• Chart: Board Committees

Two new members have joined the Microsoft board of directors, bringing the total number of directors to 10. Former AT&T Vice Chairman Charles Noski and BMW Chairman Helmut Panke add geographic diversity and business experience and increase the ratio of outsiders to insiders, making it easier for the board to overrule the company's executives to protect shareholder interests, if necessary. The additions cap a busy year for the board, which also established two new committees, evaluated and approved a major change to equity-based compensation, and ratified new standards of conduct for Microsoft employees.

Strengthening the Board

A board of directors is supposed to ensure that a company's executives are acting in the best interests of its shareholders. Boards with a high ratio of outsiders (members who have no formal connection to the company outside board membership) to insiders are more likely to be an effective forum to discuss and evaluate executive decisions, rather than serving as a rubber stamp.

Most high-profile technology companies have boards with eight to 12 members and no more than three insiders. But in late 2000, when Microsoft Co-founder Paul Allen and Hewlett-Packard Chairman Richard Hackborn stepped down from the board, Microsoft had only six board members, three of whom—Chairman Bill Gates, CEO Steve Ballmer, and former Microsoft President Jon Shirley—could be considered insiders.

Over the last three years, Microsoft's board has addressed this problem by adding four outsiders. Nominated by the board in Sept. 2003 and approved by shareholders on Nov. 11, Noski and Panke have significant business experience in companies that, like Microsoft, rely heavily on technological innovation and intellectual property, but that do not compete directly with Microsoft. Panke also lets Microsoft CEO Ballmer make good on his June 2001 promise to employees that Microsoft would add one new board member from outside the U.S.—a potentially important factor as the company attempts to increase its presence in Europe (particularly in business management applications) and faces increasing scrutiny from the European Union over its business practices.

Noski and Panke follow two other outsiders who joined the board in 2001: Raymond Gilmartin, the CEO of pharmaceutical company Merck, and James Cash, Jr., a Harvard Business School professor. (Cash has since retired from his professorship but was asked to remain on the board.) Other outsiders include former U.S. Secretary of Labor Ann McLaughlin Korologos, who joined the board in 2000, former Simpson Timber Chairman William Gary Reed, who joined in 1987, and venture capitalist and founding board member David Marquardt.

According to the company's corporate governance guidelines, an "appropriate" board size is eight to 10 members, suggesting that no more board members will be added unless a current member steps down. The guidelines suggest that board members must offer to step down if their employment status changes.

Filling Committees

The additions will also help the board fulfill new duties. Since late 2002, Microsoft's board has added two new committees: an Antitrust Compliance Committee, which was mandated by Microsoft's Nov. 2002 settlement with the U.S. Department of Justice (DoJ) and keeps tabs on Microsoft's internal processes for obeying the settlement and avoiding future antitrust violations, and a Governance and Nominating Committee, which finds potential new board members and oversees the company's corporate governance guidelines.

The board also has an Audit Committee to oversee accounting procedures, a Compensation Committee to determine executive pay and approve equity-based compensation for all employees, and a Finance Committee to identify financial opportunities and capital requirements. All five committees consist almost exclusively of outsiders. (For more details, see the chart "Board Committees".)

In addition, calendar year 2003 has been extremely busy—the board ratified a major change to the employee stock plan and adopted new standards of business conduct that apply to all Microsoft employees.

Given this activity, the outsiders on the board may have felt overburdened. The addition of Noski and Panke and their appointment to multiple committees will help alleviate this strain—no board member now serves on more than two committees, whereas Cash, Gilmartin, and Korologos used to serve on three.

Resources

More details about the composition and responsibilities of Microsoft's board of directors, including the charter and membership of each committee and the recently revised standards of business conduct, are available at www.microsoft.com/msft/corpinfo.mspx.

For background on the changes to the employee stock plan, see the sidebar "Equity Compensation Changed" on page 33 of the Aug. 2003 Update.