The Board of Directors (the “Board” ) of Longs Drug Stores Corporation (the “Company” ) has adopted the following Corporate Governance Guidelines (the “Guidelines” ) to assist the Board in the exercise of its responsibilities and to serve best the interests of the Company and its shareholders. These Guidelines should be interpreted in the context of all applicable laws and the Company's Articles of Incorporation, bylaws and other corporate governance documents. These Guidelines acknowledge the leadership exercised by the Board's standing committees and their chairs and are intended to serve as a flexible framework within which the Board may conduct its business and not as a set of legally binding obligations. The Guidelines are subject to modification from time to time by the Board as the Board may deem appropriate in the best interests of the Company and its shareholders or as required by applicable laws and regulations.
These Guidelines are available on the Company's website at “www.longs.com” and to any shareholder who otherwise requests a copy. The Company's Annual Report on Form 10-K shall state the foregoing.
The Company's Articles of Incorporation provide that the number of directors will be fixed from time to time by the Board, but in no event will be less than three (3) or more than fifteen (15). The Board currently has ten (10) members. The Board believes that seven (7) to twelve (12) directors is an appropriate size based on the Company's present circumstances. The Board also believes that this number of directors permits diversity of experience without hindering effective discussion or diminishing individual accountability. The Board will periodically review the size of the Board, and determine the size that is most effective in relation to future operations.
The Board shall be comprised of a majority of directors who qualify as independent directors (the “Independent Directors” ) under the listing standards of the New York Stock Exchange (the “NYSE” ).
The Governance and Nominating Committee reviews annually the relationships that each director has with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). Following such annual review, only those directors who the Board affirmatively determines have no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company) are considered Independent Directors, subject to additional qualifications prescribed under the listing standards of the NYSE. The basis for any determination that a relationship is not material are published in the Company's annual proxy statement.
The Board selects the Chairman of the Board in accordance with the Company's bylaws. The Chairman shall be the chair of all meetings of the shareholders at which he or she is present and all meetings of the Board at which he or she is present, and shall perform such other duties as may be assigned to the Chairman by the Company's bylaws or the Board.
The Independent Directors select at least annually a lead Independent Director (the “Lead Director” ). The Lead Director: convenes and chairs meetings of the Independent Directors in executive session on a quarterly basis and more often if needed; serves as a communication facilitator for the Board; develops and maintains an alignment of their respective expectations for company performance among the Independent Directors, the Chairman and Chief Executive Officer and Senior Management; presides at all meetings of the Board at which the Chairman is not present, including executive sessions of the Independent Directors; regularly polls the Independent Directors for advice on agenda items for meetings of the Board; serves as a liaison between the Chairman and the Independent Directors; collaborates with the Chairman and Chief Executive Officer in developing the agenda for meetings of the Board and approves such agendas; approves information that is sent to the Board; collaborates with the Chairman and the Chief Executive Officer and the chairs of the standing committees in developing and managing the schedule of meetings of the Board and approves such schedules; collaborates with the Chairman and Chief Executive Officer in developing the budget of the Board; if requested by major shareholders, ensures that he or she is available for consultation and direct communication; and leads the Independent Directors in anticipating and addressing special issues. In performing the duties described above, the Lead Director is expected to consult with the chairs of the appropriate Board committees and solicit their participation in order to avoid diluting the authority or responsibility of such committee chairs. The Lead Director shall also perform such other duties as may be assigned to the Lead Director by the Company's bylaws or the Board. The name of the Lead Director is published along with a means for shareholders to communicate with the non-management directors through the Lead Director.
The non-management directors meet in executive session without management directors or management present on a quarterly basis and more often if needed. The Lead Director chairs such meetings. At least annually, the non-management directors review the Company's implementation of and compliance with its Guidelines and consider such matters as they may deem appropriate at such meetings. Non-management directors are all directors who are not Company officers (as that term is defined in Rule 16a-1(f) under the Securities Act of 1933), including such directors who are not independent by virtue of a material relationship, former status or family membership or for any other reason. In addition, if the non-management directors include directors who are not also Independent Directors, the Independent Directors shall also meet separately at least once per year in executive session. The Lead Director shall have the authority to call meetings of the Independent Directors and non-management directors.
The Governance and Nominating Committee is responsible for reviewing with the Board, on an annual basis, the appropriate characteristics, skills and experience required for the Board as a whole and its individual members. In evaluating the suitability of individual candidates (both new candidates and current Board members), the Governance and Nominating Committee, in recommending candidates for election and considering candidates recommended by shareholders, and the Board, in approving (and, in the case of vacancies, appointing) such candidates, takes into account many factors, including ability to make independent analytical inquiries, general understanding of marketing, finance and other elements relevant to the success of a publicly-traded company in today's business environment, understanding of the Company's business on a technical level, other board service and educational and professional background. Each candidate nominee must also possess fundamental qualities of intelligence, honesty, good judgment, high ethics and standards of integrity, fairness and responsibility. The Board evaluates each individual in the context of the Board as a whole, with the objective of assembling a group that can best perpetuate the success of the business and represent shareholder interests through the exercise of sound judgment using its diversity of experience in these various areas. In determining whether to recommend a director for re-election, the Governance and Nominating Committee also considers the director's past attendance at meetings and participation in and contributions to the activities of the Board as well as the criteria set forth in such Committee's charter.
Directors will stand for election by the shareholders of the Company at the Company's annual meeting as provided in the Company's bylaws. Each year, at the annual meeting, the Board will recommend a slate of directors for election by the shareholders. In accordance with the bylaws of the Company, the Board is also responsible for filling vacancies or newly-created directorships on the Board that may occur between annual meetings of shareholders. The Governance and Nominating Committee is responsible for identifying, screening and recommending candidates to the entire Board for Board membership. The Governance and Nominating Committee considers director candidates recommended by shareholders using the same criteria it uses for evaluating other candidates provided the shareholder has given notice to the Secretary of the Company at the principal offices of the Company and such notice is received by the Company not less than 90 days prior to the annual meeting of shareholders.
The Governance and Nominating Committee and the Board will take into account the nature of and time involved in a director's service on other boards and/or committees in evaluating the suitability of individual director candidates and current directors and in making its recommendations to the Company's shareholders. In that regard, Board members may not serve on boards of more than four other public companies, except that in special circumstances the Governance and Nominating Committee may approve service on one additional board of a publicly traded company if the Committee determines that the director's service would not adversely affect the service of the director on the Company's Board. Directors who also serve as CEOs of publicly traded companies may not serve on more than two other boards of a public company.
Any Board member considering service on the board of a public company where he or she is not currently serving shall notify the Chairman of he Board, the Lead Director, and the Chair of the Governance and Nominating Committee before accepting such service or standing for election.
Due to the demanding nature of service on the Company's Audit and Finance Committee, the members of the Company's Audit and Finance Committee may not serve on the audit committees of the boards of directors of more than two other public companies at the same time as they are serving on the Company's Audit and Finance Committee, unless the Board determines in advance that such simultaneous service would not impair the ability of such member to effectively serve on the Company's Audit and Finance Committee and the Company discloses such determination in the Company's annual proxy statement.
Service on other boards and/or committees must be consistent with the Company's conflict of interest policies set forth below.
When a director, including any director who is currently an officer or employee of the Company, resigns or materially changes his or her position with his or her employer, such director should submit his or her offer of resignation from the Board, which the Board may accept, reject, or take any other appropriate actions, taking into account the recommendation of the Governance and Nominating Committee.
As each director is subject to election by shareholders, the Board does not believe it is in the best interests of the Company to establish term limits. Term limits may cause the Company to lose the contribution of directors who have been able to develop, over a period of time, increasing insight into the Company's business and therefore can provide an increasingly significant contribution to the Board.
It is the general policy of the Company that no director may stand for election to the Board after his or her 72nd birthday. In exceptional cases, a director may be nominated for re-election after reaching age 72 when the Governance and Nominating Committee and the Board of Directors believes that it would be in the best interests of the Company's stockholders and the Company for the individual to continue in his or her position. In such cases, there must exist substantial evidence that the candidate possesses unique skills or experiences that justify an exception to the policy.
The business and affairs of the Company are managed under the general direction of the Board, including through one or more of its committees as set forth in the bylaws and committee charters. Each director is expected to spend the time and effort necessary to properly discharge his or her responsibilities. These include, but are not limited to:
(1) overseeing the conduct of the Company's business to evaluate whether the business is being properly managed;
(2) reviewing and, where appropriate , approving the Company's major financial objectives, plans and actions;
(3) reviewing and, where appropriate, approving major changes in, and determinations of other major issues respecting, the appropriate auditing and accounting principles and practices to be used in the preparation of the Company's financial statements;
(4) reviewing and, where appropriate , approving major changes in, and determinations under the Company's Guidelines, Code of Business Conduct and Ethics and other Company policies;
(5) reviewing and, where appropriate, approving actions to be undertaken by the Company that would result in a material change in the financial structure or control of the Company, the acquisition or disposition of any businesses or asset(s) material to the Company or the entry of the Company into any major new line of business;
(6) with respect to the Independent Directors, and as directed by the Board together with other relevant Board committees, regularly evaluating the performance and approving the compensation of the Chief Executive Officer;
(7) selecting the Chief Executive Officer of the Company;
(8) planning for succession with respect to the position of Chief Executive Officer and monitoring management's succession planning for other key executives; and
(9) helping to ensure that the Company's business is conducted with the highest standards of ethical conduct and in conformity with applicable laws and regulations.
The Company's executive officers shall not receive additional compensation for their service as directors. Senior management of the Company and/or outside consultants, at the discretion of the Compensation Committee, shall report once a year to the Compensation Committee regarding the status of the Company's non-management director compensation in relation to other U.S. companies of comparable size and the Company's competitors. Such report shall include consideration of both direct and indirect forms of compensation to the Company's non-management directors, including any charitable contributions by the Company to organizations in which a non-management director is involved. Following a review of the report, the Compensation Committee will recommend any changes in director compensation to the Chairman of the Board, which changes shall be approved or disapproved by the Board after a full discussion.
Director fees (including expense reimbursement and equity awards) are the sole form of compensation that non-management directors, including members of the Audit and Finance Committee, may receive from the Company.
Directors are expected to avoid any action, position or interest that conflicts with the interests of the Company or gives the appearance of a conflict. If an actual or potential conflict of interest develops, the director shall immediately report the matter to the Chairman of the Board. Any significant conflict must be resolved or the director must resign. If a director has a personal interest in a matter before the Board, the director shall disclose the interest to the Board, excuse himself or herself from discussion on the matter and not vote on the matter. In addition, at least annually each director shall submit a signed questionnaire which assesses areas where potential conflicts may arise or have arisen. Directors must also abide by the requirements set forth below under "Related Party Transactions."
The Company provides new directors with a director orientation program to familiarize them with, among other things, the Company's business, strategic plans, significant financial, accounting and management issues, compliance programs, conflicts policies, Code of Business Conduct and Ethics, Guidelines, principal officers, internal auditors and independent auditors. Directors are expected to make time to complete such orientation.
The Company makes available to directors continuing education programs, and each director is expected to participate in such programs, as management or the Board determines desirable.
The Board believes that management speaks for the Company. Each director shall refer all inquiries from institutional investors, the press or customers to management. Individual Board members may, from time to time at the request of the management, meet or otherwise communicate with various constituencies that are involved with the Company. If comments from the Board are appropriate, they should, in most circumstances, come from the Chairman of the Board. Shareholders may communicate with the Board or individual members of the Board by sending written or email communication to the Secretary of the Company, who collects and forwards all such communications, as appropriate, to the Board or specified Board member.
The Board shall have complete access to Company management in order to ensure that directors can ask any questions and receive all information necessary to perform their duties.
The Board committees may hire independent advisors as set forth in their applicable charters. The Board as a whole shall have access to such advisors and such other independent advisors that the Company retains or that the Board considers necessary to discharge its responsibilities.
Annually, the Governance and Nominating Committee oversees an annual assessment by the Board of the Board's performance. The Governance and Nominating Committee is responsible for establishing the evaluation criteria and implementing the process for such evaluation, as well as considering other corporate governance principles that may, from time to time, merit consideration by the Board.
The assessment should include a review of any areas in which the Board or management believes the Board can make a better contribution to the governance of the Company, as well as a review of the committee structure and an assessment of the Board's compliance with the principles set forth in these Guidelines. The purpose of the review will be to improve the performance of the Board as a unit. The Governance and Nominating Committee utilizes the results of the Board evaluation process in assessing and determining the characteristics and critical skills required of prospective candidates for election to the Board.
The Board meets at least four (4) times annually. In addition, special meetings may be called from time to time as determined by the needs of the business. It is the responsibility of the directors to attend meetings.
A director is expected to spend the time and effort necessary to properly discharge his or her responsibilities. Accordingly, a director is expected to prepare for and attend meetings of the Board, meetings of all committees on which the director sits (including separate meetings of non-management directors and the Independent Directors) and the annual meeting of shareholders, with the understanding that, on occasion, a director may be unable to attend a meeting. A director who is unable to attend a meeting in person is expected to notify the chair of the Board or the Chairman of the appropriate committee in advance of such meeting, and, whenever possible, participate in such meeting via teleconference.
The Board encourages the Chairman of the Board or the chair of any committee to bring Company management and outside advisors or consultants from time to time into Board and/or committee meetings to (i) provide insight into items being discussed by the Board which involve the manager, advisor or consultant, (ii) make presentations to the Board on matters which involve the manager, advisor or consultant and (iii) bring managers with high potential into contact with the Board. Attendance of non-directors at Board meetings is at the discretion of the Board.
The Chairman establishes the agenda for each Board meeting with approval from the Lead Director and input from the management and, as necessary or desired, from the other directors.
Information regarding the topics to be considered at a meeting is essential to the Board's understanding of the business and the preparation of the directors for a productive meeting. To the extent feasible, the meeting agenda and any written materials relating to each Board meeting will be distributed to the directors sufficiently in advance of each meeting to allow for meaningful review of such agenda and materials by the directors. Directors are expected to have reviewed and be prepared to discuss all materials distributed in advance of any meeting.
The Board currently has three standing committees, each composed entirely of Independent Directors, as set forth in the committee charters. From time to time, the Board may form a new committee, disband a current committee, or consolidate committees depending upon the circumstances.
The following sets forth the current Board committees and a summary of their responsibilities.
(1) Audit and Finance Committee. The Audit and Finance Committee consists of at least three (3) members and reviews the Company's audit processes as well as the work of the Company's internal accounting staff and independent auditors. This committee has the authority to appoint and fire the Company's independent auditors and to approve any significant non-audit relationship with the independent auditors. This committee performs its duties as assigned by the Board in compliance with the Company's bylaws and the committee's charter.
(2) Compensation Committee. The Compensation Committee consists of at least two (2) members and reviews and approves the Company's goals and objectives relevant to compensation, stays informed as to market levels of compensation and, based on evaluations submitted by management and/or outside consultants, recommends to the Board's independent members compensation levels and systems for Board and the Chief Executive Officer that correspond to the Company's goals and objectives. The committee also produces an annual report on executive compensation for inclusion in the Company's proxy statement, in accordance with applicable rules and regulations. This committee performs its duties as assigned by the Board in compliance with the Company's bylaws and the committee's charter.
(3) Governance and Nominating Committee. The Governance and Nominating Committee consists of at least three (3) members and is responsible for recommending to the Board individuals to be nominated as directors and committee members. This includes evaluating new candidates as well as evaluating current directors. This committee is also responsible for developing and recommending to the Board the Guidelines, as well are reviewing and recommending revisions to such Guidelines on a regular basis. This committee also performs other duties as are described in these Guidelines and prepares any disclosure of the nominating process required by applicable rules and regulations. This committee performs its duties as assigned by the Board in compliance with the Company's bylaws and the committee's charter.
Based on the recommendations of the Governance and Nominating Committee, the Board appoints committee members and committee chairs according to criteria set forth in the applicable committee charter and such other criteria that the Board determines to be appropriate in light of the responsibilities of each committee. The Board considers experience gained through continuity of service to be valuable, and therefore, Committee membership and the position of committee chair will not be rotated on a mandatory basis unless the Board determines that rotation is in the best interest of the Company.
Each committee meets at least the minimum number of times set forth in such committee's charter. In addition, special meetings may be called by the chair of the committee from time to time. It is the responsibility of the directors to attend the meetings of the committees on which they serve.
The chair of each committee, in consultation with the appropriate members of the committee and any person or persons appointed by Management as liaison to such committee, develops his or her committee's agenda.
Annually, each committee shall review its performance and charter and recommend to the Board any changes it deems necessary.
Non-management members of the Board, with input from the Chief Executive Officer, shall annually establish the performance criteria (including both long-term and short-term goals) to be considered in connection with the Chief Executive Officer's next annual performance evaluation. Annually, the Chief Executive Officer shall make a presentation or furnish a written report to the Board indicating his or her progress against such established performance criteria. Thereafter, with the Chief Executive Officer absent, the Board shall meet to review the Chief Executive Officer's performance. The results of the review and evaluation shall be communicated to the Chief Executive Officer by the Lead Director and the Chair of the Compensation Committee.
The Governance and Nominating Committee shall work with the Chief Executive Officer to review, maintain and revise, if necessary, the Company's succession plan upon the Chief Executive Officer's retirement and/or in the event of an unexpected occurrence. The Chief Executive Officer shall report annually to the Board on succession planning for the Chief Executive Officer and senior management positions, including a discussion of assessments, leadership development plans and other relevant factors.
The Board shall determine that a satisfactory system is in effect for the education, development and orderly succession of senior and mid-level managers throughout the Company. In addition, the Company is committed to providing equal opportunity and fair treatment to all individuals on the basis of merit, without discrimination because of race, color, religion, national origin, sex (including pregnancy), sexual orientation, age, disability, veteran status or other characteristics protected by law.
Non-employee members of the Company’s Board and Company executives at the Senior Vice President and higher level are subject to the following guidelines. Each non-employee Board member and Company executive is encouraged to achieve and maintain the applicable level of Company stock ownership shown below utilizing the methodology described:
Value of Company Stock
Non-Employee Board Member 3x Non-Employee Director
Annual Cash Retainer
Chairman and/or CEO and/or President 3x Base Salary
Executive or Senior Vice President 2x Base Salary
To achieve these stock ownership objectives, each such non-employee Board member and Company executive is expected to retain 75% of his or her profit shares acquired upon exercise of options, vesting of restricted stock or receipt of performance shares during the time he or she occupies the position indicated. “Profit shares” are the shares acquired through the exercise of options to purchase Company stock, the vesting of restricted stock or the earning of performance shares, in each case that are equal in value on the date of acquisition to the excess of the fair market value of such shares on the date of acquisition over any exercise price and taxes paid or to be paid as a result of the exercise of such options or receipt of such restricted stock or performance shares. Non-employee Board members and Company executives are not required to continue to retain shares purchased with their own resources, shares acquired prior to their becoming a director or executive, or shares acquired as the result of the exercise of options granted prior to their becoming a director or Company executive covered by these guidelines.
In order to determine whether a non-employee Board member of Company executive is permitted to sell shares free of the retention requirement, at the time of the proposed sale the individual’s ownership shall be measured by looking at the then effective base salary rate (or annual cash retainer in the case of non-employee Board members) and the then current Company stock price. Shares in excess at this level may be sold.
(1) Policy. It is the policy of the Board that all transactions with Related Parties (“Related Party Transactions”), as defined in these Guidelines, shall be subject to approval or ratification in accordance with the procedures set forth below.
(2) Procedures. The Governance and Nominating Committee shall review the material facts of all Related Party Transactions that require its approval and either approve or disapprove of the entry into the Related Party Transaction, subject to the exceptions described below. If advance approval by the Governance and Nominating Committee of a Related Party Transaction is not feasible, then the Related Party Transaction shall be considered and, if the Committee determines it to be appropriate, ratified at the next regularly scheduled meeting of the Governance and Nominating Committee. In determining whether to approve or ratify a Related Party Transaction, the Governance and Nominating Committee will take into account, among other factors it deems appropriate, whether the Related Party Transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the Related Person’s interest in the transaction.
The Governance and Nominating Committee has reviewed the Related Party Transactions described below in "Standing Pre-Approval for Certain Related Party Transactions" and determined that each of the Related Party Transactions described therein shall be deemed to be pre-approved or ratified (as applicable) by the Governance and Nominating Committee under the terms of this policy. In addition, the Board has delegated to the Chair of the Governance and Nominating Committee the authority to pre-approve or ratify (as applicable) any Related Party Transaction in which the aggregate amount involved is expected to be less than $1 million. In connection with each regularly scheduled meeting of the Governance and Nominating Committee, a summary of each new Related Party Transaction deemed pre-approved pursuant to paragraph c. or d. under "Standing Pre-Approval for Certain Related Party Transactions" below and each new Related Party Transaction pre-approved by the Chair in accordance with this paragraph shall be provided to the Committee for its review.
No director shall participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the director shall provide all material information concerning the Related Party Transaction to the Governance and Nominating Committee.
If a Related Party Transaction will be ongoing, the Governance and Nominating Committee may establish guidelines for the Company’s management to follow in its ongoing dealings with the Related Party. Thereafter, the Governance and Nominating Committee, on at least an annual basis, shall review and assess ongoing relationships with the Related Party to see that they are in compliance with the Committee’s guidelines and that the Related Party Transaction remains appropriate.
(3) Definitions. A "Related Party Transaction" is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including any indebtedness or guarantee of indebtedness) in which (1) the aggregate amount involved will or may be expected to exceed $100,000 in any calendar year, (2) the Company is a participant, and (3) any Related Party has or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of another entity).
A "Related Party" is any (a) person who is or was (since the beginning of the last fiscal year for which the Company has filed a Form 10-K and proxy statement, even if they do not presently serve in that role) an executive officer, director or nominee for election as a director, (b) greater than 5 percent beneficial owner of the Company’s common stock, or (c) immediate family member of any of the foregoing. Immediate family member includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law and anyone residing in such person’s home (other than a tenant or employee).
(4) Standing Pre-Approval for Certain Related Party Transactions. The Governance and Nominating Committee has reviewed the types of Related Party Transactions described below and determined that each of the following Related Party Transactions shall be deemed to be pre-approved by the Committee, even if the aggregate amount involved will exceed $100,000.
a. Employment of executive officers. Any employment by the Company of an executive officer of the Company if:
(i) the related compensation is required to be reported in the Company’s proxy statement under Item 402 of the Securities and Exchange Commission’s ("SEC’s") compensation disclosure requirements (generally applicable to "named executive officers"); or
(ii) the executive officer is not an immediate family member of another executive officer or director of the Company, the related compensation would be reported in the Company’s proxy statement under Item 402 of the SEC’s compensation disclosure requirements if the executive officer was a "named executive officer," and the Company’s Compensation Committee approved (or recommended that the Board approve) such compensation.
b. Director compensation. Any compensation paid to a director if the compensation is required to be reported in the Company’s proxy statement under Item 402 of the SEC’s compensation disclosure requirements;
c. Certain transactions with other companies. Any transaction with another company with which a Related Person’s only relationship is as an employee (other than an executive officer), director or beneficial owner of less than 10% of that company’s shares, if the aggregate amount involved does not exceed the greater of $1,000,000 or two percent of that company’s total annual revenues;
d. Certain Company charitable contributions. Any charitable contribution, grant or endowment by the Company to a charitable organization, foundation or university at which a Related Person’s only relationship is as an employee (other than an executive officer) or a director, if the aggregate amount involved does not exceed the lesser of $1,000,000 or two percent of the charitable organization’s total annual receipts;
e. Transactions where all stockholders receive proportional benefits. Any transaction where the Related Person’s interest arises solely from the ownership of the Company’s common stock and all holders of the Company’s common stock received the same benefit on a pro rata basis (e.g. dividends).
f. Transactions involving competitive bids. Any transaction involving a Related Party where the rates or charges involved are determined by competitive bids.
g. Regulated transactions. Any transaction with a Related Party involving the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority.
h. Certain banking-related services. Any transaction with a Related Party involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services.