Notice of Annual Shareholders Meeting and
Proxy Statement 2017
November 29, 2017 8:00 a.m. Pacific Time		Meydenbauer Center 11100 NE 6th Street Bellevue, Washington 98004

 

Whether or not you attend the Annual Meeting, it is important that your shares be represented and voted at the meeting. We urge you to promptly vote and submit your proxy via the Internet, by phone, or by signing, dating, and returning the enclosed proxy card in the enclosed envelope. If you attend the Annual Meeting, you can vote in person even if you previously submitted your proxy.

This year’s shareholder question and answer session will include both live questions and questions submitted in advance. You may submit a question in advance of the meeting at www.proxyvote.com after logging in with the control number found next to the label “Control Number” for postal mail recipients or next to the field labeled “Control Number” within the body of your email. We will respond to you by email if your online question isn’t answered during the meeting.

For those who can’t attend in person, we again are offering a virtual shareholder meeting in which you can view the meeting, submit questions, and vote online at www.microsoft.onlineshareholdermeeting.com . We will also provide a live webcast of the Annual Meeting from the Microsoft Investor Relations website at www.microsoft.com/investor . A transcript with video and audio of the entire Annual Meeting will be available on the Investor Relations website after the meeting. We hope this will allow those who cannot attend the meeting in person to hear Microsoft executives discuss the past year’s results and our future opportunities. In addition, we make available at our Investor Relations website a variety of information for investors. Our goal is to maintain the Investor Relations website as a portal through which investors can easily find pertinent information about us.

On behalf of the Board of Directors, thank you for your continued investment in Microsoft. We look forward to greeting as many of you as possible.

Sincerely,

 

John W. Thompson Independent Chairman		Satya Nadella Chief Executive Officer

						October 16, 2017
Letter from the Board of Directors						Dear Shareholder,     On behalf of the Board of Directors and management, we want to thank you for your continued investment in Microsoft. With this proxy filing, we intend to address the most recent developments at Microsoft that demonstrate our ongoing commitment to strong corporate governance.
						Digital transformation   One of the Board’s key responsibilities is overseeing strategy. At its core, Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. The Company’s strategy is to build best-in-class platforms and productivity services for an intelligent cloud and an intelligent edge infused with artificial intelligence. In this era of digital transformation, as Microsoft continues to transform its business, we work with CEO Satya Nadella and his senior leadership team to adjust plans as needed to respond to a dynamically changing environment.
						Board oversight of corporate social responsibility   Microsoft’s commitment to achieving its mission extends beyond products and services. It also informs the Company’s policies and business practices, and commitment to helping address economic, social, and environmental issues around the world. Microsoft’s approach - in important areas like energy usage, data privacy, and diversity and inclusion - is always grounded in its mission and values.   The Regulatory and Public Policy Committee of the Board leads oversight of Microsoft’s corporate social responsibility (“CSR”). The Committee’s charter includes reviewing and providing guidance on policies and programs related to:
						•  Human rights •  Environmental sustainability •  Supply chain management		•  Political activities & expenditures •  Philanthropy
						Board composition and refreshment   As part of our ongoing commitment to creating a balanced Board with diverse viewpoints and deep industry expertise, we regularly add new directors to infuse new ideas and fresh perspectives in the boardroom.   In 2017, we welcomed Reid Hoffman and Hugh Johnston to the Board. Mr. Hoffman, who joined in March, is the co-founder and former CEO of LinkedIn and a partner at Greylock Partners. Mr. Johnston, who joined in September, is Vice Chairman and Chief Financial Officer of PepsiCo. We are also pleased to announce the nominations of Penny Pritzker and Arne Sorenson for election to the Board at our November 29 Annual Meeting. Ms. Pritzker is founder and chairman of PSP Capital and the former U.S. Secretary of Commerce. Mr. Sorenson is President and Chief Executive Officer of Marriott International, Inc. All are accomplished business leaders with significant experience directly relevant to Microsoft’s strategic vision and business strategies.   Mason Morfit is not seeking re-election and will end his Board service in November. We thank Mr. Morfit for his many contributions.   Though we still have more work to do, our Board nominees continue to be more diverse than ever; seven of fourteen nominees are either female, nationally, or ethnically diverse.

 

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				Effective July 2017, we adopted a new board tenure policy. Since we first adopted our Corporate Governance Guidelines, it has been our intention to maintain a board with backgrounds and experiences that match the evolution of the Company. In keeping with this mindset, we adopted a board tenure policy that targets an average tenure of ten years or less for the Board’s independent directors as a group. This approach strikes a balance between retaining directors with deep knowledge of the Company while adding directors who bring a fresh perspective.   Incentive compensation changes   We know from our shareholder engagement that investors favor incentive compensation tied to specific performance measures that are aimed at driving long-term performance and value creation. In fiscal year 2017, we completed the steps described in last year’s Proxy Statement so that performance-based pay is aligned with key strategic opportunities, business results, and shareholder returns. We adopted pre-established financial metrics to formulaically determine 50% of the annual cash incentive for all executive officers; we aligned the metrics for our performance stock awards with our three strategic ambitions, reducing overlap with the annual bonus; and we reduced the maximum award levels for performance stock awards.   Shareholder engagement   We are committed to using technology to enhance our external relations and communications with our shareholders and other stakeholders. We work closely with our partners to help pioneer innovative technology solutions such as using an online platform for hosting proxy statements to deliver an interactive version through the Microsoft Investor Relations website.   In addition to the proxy statement and our virtual shareholder meetings, Microsoft’s director video series is another channel we offer to help shareholders understand the unique skills and perspectives that each director brings to the board. In the most recent installment, Sandra Peterson shares her thoughts on how Microsoft’s leadership is reinvigorating our Company culture, the power of cloud technology in healthcare, and how diversity in the workplace is always a smart business decision. The complete series can be viewed on our website at https://aka.ms/DirectorVideoSeries .   Thank you for the trust you place in us and your continued investment in our vision for the future. We appreciate the opportunity to serve Microsoft on your behalf.   Sincerely,   Your Board of Directors

 

2017 PROXY STATEMENT   iii

Notice of 2017 Annual Shareholders Meeting

 

Date				November 29, 2017
Time				8:00 a.m. Pacific Time
Place				Meydenbauer Center, 11100 NE 6th Street, Bellevue, Washington 98004
Record date				September 29, 2017. Only shareholders of record at the close of business on the record date are entitled to receive notice of, and to vote at, the Annual Meeting.
Proxy voting				Make your vote count. Please vote your shares promptly to ensure the presence of a quorum at the Annual Meeting. Voting your shares now via the Internet, by telephone, or by signing, dating, and returning the enclosed proxy card or voting instruction form will save the expense and extra work of additional solicitation. If you wish to vote by mail, we have enclosed an addressed envelope, postage prepaid if mailed in the United States. Submitting your proxy now will not prevent you from voting your shares at the Annual Meeting, as your proxy is revocable at your option. We are requesting your vote to:
Items of business				•  Elect the 14 director nominees named in this Proxy Statement •  Approve, on a non-binding advisory basis, the compensation paid to our named executive officers (the “say-on-pay” vote) •  Vote, on a non-binding advisory basis, on the frequency (i.e., every one, two, or three years) of holding the say-on-pay vote •  Ratify the selection of Deloitte & Touche LLP as our independent auditor for fiscal year 2018 •  Approve material terms of the performance goals under the Microsoft Corporation Executive Incentive Plan •  Approve the Microsoft Corporation 2017 Stock Plan •  Transact other business that may properly come before the Annual Meeting
Virtual meeting				You also may vote at the Annual Meeting via the Internet by visiting www.microsoft.onlineshareholdermeeting.com and following the instructions.
Admission to meeting				Proof of share ownership will be required to enter the Annual Meeting. See Part 6 – “Information about the meeting” for details.

 

Important notice regarding the availability of proxy materials for the Annual Meeting to be held on November 29, 2017 . Our 2017 Proxy Statement and Annual Report to Shareholders are available at www.microsoft.com/investor .

By order of the Board of Directors

 

 

John A. Seethoff

Secretary

Redmond, Washington

October 16, 2017

The use of cameras at the Annual Meeting is prohibited and they will not be allowed into the meeting or any other adjacent areas, except by credentialed media. We realize that many mobile phones have built-in cameras; while these phones may be brought into the venue, the camera function may not be used at any time.

 

2017 PROXY STATEMENT   v

Proxy Statement table of contents

 

Proxy summary													1
1			Corporate governance at Microsoft							Corporate governance principles and practices			7
										Our corporate governance cycle promotes effective shareholder engagement			7
										Annual corporate governance cycle			7
										Our progressive corporate governance framework			8
										We have an independent Chairman of the Board			8
										Our Board is independent			9
										We have independent Board committees with appropriate expertise			9
										We have progressive shareholder rights			9
										Our approach to risk oversight			10
										Key policies ensure accountability and alignment with shareholder interests			10
										Directors receive orientation and continuing education			10
										Board and committees annually evaluate their effectiveness			10
										Our approach to corporate social responsibility			10
										Political contributions transparency			12
										How to communicate with our Board			12
2			Board of Directors							Proposal 1: Election of directors			13
										Director selection and qualifications			13
										We select Board members through a disciplined process			13
										Board membership criteria			14
										Key board qualifications, expertise, and attributes			15
										Shareholder recommendations and nominations of director candidates			16
										Our director nominees			17
										Director independence			24
										Director attendance			24
										Board committees			25
										Audit Committee			25
										Compensation Committee			26
										Governance and Nominating Committee			27
										Regulatory and Public Policy Committee			27
										Director compensation			28
										Compensation structure for directors			28
										Fiscal year 2017 director compensation			29
										Certain relationships and related transactions			30

 

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3			Named executive officer compensation							Proposal 2: Advisory vote to approve named executive officer compensation			31
										Statement in support			31
										Compensation discussion and analysis			32
										Section 1 – Executive compensation overview			33
										Shareholder feedback considered in evolution of pay program			33
										Annual compensation components			34
										Section 2 – Fiscal year 2017 compensation decisions			38
										Business results			38
										Decisions			38
										Fiscal year 2017 base salaries			38
										Cash incentive awards			38
										Fiscal year 2017 stock awards			42
										Section 3 – Fiscal year 2017 compensation design process			43
										Executive compensation program design			43
										Target annual compensation mix			44
										Paying competitively			44
										Technology labor market			45
										Scope of executive roles			45
										Establishing compensation opportunities			45
										Independent compensation consultant			46
										Section 4 – Other compensation policies and information			46
										No significant executive benefits and perquisites			46
										Limited post-employment compensation			46
										Strong clawback policy			47
										Robust stock ownership policy			48
										Derivatives trading, hedging, and pledging prohibited			48
										Deductibility of executive compensation			48
										Annual compensation risk assessment			49
										Compensation Committee report			50
										Fiscal year 2017 compensation tables			50
										Summary compensation table			50
										Grants of plan-based awards			52
										Outstanding equity awards at June 30, 2017			53
										Stock vested			54
										Non-qualified deferred compensation			54
										Equity compensation plan information			55
										Compensation Committee interlocks and insider participation			55
										Stock ownership information			55
										Principal shareholders			57
										Section 16(a) – beneficial ownership reporting compliance			57
										Proposal 3: Advisory vote on frequency of advisory vote on executive compensation			57

 

2017 PROXY STATEMENT   vii

4			Audit Committee matters							Proposal 4: Ratify Deloitte & Touche LLP as independent auditor for fiscal year 2018			58
										Audit Committee report			58
										Charter and responsibilities			58
										Fiscal year 2017 activity			58
										Fiscal year 2017 financial statements			59
										Independent auditor tenure and rotation			59
										Independence and performance of outside audit firm			59
										Recommendation of Deloitte & Touche for fiscal year 2018			60
										Fees billed by Deloitte & Touche			60
										Audit fees			61
										Audit-related fees			61
										Tax fees			61
										All other fees			61
										Policy on Audit Committee pre-approval of audit and permissible non-audit services of independent auditor			61
5			Other management proposals							Proposal 5: Approve material terms of the performance goals under the Microsoft Corporation Executive Incentive Plan			62
										Code section 162(m) approval			62
										Description of the Incentive Plan			63
										Federal income tax consequences			65
										New plan benefits			65
										Proposal 6: Approve the Microsoft Corporation 2017 Stock Plan			66
										Burn rate and overhang			67
										Description of the 2017 Stock Plan			69
										Federal income tax consequences			73
										New plan benefits			75
6			Information about the meeting							Proxy materials are available on the Internet			76
										Proof of ownership required for attending meeting in person			76
										Participating in electronic meeting			76
										Soliciting proxies			77
										Householding			77
										Election of directors			77
										Voting procedures			77
										Tabulation of votes			77
										Majority vote standard for election of directors			77
										Vote required; effect of abstentions and broker non-votes			78
										Vote confidentiality			78
										Where to find more proxy voting information			79
										Where to find our corporate governance documents			79
										Proposals by shareholders for 2018 annual meeting			79
										Other business			80
Annex A — Reconciliation of non-GAAP and GAAP financial measures													81
Annex B — Microsoft Corporation Executive Incentive Plan													82
Annex C — Microsoft Corporation 2017 Stock Plan													86
Downtown Bellevue driving directions and parking													93

 

viii

 

2017 PROXY STATEMENT   1

 

2

 

2017 PROXY STATEMENT   3

 

4

 

2017 PROXY STATEMENT   5

 

Note about forward-looking statements
		This Proxy Statement includes estimates, projections and statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including this Proxy Summary and Part 3 – “Named executive officer compensation.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Management’s Discussion and Analysis and Results of Operations” sections of our Forms 10-K and 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

 

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1. Corporate governance at Microsoft

 

 

Corporate governance principles and practices

Our corporate governance cycle promotes effective shareholder engagement –  Microsoft believes effective corporate governance includes regular, constructive conversations with our shareholders. We actively engage with our shareholders as part of our annual corporate governance cycle .

 

We are transparent – Communicating governance policies and practices to all shareholders and other stakeholders is an important part of our commitment to transparency. With over 4.2 million Microsoft shareholders, we use both direct dialogue and ‘one-to-many’ communications to reach all our shareholders.

We proactively engage with our shareholders – During fiscal year 2017, our independent Chairman, Compensation Committee Chair, and members of senior management engaged with a cross-section of shareholders owning almost 45% of our shares. Our CEO, Satya Nadella, remains committed to investing time with our shareholders to maintain transparency and better understand their perspectives, including by participating in our quarterly earnings calls and other forums.

Our director video series provides all stakeholders insight about our Board – We recently released a new installment of our director video series featuring an interview with Sandra Peterson. The videos provide an informal opportunity for our directors to discuss their own approaches to their role. The complete series can be viewed on our website at https://aka.ms/DirectorVideoSeries .

Microsoft on the Issues blog posts address our views on emerging governance topics – We regularly post policy blogs on Microsoft on the Issues, covering topics ranging from the latest in corporate governance and corporate social responsibility to privacy, cybersecurity, online safety, jobs, and education. We broadcast information posted on the Microsoft on the Issues blog via social media handles, including @MSFTIssues and @MSFTNews.

 

2017 PROXY STATEMENT   7

 

Our Investor Relations website delivers extensive content about governance and corporate social responsibility – Our Investor Relations website provides in-depth information about our corporate governance and corporate social responsibility initiatives.

 

Our progressive corporate governance framework
Corporate governance at Microsoft is designed to promote the long-term interests of our shareholders, maintain internal checks and balances, strengthen management accountability, inspire public trust, and foster responsible decision making and accountability.   Our corporate governance framework is designed to ensure our Board of Directors has the necessary authority and practices in place to review and evaluate our business operations and to make decisions independent of management. Our goal is to align the interests of directors, management, and shareholders, and meet or exceed the requirements of the NASDAQ Stock Market (“NASDAQ”) and applicable law. This framework establishes the practices our Board follows for:
•  Board composition, director selection, and director compensation   •  Board refreshment and succession planning   •  Independent Board leadership   •  Board meetings and involvement of senior management   •  CEO performance evaluation		•  CEO and senior executive development and succession planning   •  Board committees   •  Board and committee evaluations   •  Shareholder engagement   •  Risk oversight

 

These documents are available on our website at http://aka.ms/policiesandguidelines .

We have an independent Chairman of the Board

The roles of chairman and CEO have been separate since 2000. The independent members of the Board annually appoint our Chairman. John Thompson currently serves as independent Chairman of the Board. Key responsibilities of the Chairman include:

 

•

Calling meetings of the Board and independent directors

 

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Setting the agenda for Board meetings in consultation with the CEO and corporate secretary

 

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Chairing executive sessions of the independent directors

 

•

Leading the full Board in the annual CEO performance evaluation

 

•

Engaging with shareholders

 

•

Acting as an advisor to Mr. Nadella on strategic aspects of the CEO role with regular consultations on major developments and decisions likely to interest the Board

 

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Performing the other duties specified in the Corporate Governance Guidelines or assigned by the Board

 

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Our Board believes its leadership structure is appropriate because it effectively allocates authority, responsibility, and oversight between management and the independent members of our Board. Our CEO has primary responsibility for the operational leadership and strategic direction of the Company while the Chairman facilitates our Board’s independent oversight of management, promotes communication between management and our Board, engages with shareholders, and leads our Board’s consideration of key governance matters.

Our Board is independent

 

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12 of 14 director nominees are independent – We are committed to maintaining a substantial majority of directors who are independent of the Company and management. Except for our CEO Satya Nadella and our co-founder Bill Gates, all directors are independent.

 

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Board tenure limits – We are committed to Board refreshment. To strike a balance between retaining directors with deep knowledge of the Company and adding directors with a fresh perspective, the Board will seek to maintain an average tenure of ten years or less for its independent directors as a group.

 

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Quarterly executive sessions of independent directors – At each quarterly Board meeting, the independent directors meet in executive session without Company management present. Additional executive sessions are held as needed.

 

•

Independent compensation consultant – The compensation consultant retained by the Compensation Committee is independent of the Company and management as required by our Compensation Consultant Independence Standards.

We have independent Board committees with appropriate expertise

 

•

Committees are independent – Only independent directors are members of the Board’s committees.

 

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Regular committee executive sessions of independent directors – At each regularly scheduled meeting, members of the Audit Committee, Compensation Committee, and Regulatory and Public Policy Committee meet in executive session. Additional executive sessions of all Board committees are held as needed.

 

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Audit Committee members have financial sophistication and expertise – All members of the Audit Committee meet the NASDAQ listing standard of financial sophistication. Ms. List-Stoll, Messrs. Johnston and Noski, and Dr. Panke are “audit committee financial experts” under Securities and Exchange Commission (“SEC”) rules.

 

We have progressive shareholder rights   •     Majority voting – In an uncontested election, directors are elected by the majority of votes cast.   •      Annual elections – All directors are elected annually. Microsoft does not have a classified board.   •     Proxy access – We have a “Proxy Access for Director Nominations” bylaw that permits eligible shareholders to nominate candidates for election to the Microsoft Board. Proxy access candidates will be included in the Company’s proxy statement and ballot.   •     Confidential voting – We have a confidential voting policy to protect the voting privacy of our individual shareholders.   •     Special meetings – Holders of 15% of outstanding shares can call a special meeting.

 

2017 PROXY STATEMENT   9

 

Our approach to risk oversight

The Board directly oversees strategic risks to the Company and other risk areas not delegated to one of its committees.

 

Audit Committee				Compensation Committee				Regulatory and Public Policy Committee
Reviews and assesses the Company’s processes to manage financial reporting risk and to manage investment, tax, and other financial risks. It also reviews the Company’s policies for risk assessment and steps management has taken to control significant risks, except those delegated by the Board to other committees.				Oversees compensation programs and policies and their effect on risk-taking by management.				Oversees risks related to competition and antitrust, data privacy and cybersecurity, and workforce and immigration laws and regulations.

Management periodically reports to the Board or relevant committee, which provide guidance on risk assessment and mitigation. Each committee charged with risk oversight reports to the Board on those matters. This approach to risk oversight does not affect the Board’s leadership structure.

Key policies ensure accountability and alignment with shareholder interests

 

•

Stock ownership requirements – We have stock ownership policies for directors, executive officers, and other senior executives to promote a long-term perspective in managing the enterprise and to help align the interests of our shareholders, executives, and directors.

 

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Compensation clawback – We have a strong ‘no-fault’ executive compensation recovery policy that applies to executive officers, other senior leaders and our principal accounting officer.

 

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Hedging and pledging prohibited – We prohibit our directors and executive officers from hedging their ownership of Microsoft stock, including by trading in options, puts, calls, or other derivative instruments related to Company stock or debt. Directors and executive officers are prohibited from purchasing Microsoft stock on margin, borrowing against Microsoft stock held in a margin account, or pledging Microsoft stock as collateral for a loan.

Directors receive orientation and continuing education

 

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Director orientation – Our robust orientation program familiarizes new directors with Microsoft’s businesses, strategies, and policies, and assists new directors in developing company and industry knowledge to optimize their service on the Board.

 

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Continuing education – Regular continuing education programs enhance the skills and knowledge directors use to perform their responsibilities. These programs may include internally developed materials and presentations, programs presented by third parties, and financial and administrative support to attend qualifying academic or other independent programs.

Board and committees annually evaluate their effectiveness

 

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Board evaluation – The Governance and Nominating Committee annually evaluates the performance of the Board and each of its members. The results are reported to and discussed with the Board. The report includes an assessment of the Board’s compliance with the principles in the Corporate Governance Guidelines and identifies areas in which the Board could enhance its performance.

 

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Committee evaluations – Each committee annually evaluates its performance and reports the results to the Board. Each committee’s report includes an assessment of the committee’s compliance with the principles in the Corporate Governance Guidelines and its charter and identifies areas in which the committee could enhance its performance.

Our approach to corporate social responsibility

At Microsoft, we work to conduct our business in ways that are principled, transparent, and accountable to key stakeholders. We believe doing so generates long-term value for our business, our shareholders, and society. The Regulatory and Public Policy Committee of the Board plays an important role in overseeing these initiatives.

To help focus our efforts, we use a corporate social responsibility (“CSR”) materiality assessment to prioritize the issues where we can have the most impact on our business and society. The assessment helps ensure our CSR priorities reflect feedback from our customers and shareholders; guidance from policymakers and regulators; insights into emerging risks and opportunities from external experts; and other stakeholder input. Three areas of particular importance in 2017 were trust, sustainability, and culture.

 

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Trust – We seek to engage thoughtfully and responsibly in public policy discussions. Satya Nadella and Brad Smith, our President and Chief Legal Officer, have publicly articulated the business and societal imperative of fostering a culture of accessibility and global diversity and inclusion. In A Cloud for Global Good we outlined a clear vision for the steps that governments and technology companies can take to ensure technology is developed and used in a way that is trusted, responsible, and inclusive.

Trust has emerged as one of the most important issues for our business. People won’t use technology they don’t trust. To ensure our customers can trust the Microsoft products and services they use, we’ve published clear privacy principles and are committed to implementing a strong privacy, security, compliance, and transparency framework across all of our services. The value in these commitments extends beyond thoughtfully managing risk by creating new business opportunities for us. As one example, Microsoft was the first global cloud services provider to publicly offer contractual commitments that allow our customers to meet the European Union’s upcoming General Data Protection Regulation (“GDPR”). Beginning in May 2018, GDPR will require that organizations serving European customers follow new privacy and security requirements. Microsoft’s expertise protecting data, championing privacy, and complying with complex regulations is manifested in our new contractual commitments to ensure our cloud services comply with GDPR – presenting new opportunities to offer value to customers while advancing our corporate values.

 

Sustainability – With the dramatic growth in cloud computing and with the world’s attention increasingly focused on addressing climate change, energy use and its relationship to climate change is an important area for us. We set our first carbon reduction goal nearly a decade ago; our operations globally have been carbon neutral since mid-2012 including both the datacenters we own and lease. In 2016, we publicly announced goals to boost the percentage of wind, solar, and hydroelectricity powering our datacenters from 44% to greater than 50% by the end of 2018, and more than 60% early in the next decade, with further improvements thereafter. We work closely with many public and private Microsoft customers and partners to apply the power of cloud computing to reduce their energy use and carbon emissions and enhance organizational resiliency in the face of a changing climate. We also are working to ensure our own business resiliency. This year Microsoft completed its first Climate Risk Vulnerability Assessment focused on potential climate-related impacts to Microsoft datacenters and other facilities including: heat, drought, sea-level rise, flood and heavy-rain intensity, and direct (on-site) and indirect (off-site) risks. We then incorporated consideration and management of these risks into our enterprise risk management system.				*Since 2012

Culture – Satya Nadella is intently focused on creating a culture that allows people to do their best work. Microsoft’s senior leaders have promoted a growth mindset culture, encouraging employees throughout the organization to become learners in all things. We then apply that mindset to learning about our customers, being diverse and inclusive, working together as one, and – ultimately – making a difference in the world. We’ve worked to support this learning culture through shifts in how we measure and reward performance, new communications channels to gain employee feedback, and new opportunities like the Microsoft Hackathon for Microsoft employees to work together to make a difference at work and in the world. As just one example, a Hackathon project inspired Microsoft to include built-in eye tracking support as part of Windows 10 that allows people with disabilities to use a compatible eye tracker to operate an on-screen mouse, keyboard and text-to-speech experience using only their eyes.

At http://www.microsoft.com/csr we share a broad array of information on our policies, practices, and performance across these areas and others, ranging from our carbon footprint to how we’ve responded to requests from law enforcement agencies for customer data. Our goal is to meet the high standards we have for ourselves and to consistently earn the trust and confidence of the public and our customers, partners, employees, and shareholders.

 

2017 PROXY STATEMENT   11

 

Political contributions transparency

Recognizing the interest of shareholders in establishing greater transparency about corporate political contributions, we disclose our political contributions to support candidates and ballot measures and how certain of our trade association membership dues are used for political activities. As part of our commitment to transparency, we developed Principles and Policies Guiding Microsoft Participation in Public Policy Process in the United States, which focus on ensuring compliance with applicable federal and state laws and go beyond compliance to implement what we consider leading practices in corporate accountability, transparency, integrity, and responsibility. The policy is available at www.microsoft.com/politicalengagement .

 

 

How to communicate with our Board

Shareholders may contact the Board about corporate governance or matters related to the Board. Communications about these topics will be received and processed by management before being forwarded to the Board, a committee of the Board, or a director as designated in your message. Communications relating to other topics, including those that are primarily commercial in nature, will not be forwarded.

 

	@			AskBoard@microsoft.com
				MSC 123/9999 Office of the Corporate Secretary Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399

Concerns about accounting or auditing matters or possible violations of our Standards of Business Conduct should be reported under the procedures outlined in the Microsoft Standards of Business Conduct, which is available on our Microsoft Integrity website at https://www.microsoft.com/en-us/legal/compliance/integrity .

 

12

 

2. Board of Directors

 

Proposal 1: Election of directors				The Board has nominated 14 directors for election at the Annual Meeting to hold office until the 2018 Annual Meeting. Mason Morfit is not seeking re-election and his Board service will end on the date of the Annual Meeting. The Board has nominated as new directors for election Penny Pritzker and Arne Sorenson; if elected, their terms will begin on November 29, 2017. The Board has authorized increasing its size to 14 members coincident with their election. The Governance and Nominating Committee evaluated and recommended the nominees in accordance with its charter and our Corporate Governance Guidelines. You can also view our video series featuring members of our Board at www.microsoft.com/investor/board .   To be elected, a director must receive a vote of the majority of the votes cast.

Our Board of Directors recommends a vote FOR the election to the Board of each of the nominees listed below.

 

Name		Age		Director since		Occupation
William H. Gates III		61		1981		Co-Chair and Trustee, Bill & Melinda Gates Foundation
Reid G. Hoffman		50		2017		Partner, Greylock Partners
Hugh F. Johnston		56		2017		Vice Chairman and CFO, PepsiCo, Inc.
Teri L. List-Stoll		54		2014		Executive Vice President and CFO, Gap, Inc.
Satya Nadella		50		2014		CEO, Microsoft Corporation
Charles H. Noski		65		2003		Former Vice Chairman, Bank of America Corporation
Helmut Panke		71		2003		Former Chairman of the Board of Management, BMW Bayerische Motoren Werke AG
Sandra E. Peterson		58		2015		Group Worldwide Chair, Johnson & Johnson
Penny S. Pritzker		58		New Nominee		Chairman, PSP Capital Partners, LLC
Charles W. Scharf		52		2014		CEO, The Bank of New York Mellon Corporation
Arne M. Sorenson		58		New Nominee		President and CEO, Marriott International, Inc.
John W. Stanton		62		2014		Chairman, Trilogy Partnerships
John W. Thompson		68		2012		Independent Chairman, Microsoft Corporation; Former CEO, Virtual Instruments, Inc.
Padmasree Warrior		56		2015		CEO, NIO USA, Inc.

 

 

Director selection and qualifications

We select Board members through a disciplined process

Shareholders elect all Board members annually. The Governance and Nominating Committee recommends to the Board director candidates for nomination and election at the annual shareholders meeting or for appointment to fill vacancies. The Committee annually reviews with the Board the skills and characteristics required of Board nominees, considering current Board composition and Company circumstances. In making its recommendations to our Board, the Committee considers the qualifications of individual director candidates applying the Board membership criteria described below. The Committee retains any search firm involved in identifying potential candidates and approves their fees.

 

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Board membership criteria

The Governance and Nominating Committee works with our Board to determine the characteristics, skills, and experiences for the Board as a whole and its individual members with the objective of having a Board with diverse backgrounds and experience. Characteristics expected of all directors include

 

In evaluating the suitability of individual Board members, our Board considers many factors, including general understanding of global business, sales and marketing, finance, and other disciplines relevant to the success of a large, publicly traded company; understanding of our business and technology; educational and professional background; personal accomplishment; and national, gender, age, and ethnic diversity. The Board is committed to actively seeking highly qualified women and individuals from minority groups to include in the pool from which new candidates are selected. The Board’s objective is to recommend a group that can best ensure the continuing success of our business and represent shareholder interests through the exercise of sound judgment using its diversity of experience and perspectives.

The Board does not believe that directors should expect to be re-nominated annually. In determining whether to recommend a director for re-election, the Governance and Nominating Committee considers the director’s participation in and contributions to the activities of the Board, the results of the most recent Board evaluation, and past attendance at meetings.

The Governance and Nominating Committee assesses its efforts to maintain an effective and diverse Board as part of its regular responsibilities, which include annually:

 

•

reporting to our Board on the performance and effectiveness of the Board,

 

•

presenting to our Board individuals recommended for election to the Board at the annual meeting, and

 

•

assessing the Committee’s own performance.

The Governance and Nominating Committee works with the full Board to regularly evaluate Board composition to assess the skills and capabilities that are relevant to the Board’s work and the Company’s strategy, whether directors should be added in view of director departures, and the number of directors needed to fulfill the Board’s responsibilities under the Corporate Governance Guidelines and committee charters.

Shareholders previously elected all current Board members except Messrs. Hoffman and Johnston. Mr. Hoffman was considered by the Governance and Nominating Committee based on his former role as Chairman of LinkedIn Corporation. In recruiting Messrs. Johnston and Sorenson, the Committee retained the search firm Spencer Stuart to help identify director prospects, perform candidate outreach, assist in reference checks, and provide other related services. An independent director and a member of management recommended Ms. Pritzker as a candidate for consideration by the Committee. The recruiting process typically involves either the search firm or a member of the Committee contacting a prospect to assess interest and availability. A candidate will then meet with members of the Board and Mr. Nadella, and then meet with members of management as appropriate. At the same time, the Committee and the search firm will contact references for the prospect. A background check is completed before a final recommendation is made to the Board to appoint a candidate to the Board.

 

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Key board qualifications, expertise, and attributes

The table below summarizes the key qualifications, skills, and attributes most relevant to the decision to nominate candidates to serve on the Board. A mark indicates a specific area of focus or expertise on which the Board particularly relies. Not having a mark does not mean the director does not possess that qualification or skill. Director biographies below describe each director’s background and relevant experience in more detail.

 

Definitions of director qualifications
Financial		Leadership of a financial firm or management of the finance function of an enterprise, resulting in proficiency in complex financial management, capital allocation, and financial reporting processes.
Gender, ethnic, national, or other diversity		Representation of gender, ethnic, geographic, cultural, or other perspectives that expand the Board’s understanding of the needs and viewpoints of our customers, partners, employees, governments, and other stakeholders worldwide.
Global business		Experience driving business success in markets around the world, with an understanding of diverse business environments, economic conditions, cultures, and regulatory frameworks, and a broad perspective on global market opportunities.
Leadership		Extended leadership experience for a significant enterprise, resulting in a practical understanding of organizations, processes, strategic planning, and risk management. Demonstrated strengths in developing talent, planning succession, and driving change and long-term growth.
Mergers and acquisitions		A history of leading growth through acquisitions and other business combinations, with the ability to assess “build or buy” decisions, analyze the fit of a target with a company’s strategy and culture, accurately value transactions, and evaluate operational integration plans.
Public company board service and governance		Service on a public company board to develop insights about maintaining board and management accountability, protecting shareholder interests, and observing appropriate governance practices.
Sales and marketing		Experience developing strategies to grow sales and market share, build brand awareness and equity, and enhance enterprise reputation.
Technology		A significant background working in technology, resulting in knowledge of how to anticipate technological trends, generate disruptive innovation, and extend or create new business models.

 

 

 

Experience, expertise, or attributes Gates Hoffman Johnston List-Stoll Nadella Noski Panke Peterson Pritzker Scharf Sorenson Stanton Thompson Warrior Financial Gender, ethnic, national, or other diversity Global business Leadership Mergers and acquisitions Public company board service and governance Sales and marketing Technology

 

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Nominees

 

Shareholder recommendations and nominations of director candidates

Recommendations

The Governance and Nominating Committee considers shareholder recommendations for candidates for the Board of Directors using the same criteria described above. The name of any recommended candidate for director, together with a brief biographical sketch, a document indicating the candidate’s willingness to serve if elected, and evidence of the nominating shareholder’s ownership of Company stock must be sent to the attention of MSC 123/9999, Office of the Corporate Secretary, Microsoft Corporation, One Microsoft Way, Redmond, WA 98052-6399.

Nominations

As described in Part 1 – “Corporate governance at Microsoft – Shareholder rights,” our Bylaws provide for proxy access shareholder nominations of director candidates by eligible shareholders. A shareholder who wishes to formally nominate a candidate must follow the procedures described in Article 1 of our Bylaws.

 

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Our director nominees

 

 

 

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Director independence

Having an independent board is a core element of our governance philosophy. Our Corporate Governance Guidelines provide that a substantial majority of our directors will be independent. Our Board has adopted director independence guidelines to assist in determining each director’s independence. These guidelines are available on our website at https://aka.ms/directorindependence. The guidelines either meet or exceed the independence requirements of NASDAQ. The guidelines identify categories of relationships the Board has determined would not affect a director’s independence, and therefore are not considered by the Board in determining director independence.

Following the director independence guidelines, each year and before a new director is appointed, the Board must affirmatively determine a director has no relationship that would interfere with the exercise of independent judgment in carrying out his or her responsibilities as a director . Annually, each director completes a detailed questionnaire that provides information about relationships that might affect the determination of independence. Management provides the Governance and Nominating Committee and Board with relevant known facts and circumstances of any relationship bearing on the independence of a director or nominee that is outside the categories permitted under the director independence guidelines. The Committee then completes an assessment of each director considering all known relevant facts and circumstances concerning any relationship bearing on the independence of a director or nominee. This process includes evaluating whether any identified relationship otherwise adversely affects a director’s independence, and affirmatively determining that the director has no material relationship with Microsoft, another director, or as a partner, shareholder, or officer of an organization that has a relationship with the Company.

The Governance and Nominating Committee also considers the tenure of a director, and for longer serving directors whether the duration of service impacts the director’s independence from management, as demonstrated by the director’s relationship with management and the director’s participation in Board and Committee deliberations. The Board seeks to maintain an average tenure of ten years or less for its independent directors as a group.

Based on the review and recommendation by the Governance and Nominating Committee, the Board analyzed the independence of each director and determined that Mmes. List-Stoll, Peterson, Pritzker, and Warrior, Messrs. Hoffman, Johnston, Morfit, Noski, Scharf, Sorenson, Stanton, and Thompson, and Dr. Panke meet the standards of independence under our Corporate Governance Guidelines, the director independence guidelines, and applicable NASDAQ listing standards, including that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment.

 

 

Director attendance

Our Board of Directors holds regularly scheduled quarterly meetings. Committee meetings occur the day before the Board meeting. Once each year, the committee and Board meetings occur on a single day so the evening and following day can be devoted to the Board’s annual strategy retreat, which includes presentations and discussions with senior management about Microsoft’s long-term strategy. Besides the quarterly meetings, typically there are two other regularly scheduled meetings and several special meetings each year. At each quarterly Board meeting, time is set aside for the independent directors to meet without management present. Our Board met six times during fiscal year 2017.

Each director nominee who is a current director attended at least 75% of the aggregate of all fiscal year 2017 meetings of the Board and each committee on which he or she served.

Directors are expected to attend the annual shareholder meeting, if practicable. All directors attended the 2016 Annual Meeting except Mr. Gates, who was unable to attend.

 

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Board committees

Our Board has four standing committees: An Audit Committee, a Compensation Committee, a Governance and Nominating Committee, and a Regulatory and Public Policy Committee. Each committee has a charter, which can be found on our website at http://aka.ms/committees . The table below provides current membership for each Board committee, followed by a description of each committee’s responsibilities.

Committees of the Board of Directors

 

Director		Audit		Compensation		Governance and Nominating		Regulatory and   Public Policy
William H. Gates III
Reid G. Hoffman								Member
Hugh F. Johnston		Member
Teri L. List-Stoll		Member				Member
G. Mason Morfit *		Member		Member
Satya Nadella
Charles H. Noski		Chair				Member
Helmut Panke		Member						Chair
Sandra E. Peterson				Member				Member
Charles W. Scharf				Member		Member
John W. Stanton				Chair				Member
John W. Thompson						Chair		Member
Padmasree Warrior				Member
Number of meetings in fiscal year 2017		9		6		6		3

*

Mason Morfit will not seek re-election at the 2017 Annual Meeting. Mr. Morfit currently serves on the Audit Committee and Compensation Committee. Penny Pritzker and Arne Sorenson are both nominated for election to the Board at the Annual Meeting. The Board will consider committee appointments for Ms. Pritzker and Mr. Sorenson following election to the Board.

Each committee has authority to engage legal counsel or other advisors or consultants as it deems appropriate to carry out its responsibilities. Below is a description of each committee’s responsibilities.

 

Audit Committee
The Audit Committee assists our Board of Directors in overseeing the quality and integrity of our accounting, auditing, and reporting practices. The Audit Committee’s role includes:
•  Overseeing the work of our accounting function and internal control over financial reporting   •  Overseeing internal auditing processes   •  Inquiring about significant risks, reviewing our policies for enterprise risk assessment and risk management, and assessing the steps management has taken to control these risks   •  Overseeing business continuity programs   •  Reviewing with management policies, practices, compliance, and risks relating to our investment portfolio		•  Overseeing, with the Regulatory and Public Policy Committee, cybersecurity and other risks relevant to our information technology environment   •  Reviewing compliance with significant applicable legal, ethical, and regulatory requirements, including those relating to regulatory matters that may have a material impact on our financial statements or internal control over financial reporting

The Audit Committee is responsible for the compensation, retention and oversight of the independent auditor engaged to issue audit reports on our financial statements and internal control over financial reporting. The Audit Committee relies on the expertise and knowledge of management, the internal auditor, and the independent auditor in carrying out its oversight responsibilities. The Audit Committee Responsibilities Calendar accompanying the Audit Committee Charter describes the Committee’s specific responsibilities.

 

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