEOs is provided in the Summary Compensation Table on page 49 and other compensation tables contained in this Proxy Statement.
20162017 NEOs
WESLEY G. BUSH
KENNETH L. BEDINGFIELD
GLORIA A. FLACH(1)
THOMAS E. VICEJANIS G. PAMILJANS(2)
KATHY J. WARDEN
(1)Ms. Flach retired from the Company on December 31, 2017.
(2) Mr. Pamiljans was elected Corporate Vice President and President, Aerospace Systems (President, Aerospace Systems) effective April 1, 2017. References to Mr. Pamiljans’ compensation prior to April 1, 2017 in this CD&A include compensation for service as an appointed officer in the role of Vice President and General Manager.
32 |NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|33
COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY
|
Summary of Our Executive Compensation Programs
|
Our executive compensation philosophy is to provide a complementary set of compensation programs to our NEOs with attractive, flexible and market-based total compensation tied to annual and long-term performance and aligned with the interests of our shareholders. The key elements of our executive compensation programs for our NEOs are summarized below.
Compensation Element |
| Purpose | Key Characteristics | |||||||||||||
Fixed Component | Base Salary | Compensate fairly and competitively
| Determined by
| |||||||||||||
Long-Term Incentive Plan (LTIP) Restricted Stock Rights (RSRs) | Link the interests of our executive officers to shareholders and retain executive talent
| 30% of annual LTIP grant
Three-year cliff vesting | ||||||||||||||
Based Component | Annual Incentive Plan (AIP) | Motivate and reward achievement of annual business objectives | Financial Metrics Pension-adjusted Operating Margin (OM) Rate*, Cash Flow from Operations Conversion*
Subject to downward adjustment for failure to achievenon-financial objectives
| |||||||||||||
LTIP Restricted Performance Stock Rights (RPSRs) | Link the interests of our executive officers to shareholders, motivate and reward achievement of long-term strategic goals and retain executive talent | 70% of annual LTIP grant
Three-year performance period
Actual shares earned are weighted |
* | This metric is anon-GAAP financial measure. For more information, see “Appendix A - Use ofNon-GAAP Financial Measures.” |
Our Compensation Pay Practices (pages37-47) 36 - 47)
Our compensation programs incorporate best practices, including the following:
Best Practices
| ||||||
|
|
| · No Hedging or Pledging of Company Stock
· Recoupment Policy on Incentive Compensation Payments · Stock Ownership Guidelines and Stock Holding Requirements · Regular Risk Assessments Performed
|
34 |NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|33
COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY
|
2016 2017 Performance Highlights
We continued to generate strong financial results in 2016,2017, including strong consolidated andhigher segment operating margin rates,income and, excluding 2017 tax reform and our related discretionary pension contribution impacts, higher earnings, cash from operations and free cash flow*, which. 2017 diluted earnings per share were $11.47 and excluding 2017 tax reform and our related discretionary pension contribution impacts were $13.28*. Our strong cash generation allowed us to distribute $2.2invest $928 million in our business and return more than $1 billion to our shareholders through share repurchases and dividends. Operational performance and effective capital deployment supported a 25.2% total shareholder return33.9% TSR in 2016.2017.
EPS GrowthEarnings Per Share
Total Shareholder Return
* This metric is anon-GAAP financial measure. For more information, see “Appendix A - Use ofNon-GAAP Financial Measures.”
34 |NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|35
COMPENSATION DISCUSSION AND ANALYSIS | EXECUTIVE SUMMARY
|
Management and the Compensation Committee believe our executive compensation programs are competitive and support achieving strong financial performance while investing for long-term profitable growth and value creation.creation over the long-term. A 95%96% shareholder majority approved last year’ssay-on-pay proposal, and this year’sour ongoing shareholder engagement indicates continued support for the structure and elements of our performance-based executive incentive compensation programs.
Performance Against Incentive Compensation Metrics
For2017 results, which have been adjusted to exclude the impacts of the Tax Cuts and Jobs Act (the “2017 Tax Act”), for AIP following are the results for 2016 performance:metrics:
· | Pension-adjusted OM Rate*: 10.5% |
· | Cash Flow from Operations Conversion*: 127% |
· | Pension-adjusted Net Income* Growth: $1.93B |
For the LTIP, our three-year TSR score covering 2014-20162015-2017 was at the 78th89th percentile as measured against the 2015 Performance Peer Group identified on page 3938 and the 98th96th percentile as measured against the S&P industrials. Over the last three years, the weighting of our LTIP RPSR metrics has transitioned from 100% TSR in 2015-2017 to 70% TSR and 30% Cumulative FCF* in 2016-2018 to the current 50% TSR and 50% Cumulative FCF* weighting. The weighting transition reflects a desire for a better balance between relative TSR performance and an operational metric more directly impacted by management decisions and behaviors.
Compensation Mix
We have a balanced pay for performance compensation structure that places an appropriate level of compensation at risk, based on our financial andnon-financial performance measures and relative TSR. The AIP award is determined by our financial performance and is subject to a downward only adjustment for performance againstnon-financial goals. For NEOs, the value of LTIP RPSR compensation is weighted 70%50% to relative TSR and 30%50% to Cumulative FCF*. Achievement of both annual and long-term incentive goals will result in individual awards commensurate with results; however, if absolute TSR is negative, the maximum relative TSR payout is capped at 100%, even if the relative TSR would have resulted in a higher score. The following charts show performance-based compensation elements at target values.
36 |NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|35
COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES
|
Compensation Philosophy and Objectives
We provide an attractive, flexible and market-based total compensation program tied to performance and aligned with the interests of our shareholders. Our objective is to recruit and retain the caliber of executives and other key employees capable of achieving top performance and generating value for our shareholders, customers and employees.
Our goal is to lead our industry in sustainable performance, while maintaining strong, enduring values. The targets and thresholds of our AIP are based on the performance of our peers and the market. Our 20162017 LTIP metrics are based on (1) total shareholder returnTSR relative to our Performance Peer Group and the S&P Industrials and (2) Cumulative FCF*. For each plan, we selected metrics that drive shareholder value and benchmark our performance against our peers and the market. Our executive compensation and benefit programs are guided by the following principles:
Pay for Performance
|
|
Leadership Retention and Succession
|
|
|
Sustainable Performance
|
|
Alignment with Shareholder Interests
|
|
Benchmarking
|
|
Compensation Risk Management
|
|
36 |NOTICE OF 20172018 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT|37
COMPENSATION DISCUSSION AND ANALYSIS | KEY PRINCIPLES
|
How We Make Compensation Decisions
Role of the Compensation Committee
The Compensation Committee is responsible for overseeing our compensation policies, incentive and equity compensation plans and approving payments or grants under these plans for elected officers (other than the CEO). The Compensation Committee recommends the compensation for our CEO to the independent directors of the Board for approval and approves the compensation for the other NEOs. In performing its duties, the Compensation Committee:
· | retains an independent compensation consultant which reports directly to the Compensation Committee and is discussed further below; |
· | reviews market data and other input from its independent compensation consultant; |
· | reviews and approves incentive goals and objectives (CEO goals and objectives are reviewed and approved by the independent directors); |
· | evaluates and approves executive benefit and perquisite programs; and |
· | evaluates the competitiveness of each elected officer’s total compensation package. |
In addition, the Compensation Committee annually reviews and discusses with management the Compensation Discussion and AnalysisCD&A and provides a Compensation Committee Report for inclusion in the proxy statement.
For more information regarding the composition of the Compensation Committee and its duties and responsibilities, see “Corporate Governance – Committees of the Board of Directors – Compensation Committee.”
Role of the Independent Compensation Consultant
The Compensation Committee retains an independent compensation consultant, Frederic W. Cook & Co. (the Compensation Consultant). The Compensation Consultant reports directly to the Compensation Committee, and the Compensation Committee may replace the Compensation Consultant or hire additional consultants at any time. A representative of the Compensation Consultant regularly attends meetings of the Compensation Committee and communicates with the Compensation Committee Chairperson between meetings as needed; however, the Compensation Committee and the independent directors of the Board make final decisions on the compensation actions for the NEOs. The Compensation Consultant may meetregularly meets in executive session with the Compensation Committee. Other than the fees paid to the Compensation Consultant pursuant to its engagement by the Compensation Committee for its advice on executive and director compensation, the Compensation Consultant does not receive any fees or income from the Company.
The Compensation Consultant’s role is to provide an independent review of market data and to advise the Compensation Committee on the levels and structure of our executive compensation policies and procedures, including compensation matters for NEOs. The Compensation Consultant utilizes aerospace and defense industry market data and conducts an independent review of publicly available data.
The roles of the Compensation Consultant include:
· | reviewing and advising the Compensation Committee on our total compensation philosophy, peer groups and target competitive positioning; |
· | identifying market trends and practices and advising the Compensation Committee on program design implications; |
· | providing proactive advice to the Compensation Committee on best practices for Board governance of executive compensation, compensation-related risk management, and any areas for program design to most appropriately support the Company’s business strategy and organizational values; and |
· | serving as a resource to the Compensation Committee Chairperson on setting agenda items for Compensation Committee meetings and undertaking special projects. |
In February 2017,2018, the Compensation Committee determined that there were no relationships between the Compensation Consultant and the Company or any of the Company’s directors or executive officers that raised a conflict of interest.
Role of Management
Our CEO makes compensation-related recommendations for elected officers to the Compensation Committee for its review and approvalapproval. The CEO’s evaluation is based on the CEO’s evaluation of each officer’s compensation relative to market and the overall framework, philosophy and objectives for our executive compensation programs set by the Compensation Committee.
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The recommendations for elected officers are based on an assessment of each executive’s performance, skills and industry knowledge, market compensation benchmarks, and succession and retention considerations. The Chief Human Resources Officer provides a summary of historical compensation and benefits relatedbenefits-related data when compensation decisions are considered by the Compensation Committee to ensure compensation decisions are made within our total compensation framework. The summaries include the values of nonqualified deferred compensation, outstanding equity awards, health and welfare benefits, pension benefits and perquisites.
Management also provides recommendations to the Compensation Committee regarding executive incentive and benefit plan designs and strategies. These recommendations include financial andnon-financial operational goals and criteria for our annual and long-term incentive plans.
Use of Competitive Data
The Compensation Committee uses a Performance Peer Group, consisting of competitor companies in the aerospace and defense market, to set performance targets and evaluate performance for the purpose of award payments under our incentive plans. In addition, the Compensation Committee uses a Target Industry Peer Group, comprised of 14 companies, to benchmark executive compensation levels and practices.
Performance Peer Group: Set Performance Targets and Evaluate Performance
The Compensation Committee uses the Performance Peer Group used for purposes of setting performance targets and evaluating performance for our annualAIP and long-term incentive plansLTIP. The Performance Peer Group is comprised of the largest global defense companies by government revenues within ourthe aerospace and defense market space. Based on this criteria, Harris Corporation (a U.S.-based provider of advanced technology based solutions) and Leidos Holdings, Inc. (a U.S.-based provider of information technology services) were added to the 2016 Performance Peer Group. AIP goals for 20162017 and goals for the LTIP grants made during 20162017 that will vest in 20182019 were established based on the 20162017 Performance Peer Group.
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BAE Systems | Harris Corporation | Lockheed Martin Corporation | ||
The Boeing Company | L3 Technologies, Inc. | Raytheon Company | ||
Booz Allen Hamilton Holding Corporation | Leidos Holdings, Inc. | Thales Group | ||
General Dynamics Corporation |
Leonardo | |||
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Performance targets for the LTIP grants for the three-year performance period vesting in 20162017 were established in 2014,2015, based on the 20142015 Performance Peer Group.
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BAE Systems | Finmeccanica(1) | Lockheed Martin Corporation | ||
The Boeing Company | General Dynamics Corporation | Raytheon Company | ||
Booz Allen Hamilton Holding Corporation | L-3 Communications Holdings, Inc.(2) | Thales Group | ||
(1) Finmeccanica changed its name to Leonardo in 2016 | ||||
(2)L-3 Communications Holdings, Inc. changed its name to L3 Technologies, Inc. in 2016 |
Target Industry Peer Group: Benchmark Executive Compensation Practices
The Compensation Committee compares thebenchmarks our executive compensation of our NEOslevels and practices against a Target Industry Peer Group of 14 companies, as well as against a subset of the Target Industry Peer Group containing six direct peers. Prior to the beginning of the year, the Compensation Committee sets the Target Industry Peer Group and the subset of direct peers used to benchmark compensation for the following year. To identify peer companies for compensation benchmarking purposes, the Compensation Consultant employed an objective criteria-based methodology where:
· | the company was identified as a peer by at least two aerospace and defense peers or proxy advisory services; |
· | the company participated in the annual Aon Hewitt executive compensation study; and |
· | revenues, total employees and market capitalization of the company were broadly similar to those of the Company. |
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While the Target Industry Peer Group is reviewed annually by the Compensation Committee with the Compensation Consultant, our goal is to keep it as consistent as reasonably possible on a year-over-year basis. The companies that comprise the 20162017 Target Industry Peer Group are listed in the following table:
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3M Company | Johnson Controls | |
The Boeing Company(1) | L3 Technologies, Inc.(1) | |
Caterpillar Inc. | Lockheed Martin Corporation(1) | |
Eaton Corporation | Raytheon Company(1) | |
Emerson Electric Company | Rockwell Collins, Inc. | |
General Dynamics Corporation(1) | Textron Inc. | |
Honeywell International Inc.(1) | United Technologies Corporation | |
(1) Included in the subset of six direct peers also used for compensation benchmarking | ||
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It is the Company’s pay philosophy to provide the CEO a compensation package that comprises competitive elements of base salary and target variable pay relative to the Target Industry Peer Group. In 2016,2017, the CEO’s target total direct compensation approximated the median of the Target Industry Peer Group.
Another element of the Company’s pay philosophy is to tie a significant portion of the CEO’s pay to performance. As a result, the CEO’s actual compensation may differ from this market median based on the Company’s actual performance.
In determining the base salary and target variable pay elements for the other NEOs, the Compensation Committee does not set any specific benchmark relative to the Target Industry Peer Group; rather, the Compensation Committee considers several factors in determining their compensation, including executive compensation levels and practices of the Target Industry Peer Group, NEO individual experience, growth in job as demonstrated through sustained performance, leadership impact, retention and pay relative to the CEO. Actual annual incentive awards and long-term incentive award opportunities reflect these factors, as well as Company performance.
Selection of Performance Criteria
Our objective in selecting performance goals for the annual incentive plan and long-term incentive plan is to establish metrics that enhance shareholder value, complement one another in support of strong Company performance, and balance annual and long-term results.
As mentioned, we used the 2016 Performance Peer Group to benchmark our key 2016 financial goals against our industry for purposes of measuring performance.
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COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTSOFOUR PROGRAMS
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Annual Incentive Compensation
Under our shareholder-approved 2002 Incentive Compensation Plan (the Plan), the Compensation Committee approves the annual incentive compensation target payout percentage for each NEO other than the CEO. For the CEO, itsuch percentage is approved by the independent directors of the Board. The Compensation Committee applies the process detailed above to set incentive compensation levels for NEOs.
The target incentive award (Target Bonus)(target bonus) represents a percentage of each NEO’s base salary. Following the completion of the fiscal year, the Target Bonustarget bonus is used by the Compensation Committee, together with its assessment of Company performance againstpre-determined performance criteria, to determine the final bonus award amount.
20162017 Annual Incentive Plan
The 2016 Target Bonus2017 target bonus for the CEO was 180% of base salary, which was unchanged from 2015.2016. For each of the other NEOs, the 2016 Target Bonus2017 target bonus was 100% of base salary, which was also unchanged from 2015.2016. Upon Mr. Pamiljans’ promotion effective April 1, 2017, his target bonus was increased to 100% of base salary. Mr. Pamiljans’ 2017 target bonus and final bonus award were prorated to reflect the time he served in his role as an elected officer and as an appointed officer.
The final bonus award for each NEO was determined by multiplying the Northrop Grumman Company Performance Factor (CPF) by the Target Bonus.target bonus. The CPF can range from 0% to 200% in the annual incentive formula described below.
Annual incentive formulaIncentive Formula for 2016:2017:
The annual incentive payments are designed to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. As a result, the terms of the Plan provide that the maximum potential individual incentive compensation award for a performance year for an officer subject to Section 162(m) shall be limited. Actual payouts for the 2016 performance year were less than the limits set forth under the Plan.
At the end of each year, the CEO conducts an annual performance evaluation for each NEO, other than himself, and then reviews the evaluation with the Compensation Committee. The Compensation Committee reviews Company performance information, as well as the comparison to market data.
The Compensation Committee approves bonus amounts for all NEOs except the CEO, whose annual bonus is recommended by the Compensation Committee to the independent members of the Board for approval. The Compensation Committee has discretion to make adjustments to the annual bonus payouts for NEOs, except the CEO, if it determines such adjustment is warranted. For example, in instances where Company performance has been impacted by unforeseen or unusual events (natural disasters, significant acquisitions or divestitures, etc.)(e.g., the 2017 Tax Act), the Compensation Committee has exercised its authority to increase the final awards (subjectas necessary to limitations under Section 162(m) ofpreserve the Internal Revenue Code).intended incentives and benefits. The Compensation Committee has also adjusted payouts downward in the past despite performance targets having been met when it determined that particular circumstances had a negative impact on the Company but were not reflected in the performance calculation.
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COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTSOFOUR PROGRAMS
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20162017 Annual Incentive Goals and Results
2015 Financial Metrics | Weighting | 2016 Financial Metrics | Weighting | |||||
Pension-adjusted OM Rate* | 35% | Pension-adjusted OM Rate* | 30% | |||||
Free Cash Flow* Conversion Rate | 35% | Cash Flow from Operations Conversion* | 30% | |||||
Pension-adjusted Net Income* | 15% | Pension-adjusted Net Income* Growth | 30% | |||||
Awards(Book-to-Bill) | 15% | Awards(Book-to-Bill) | 10% | |||||
* This metric is anon-GAAP financial measure. For more information, see “Appendix A - Use ofNon-GAAP Financial Measures.” |
2016 Financial Metrics | Weighting | 2017 Financial Metrics | Weighting | |||||
Pension-adjusted OM Rate* | 30% | Pension-adjusted OM Rate* | 1/3 | |||||
Cash Flow from Operations Conversion* | 30% | Cash Flow from Operations Conversion* | 1/3 | |||||
Pension-adjusted Net Income* Growth | 30% | Pension-adjusted Net Income* Growth | 1/3 | |||||
Awards(Book-to-Bill) | 10% | |||||||
* This metric is anon-GAAP financial measure. For more information, see “Appendix A - Use ofNon-GAAP Financial Measures.” |
For the AIP, we use a mix of financial andnon-financial metrics to measure our performance. For 2016,2017, the Compensation Committee modifiedrefined our AIP financial metrics and weightings, reflecting our commitment to investing for and achieving long-term profitable growth; maintaining alignment with shareholders’ interests; and incentivizing top performance against our industry peers. For 2016, theThe Compensation Committee approved fourthe following metrics, that support long-term profitable growth. Three of the metrics, Pension-adjusted OM Rate*, Cash Flow from Operations Conversion* and Pension-adjusted Net Income* Growth are equally weighted at 30%. The fourth metric, Awards(Book-to-Bill), is weighted at 10%. The metrics are defined as follows:1/3:
· | Pension-adjusted OM Rate*: establishes high program performance expectations for the Company and is calculated as OM rate (operating margin divided by sales) before net FAS/CAS pension adjustment* (the difference between pension expense charged to contracts and included as cost in segment operating income in accordance with U.S. Government Cost Accounting Standards (CAS) and pension expense determined in accordance with GAAP (FAS)). |
· | Cash Flow from Operations Conversion*: recognizes the importance of converting net income into cash. The metric is calculated as cash provided by operating activities before theafter-tax impact of discretionary pension contributions* divided by net income. Cash Flow from Operations Conversion* enables management to make capital investment decisions that support long-term profitable growth without impacting performance-based incentive compensation. |
· | Pension-adjusted Net Income* Growth: incentivizes management to achieve relative long-term profitable growth greater than a projected industry growth rate. Pension-adjusted Net Income* Growth is calculated as net income before theafter-tax impact of the net FAS/CAS pension adjustment* and is based on a three-year growth trajectory. |
In addition to thethese financial goals, we establishednon-financial goals have been established to align our objectives with shareholders, customers and employees.all our stakeholders. Performance againstnon-financial metrics can result only in a downward adjustment to the financial metric score. TheFor 2017, we selected the followingnon-financial metrics were selected:metrics:
· | Customer Satisfaction: measured in terms of customer feedback, including customer-generated performance scores, award fees and verbal and written feedback. |
· | Quality: measured using program-specific objectives, including defect rates, process quality, supplier quality, planning quality or other appropriate criteria for program type and phase. |
· | Engagement & Inclusion: measured based on performance at or above the global high performing norm for engagement and inclusion indices and an accountability metric (as reported in a company-wide employee survey). |
· | Diversity: measured in terms of improving representation of females and people of color in all management level positions with respect to internal and external benchmarks. |
· | Safety: measured by total case rate, defined as the number of Occupational Safety & Health Administration recordable injuries as well as by lost work day rate associated with those injuries. |
· | Environmental Sustainability: measured in terms of reductions in absolute greenhouse gas emissions and potable water use consumption, and improvement in solid waste diversion (i.e., waste diverted from landfill disposal). |
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COMPENSATION DISCUSSION AND ANALYSIS | KEY COMPONENTSOFOUR PROGRAMS |
Our AIP provides for payout levels from 0% to 200% of target. The minimum, target and maximum performance levels are derived based on an analysis of the past performance of our Performance Peer Group (Pension-adjusted Net Income* Growth is based on projected market growth rates). Specific values are identified for each metric at selected points in thenon-linear range between minimum and maximum and other values are determined by linear interpolation between these points. No payout is made if performance is below the minimum. Above target payout can be earned only if the Company’s performance exceeds the performance threshold noted in the table below. The
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maximum 200% payout is based upon top quartile past performance of the Performance Peer Group. This structure rewards superior performance by aligning above-target payouts to outperforming our peer benchmarks and provides reduced awards for below target performance. Based on Company performance for the fourthree financial metrics shown in the table below, which have been adjusted to exclude the impact of the 2017 Tax Act, the 2017 CPF was 160%131%. No downward adjustment was made fornon-financial metric performance as the Compensation Committee determined that performance, in aggregate, against thenon-financial goals, met the Company’s stated objectives.
Metric/Goal | Weighting | Performance to Achieve Target Payout | 2016 Performance | 2016 Score | Weighting
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Performance to Achieve
| 2017
| 2017 Score
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Pension-adjusted OM Rate* | 30% | 10.0% | 11.7% | 56% | 1/3
| 10.0%
| 10.5%
| 44%
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Cash Flow from Operations Conversion* | 30% | 135% | 128% | 24% | 1/3
| 145%
| 127%
| 20%
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Pension-adjusted Net Income* Growth | 30% | $1.61B | $2.0B | 60% | 1/3
| $1.67B
| $1.93B
| 67%
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Awards(Book-to-Bill) | 10% | 100% | 138% | 20% | ||||||||||||
Company Performance Factor | 160% | 131%
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* This metric is anon-GAAP financial measure. For more information, see “Appendix A - Use ofNon-GAAP Financial Measures.”
Decisions for 20162017
In February 2017,2018, the Compensation Committee applied the CPF to Mr. Bush’s Target Bonus.target bonus. Based on the CPF, in February 2017,2018, the Committee recommended, and the independent members of our Board approved, a 20162017 annual incentive award of $4,406,400$3,662,000 for Mr. Bush. Based on the CPF, the CEO recommended, and the Compensation Committee approved, the other NEOs’ annual incentive awards.
Name | Target Payout % of Salary | Payout Range % of Salary | Actual Payout % of Salary | Actual Payout (1) | ||||
Wesley G. Bush | 180% | 0% - 360% | 288% | $4,406,400 | ||||
Kenneth L. Bedingfield | 100% | 0% - 200% | 160% | $1,232,000 | ||||
Gloria A. Flach | 100% | 0% - 200% | 160% | $1,272,000 | ||||
Thomas E. Vice | 100% | 0% - 200% | 160% | $1,272,000 | ||||
Kathy J. Warden | 100% | 0% - 200% | 160% | $1,272,000 |
(1) | Ms. Warden participates in OSERP II, which mirrors the benefits provided under the Cash Balance Formula, ERISA 2 and OSERP provisions described above. |
Information on Executives Eligible for Early Retirement
The following NEOs were eligible for early retirement as of December 31, 2017:
· | If Mr. Bush had retired on December 31, |
· | Ms. Flach retired on December 31, 2017. Her total annual pension benefit is $790,646 (based on a commencement date of January 1, 2018) plus a supplemental benefit payable from retirement to age 62 of $3,152. |
· | If Mr. Pamiljans had retired on December 31,
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