Proxy voting options

Your vote is important!

Whether or not you expect to attend in person, we urge you to vote your shares by phone, via the Internet, or by signing, dating, and returning the enclosed proxy card or voting instruction form at your earliest convenience. This will ensure the presence of a quorum at the meeting. Promptly voting your shares will save us the expense and extra work of additional solicitation. Submitting your proxy now will not prevent you from voting your stock at the meeting if you desire to do so, as your vote by proxy is revocable at your option.

Voting by the Internet or telephone is fast and convenient, your vote is immediately confirmed and tabulated, and helps Microsoft reduce postage and proxy tabulation costs.

If you prefer, you can vote by mail by returning the enclosed proxy card or voting instruction form in the addressed, prepaid envelope provided.

Please do not return the enclosed paper ballot if you are voting via the Internet or by telephone.

Vote by Internet

www.proxyvote.com

24 hours a day / 7 days a week

Instructions:

 

1.

Read the accompanying Proxy Statement.

 

2.

Go to the following website: www.proxyvote.com

 

3.

Have your proxy card or voting instruction form in hand and follow the instructions. You can also register to receive all future shareholder communications electronically, instead of in print. This means that the annual report, Proxy Statement, and other correspondence will be delivered to you via e-mail.

Vote by telephone

1.800.690.6903 via touch tone phone

toll-free 24 hours a day / 7 days a week

Instructions:

 

1.

Read the accompanying Proxy Statement.

 

2.

Call toll-free 1.800.690.6903.

 

3.

Have your proxy card or voting instruction form in hand and follow the instructions.

 

Annual Meeting of Shareholders

 

Date:		November 28, 2012
Time:		8:00 a.m. Pacific Time
Place:		Meydenbauer Center 11100 NE 6th Street Bellevue, Washington 98004
Record date:		September 14, 2012
Voting:		Shareholders as of the record date are entitled to vote. Each share of common stock is entitled to one vote for each director nominee and one vote for each of the proposals to be voted on.
Admission to meeting:		Proof of share ownership will be required to enter the Microsoft Annual Meeting – see Part 1 – “Information about the meeting” for details. Please follow the directions to Meydenbauer Center on the last page of this Proxy Statement.

Meeting agenda

 

•

Election of nine directors

 

•

Advisory vote on executive compensation

 

•

Approval of Employee Stock Purchase Plan

 

•

Ratification of Deloitte & Touche LLP as our independent auditor for fiscal year 2013

 

•

Vote on one shareholder proposal

 

•

Transact other business that may properly come before the meeting

 

Business highlights

In fiscal year 2012, we delivered strong financial results and continued to move our businesses forward.

Performance results included:

 

•

$74.26 billion in revenue as adjusted,* an increase of 6% (GAAP revenue of $73.72 billion)

 

•

$28.50 billion in operating income as adjusted,* an increase of 5% (GAAP operating income of $21.76 billion)

 

•

Cash flow from operations of $31.6 billion, an increase of 17%, reflecting continued discipline in controlling costs

 

•

$10.7 billion returned to shareholders through dividends and stock buybacks

 

•

Server and Tools revenue grew 12%

 

•

Microsoft Business Division revenue grew 7%

 

•

Office is now installed on over 1 billion PCs

 

•

Over 50% of enterprise desktop PCs run Windows 7

We delivered these results while preparing a pipeline of new and updated products that will launch in the year ahead.

 

•

Windows 8 Release Preview made available in May 2012 with release to manufacturing in August

 

•

Microsoft Surface devices introduced in June 2012 to complement the variety of OEM hardware to run Windows 8

 

•

Customer preview of the new Office unveiled in July 2012

 

•

Windows Phone 8 operating system introduced in June 2012

 

•

Windows Server 2012 launched September 2012 and Visual Studio 2012 released to manufacturing in August 2012

 

•

Xbox SmartGlass for Xbox 360 introduced in June 2012

 

 

 

*

See Annex A for a reconciliation of non-GAAP and GAAP measures presented.

Executive compensation advisory vote

Our Board of Directors recommends that shareholders vote to approve, on an advisory basis, the compensation paid to the Company’s Named Executive Officers, as described in this proxy statement for the following reasons.

Pay for performance

Our compensation program allows our Compensation Committee and Board to determine pay based on a comprehensive view of quantitative and qualitative factors designed to produce long-term business success. The correlation between our financial results and executive officer compensation awarded, as described in Part 4 – “Named Executive Officer compensation – Compensation discussion and analysis,” demonstrates the success of this approach.

Sound program design

We designed our executive officer compensation programs to attract, motivate, and retain the key executives who drive our success and industry leadership. Pay that reflects performance and alignment with the interests of long-term shareholders are key principles. We achieve our objectives through compensation that:

 

•

provides a competitive total pay opportunity,

 

•

consists primarily of stock-based compensation,

 

•

links a significant portion of total compensation to performance we believe will create long-term shareholder value,

 

•

differentiates rewards based on the executive officer’s contributions to business performance,

 

•

enhances retention by subjecting much of total compensation to multi-year vesting, and

 

•

does not encourage unnecessary and excessive risk taking.

 

Our compensation programs for our Named Executive Officers incentivize superior individual and business performance and do not reward inappropriate risk taking. Some of our leading practices include:

 

•

an executive compensation recovery policy,

 

•

an executive stock ownership policy,

•

a policy prohibiting hedging ownership of Microsoft stock,

 

•

no special perquisites or benefits,

 

•

no employment contracts, change in control protections, or severance pay agreements, and

 

•

no special retirement programs.

 

Shareholder proposals submitted for inclusion in our 2013 proxy statement pursuant to SEC Rule 14a-8 must be received by us by June 18, 2013.

Notice of shareholder proposals to be raised from the floor of the 2013 Annual Meeting of shareholders outside of SEC Rule 14a-8 must be delivered to us no earlier than July 31, 2013 and no later than August 30, 2013.

 

Certain statements in this proxy statement, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, 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 without limitation, this Proxy Summary and Part 4 – “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 which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” of our Forms 10-K and 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Part 1. Information about the meeting
Internet availability of proxy materials			1
Proof of ownership required for attending meeting in person			1
Participation in electronic meeting			1
Solicitation of proxies			2
Householding			2
Election of directors			2
Voting procedures			2
Tabulation of votes			2
Majority vote standard for election of directors			3
Vote required; effect of abstentions and broker non-votes			3
Vote confidentiality			4
Where to find more proxy voting information			4
Other business			4
Part 2. Corporate governance at Microsoft
Corporate governance principles and practices			5
Board independence			5
Chief executive officer, chairman, and lead independent director			5
Board committee independence and expertise			5
Shareholder authority			5
Compensation			5
Stock ownership			5
Hedging policy			6
Director orientation and continuing education			6
Risk oversight			6
Political contributions			6
Corporate governance guidelines and committee charters			7
Microsoft corporate governance website			7
Board and executive leadership			7
Director independence			8
Procedures for nominating directors			8
Shareholder communication with directors			9

Certain relationships and related transactions			9
Section 16(a) – Beneficial ownership reporting compliance			10
Information regarding beneficial ownership of principal shareholders, directors, and  management			10
Part 3. Board of Directors
Our director nominees			12
Meetings and meeting attendance			17
Board committees			17
Audit Committee			18
Compensation Committee			18
Governance and Nominating Committee			19
Regulatory and Public Policy Committee			19
Director compensation			20
Part 4. Named Executive Officer compensation
Compensation discussion and analysis			23
Section 1 – Performance and pay			23
Section 2 – Compensation setting process and decisions for fiscal year 2012			25
Section 3 – Other compensation policies and information			32
Compensation risk assessment			33
Fiscal year 2012 compensation tables			34
Compensation committee interlocks and insider participation			39
Compensation committee report			39
Part 5. Audit Committee matters
Audit Committee report			40
Fees billed by Deloitte & Touche			42
Audit fees			42
Audit-related fees			42
Tax fees			42
All other fees			42
Policy on Audit Committee pre-approval of audit and permissible non-audit services of  independent auditor			43

 

Part 6. Proposals to be voted on at the meeting
Election of directors			44
Advisory vote on executive compensation			45
Statement in support			45
Approval of Employee Stock Purchase Plan			46
Ratification of independent auditor			48
Shareholder proposal			49
Board recommendation			49
Proposals of shareholders for 2013 Annual Meeting			50

Driving directions and parking
Downtown Bellevue			51
Annex A
Reconciliation of non-GAAP and GAAP Financial Measures			52

 

This Proxy Statement was first mailed to shareholders on or about October 16, 2012. It is furnished in connection with the solicitation of proxies by the Board of Directors of Microsoft Corporation (“Microsoft” or “the Company”) to be voted at the Annual Meeting of Shareholders for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting of Shareholders will be held at 8:00 a.m. Pacific Time on November 28, 2012 at Meydenbauer Center,

11100 NE 6th Street, Bellevue, Washington 98004. Shareholders who execute proxies retain the right to revoke them at any time before the shares are voted by proxy at the meeting. A shareholder may revoke a proxy by delivering a signed statement to our Corporate Secretary at or prior to the Annual Meeting or by timely executing and delivering, by Internet, telephone, mail, or in person at the Annual Meeting, another proxy dated as of a later date. Microsoft will pay the cost of solicitation of proxies.

 

We are furnishing proxy materials to our shareholders primarily via the Internet, instead of mailing printed copies of those materials to each shareholder. By doing so, we save costs and reduce the environmental impact of our Annual Meeting. On October 16, 2012, we mailed a Notice of Internet Availability of Proxy Materials to certain of our shareholders. The Notice contains instructions about how

to access our proxy materials and vote online or vote by telephone. If you would like to receive a paper copy of our proxy materials, please follow the instructions included in the Notice of Internet Availability of Proxy Materials. If you previously chose to receive our proxy materials electronically, you will continue to receive access to these materials via e-mail unless you elect otherwise.

 

You are entitled to attend the Annual Meeting only if you are a shareholder as of the close of business on September 14, 2012, the record date, or hold a valid proxy for the meeting. In order to be admitted to the Annual Meeting, you must present proof of ownership of Microsoft stock on the record date. This can be:

 

•

a brokerage statement or letter from a bank or broker indicating ownership on September 14, 2012,

 

•

the Notice of Internet Availability of Proxy Materials,

 

•

a printout of the proxy distribution email (if you received your materials electronically),

•

a proxy card,

 

•

a voting instruction form, or

 

•

a legal proxy provided by your broker, bank or nominee.

Any holder of a proxy from a shareholder must present the proxy card, properly executed, and a copy of the proof of ownership. Shareholders and proxy holders must also present a form of photo identification such as a driver’s license. We will be unable to admit anyone who does not present identification or refuses to comply with our security procedures.

 

You may also attend this year’s Annual Meeting of Shareholders via the Internet. The accompanying proxy materials include instructions on how to participate in the meeting and the means by which you may vote your shares of Company stock. To submit your questions

during the Annual Meeting, please log on to www.virtualshareholdermeeting.com/MSFT12. You will need to enter the 12-digit control number received with your Notice or Proxy to enter the meeting.

 

The Board of Directors of Microsoft is soliciting the proxy accompanying this Proxy Statement. Proxies may be solicited by officers, directors, and employees of Microsoft, none of whom will receive any additional compensation for their services. Also, Phoenix Advisory Partners, LLC may solicit proxies at a cost we anticipate will not exceed $15,000. These solicitations may be made personally or by mail, facsimile, telephone, messenger, email, or the Internet. Microsoft will pay persons holding shares of common stock in their names or in the names of nominees, but not owning such shares beneficially, such

as brokerage houses, banks, and other fiduciaries, for the expense of forwarding solicitation materials to their principals. Microsoft will pay all proxy solicitation costs.

Shareholders of record at the close of business on September 14, 2012 will be entitled to vote at the meeting on the basis of one vote for each share held. On September 14, 2012, there were 8,430,933,156 shares of common stock outstanding, held of record by 126,449 shareholders.

 

To reduce costs and reduce the environmental impact of our Annual Meeting, a single proxy statement and annual report, along with individual proxy cards or individual Notices of Internet Availability, will be delivered in one envelope to certain shareholders having the same last name and address and to individuals with more than one account registered at our transfer agent with the same address, unless contrary instructions have been received from an affected shareholder. Shareholders participating in householding will continue to receive separate proxy

cards. If you are a registered shareholder and would like to enroll in this service or receive individual copies of this year’s and/or future proxy materials, please contact our transfer agent, American Stock Transfer & Trust Company, by mail at P.O. Box 2362, New York, NY 10272-2362, by phone at (800) 285-7772, option 1, or by email at msft@amstock.com. If you are a beneficial shareholder, you may contact the broker or bank where you hold the account.

 

Nine directors are to be elected at the Annual Meeting to hold office until the next annual meeting of shareholders, and until their respective successors are elected and qualified. If, for any reason, the directors are not elected at an Annual Meeting, they may be elected at a special meeting of shareholders called for that purpose in the manner provided by the Bylaws of Microsoft Corporation (“Bylaws”). The accompanying proxy will be voted in favor of the nominees presented in Part 3 – “Board of Directors – Our director nominees” to serve as directors unless the

shareholder indicates to the contrary on the proxy. All the nominees are current directors.

The Board of Directors expects that each of the nominees will be available for election, but if any of them is unable to serve at the time the election occurs, the proxy will be voted for the election of another nominee designated by our Board.

 

Our independent election inspector, American Stock Transfer & Trust Company LLC, will tabulate votes cast by proxy or in person at the meeting. We expect to publish the final vote tabulation on our website,

www.microsoft.com/investor/votingresults, within one business day after the Annual Meeting. We will also report the results in a Form 8-K filed with the SEC within four business days of the Annual Meeting.

 

Majority vote standard for election of directors

In an uncontested election, each director will be elected by a vote of the majority of the votes cast. A majority of votes cast means the number of shares cast “for” a director’s election exceeds the number of votes cast “against” that director. We will not treat as cast any share (a) whose ballot is marked as withheld, (b) that is otherwise present at the meeting but for which there is an abstention, or (c) a share otherwise present at the meeting as to which a shareholder gives no authority or direction. In a contested election, the directors will be elected by a plurality of the votes cast, meaning the directors receiving the largest number of “for” votes will be elected to the open positions.

A contested election is one in which:

 

•

as of the last day for giving notice of a shareholder nominee, a shareholder has nominated a candidate for director according to the requirements of our Bylaws and

 

•

as of the date that notice of the meeting is given, the Board of Directors considers that a shareholder candidacy has created a bona fide election contest.

In an uncontested election, a nominee who does not receive a majority vote will not be elected. Except as explained in the next paragraph, an incumbent director who is not elected because he or she does not receive a majority vote will continue to serve as a holdover director until the earliest of: (a) 90 days after the date on which the election inspector determines the voting results as to that director, (b) the date on which the Board of Directors appoints an individual to fill the office held by that director, or (c) the date of that director’s resignation.

The Board of Directors may fill any vacancy resulting from the non-election of a director as provided in our Bylaws.

The Governance and Nominating Committee will consider promptly whether to fill the office of a nominee who fails to receive a majority vote and make a recommendation to our Board about filling the office.

The Board of Directors will act on the Governance and Nominating Committee’s recommendation and within 90 days after certification of the shareholder vote will disclose publicly its decision.

Additional details about this process are specified in our Bylaws, which are available on our website at www.microsoft.com/bylaws.

Vote required; effect of abstentions and broker non-votes

The shares of a shareholder whose ballot on any or all proposals is marked as “abstain” will be included in the number of shares present at the Annual Meeting to determine whether a quorum is present. If you are the beneficial owner of shares held by a broker or other custodian, you may instruct your broker how to vote your shares through the voting instruction form included with this Proxy Statement. If you wish to vote the shares you own beneficially at the meeting, you must first request and obtain a “legal proxy” from your broker or other custodian. If you choose not to provide instructions or a legal proxy, your shares are referred to as “uninstructed shares.” Whether your broker or custodian has the discretion to vote these shares on your behalf depends on the ballot item. The following table summarizes the votes required for passage of each proposal and the effect of abstentions and uninstructed shares held by brokers.

Brokers and custodians can no longer vote uninstructed shares on your behalf in director elections. For your vote to be counted, you must submit your voting instruction form to your broker or custodian.

 

For purposes of our majority vote standard for uncontested director elections, the following will not be votes cast: (a) a share whose ballot is marked as withheld, (b) a share otherwise present at the meeting but for which there is an abstention, and (c) a share otherwise present at the meeting as to which a shareholder gives no authority or direction.

Vote confidentiality

We maintain the confidentiality of the votes of individual shareholders. Ballots, proxy forms, and voting instructions returned to brokerage firms, banks, and other holders of record are kept confidential. Only the proxy solicitor, the proxy tabulator, and the inspector of election have access to the ballots, proxy forms, and voting instructions. The proxy solicitor and the proxy tabulator will disclose information taken from the ballots, proxy forms, and voting instructions only if there is a proxy contest, if the

shareholder authorizes disclosure, to defend legal claims, or as otherwise required by law. If you write comments on your proxy card or ballot, management may learn how you voted in reviewing your comments.

Where to find more proxy voting information

 

•

The Securities and Exchange Commission (“SEC”) website has a variety of information about the proxy voting process at www.sec.gov/spotlight/proxymatters.shtml.

 

•

Contact the Microsoft Investor Relations department through our website at www.microsoft.com/investor/contacts/default.aspx or by phone at 425.706.4400.

 

•

You may view our annual report and vote your shares at www.proxyvote.com.

 

•

Contact the broker or bank through which you beneficially own your shares.

 

The Board of Directors does not intend to bring any other business before the Annual Meeting, and so far as is known to our Board, no matters are to be brought before the meeting other than as specified in the notice of meeting. In addition to the scheduled items of business, the meeting may consider other shareholder proposals and matters relating to the conduct of the meeting. As to any other business that may properly come before the meeting, proxies will be voted in accordance with the judgment of the persons voting such proxies.

Representatives of Deloitte & Touche LLP (“Deloitte & Touche”), independent auditor for Microsoft for fiscal year 2012 and the current fiscal year, will be present at the Annual Meeting, will have an opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions.

 

Corporate governance at Microsoft is used to promote the long-term interests of our shareholders, as well as to maintain internal checks and balances, strengthen management accountability, engender public trust, and foster responsible decision making and accountability. We continue to strengthen existing governance practices and develop new policies that make us a better company.

Our Board of Directors periodically reviews evolving legal, regulatory, and best practice developments to determine those that will best serve the interests of our shareholders. Our Corporate Governance Guidelines were most recently updated in July 2012. Highlights of our corporate governance framework include:

Board independence

 

•

Seven of our nine directors are independent of the Company and management. We are committed to maintaining a substantial majority of independent directors.

 

•

At each quarterly meeting, time is set aside for the independent directors to meet in executive session without Company management present. Additional executive sessions may be held as needed.

 

•

The Compensation Committee has a policy that any compensation consultant retained by the Committee must be independent of the Company and management.

Chief executive officer, chairman, and lead independent director

 

•

The roles of chairman and chief executive officer have been separate since 2000. Mr. Gates serves as Chairman and Mr. Ballmer serves as Chief Executive Officer (“CEO”).

 

•

Mr. Hastings serves as lead independent director. That role is described in this Part 2 under “Board and executive leadership.”

Board committee independence and expertise

 

•

Only independent directors are members of the Audit, Compensation, Governance and Nominating, and Regulatory and Public Policy Committees.

 

•

All members of the Audit Committee are “audit committee financial experts” under SEC rules.

Shareholder authority

 

•

We have a majority vote standard for director elections. In an uncontested election, directors will be elected by the majority of votes cast.

 

•

All directors are elected annually; Microsoft does not have a classified board.

 

•

We have a confidential voting policy to protect our shareholders’ voting privacy.

 

•

Shareholders representing 25% or more of outstanding shares can call a special shareholders meeting by following the procedural requirements in our Bylaws.

Compensation

 

•

We have an executive compensation recovery policy that applies to executive officers, including our principal accounting officer. This policy, along with other compensation practices that we believe reflect good governance, is described in greater detail in Part 4 – “Named Executive Officer compensation – Compensation discussion and analysis – Other compensation policies and information.”

Stock ownership

 

•

Our Board of Directors has adopted stock ownership policies for directors, executive officers, and other senior executives. The policies were established to promote a long-term perspective in managing the enterprise, and to help align the interests of our shareholders,

 

executives, and directors. For directors, a more complete description of the stock ownership policy appears in Part 3 – “Board of Directors – Director compensation.” For executive officers, a more complete description of the stock ownership and holding requirements appears in Part 4 – “Named Executive Officer compensation – Compensation discussion and analysis – Other compensation policies and information.”

Hedging policy

 

•

We prohibit our directors and executive officers from hedging their ownership of Microsoft stock, including trading in options, puts, calls, or other derivative instruments related to Company stock or debt.

Director orientation and continuing education

 

•

The Governance and Nominating Committee and management are responsible for director orientation programs and for director continuing education programs to assist directors in maintaining skills and knowledge necessary or appropriate for the performance of their responsibilities.

 

•

Orientation programs are designed to familiarize new directors with Microsoft’s businesses, strategies, and policies and to assist new directors in developing the skills and knowledge required for their service on the Board of Directors.

 

•

Continuing education programs for directors may include a combination of internally developed materials and presentations, programs presented by third parties, and financial and administrative support for attendance at qualifying academic or other independent programs.

Risk oversight

 

•

The Board is responsible for overseeing risk management at the Company. The Board exercises direct oversight of strategic risks to the Company and other risk areas not delegated to one of its committees.

•

The Audit 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.

 

•

The Compensation Committee oversees compensation programs and policies and their effect on risk taking by management.

 

•

The Regulatory and Public Policy Committee oversees operational risks including those related to business continuity, security, privacy, and competition law-related risks.

 

•

In each case, management periodically reports to the Board or relevant committee, which provides guidance on risk assessment and mitigation. Each committee charged with risk oversight reports up to the Board on those matters.

Political contributions

 

•

Microsoft recognizes the increasing interest of U.S. public company shareholders in establishing greater transparency about corporate political contributions. Microsoft discloses its political contributions to support candidates and ballot measures as well as how certain of our trade association membership dues are used for political activities. As part of our commitment to transparency, after the U.S. Supreme Court’s decision in the Citizens United case in 2010, Microsoft amended its Principles Guiding Microsoft Participation in the Political Process in the United States to clarify that Microsoft will not make independent political expenditures or electioneering communications as are now permitted after the court’s decision. The policy is available at www.microsoft.com/politicalengagement.

 

Our Corporate Governance Guidelines and the charters of the four standing committees of the Board of Directors describe our governance framework. The Corporate Governance Guidelines and charters are intended to ensure our Board has the necessary authority and practices in place to review and evaluate our business operations and to make decisions that are independent of management. Our Corporate Governance Guidelines also are intended to align the interests of directors and management with those of our shareholders, and comply with or exceed the requirements of the NASDAQ Stock Market (“NASDAQ”) and applicable law. They establish the practices our Board follows with respect to:

 

•

Board composition and member selection,

 

•

Board meetings and involvement of senior management,

•

chief executive officer performance evaluation,

 

•

management succession planning,

 

•

Board committees, and

 

•

director compensation.

Our Board annually conducts a self-evaluation to assess its adherence to the Corporate Governance Guidelines and committee charters and identify opportunities to improve Board performance. The Board periodically reviews our Corporate Governance Guidelines and committee charters and updates them as necessary to reflect changes in regulatory requirements and evolving oversight practices.

 

If you would like additional information about our corporate governance practices, you may view the following documents at www.microsoft.com/investor/corporategovernance:

 

•

Corporate Governance Guidelines

 

•

Director Independence Guidelines

 

•

Audit Committee Charter and Responsibilities Calendar

 

•

Compensation Committee Charter

 

•

Governance and Nominating Committee Charter

 

•

Regulatory and Public Policy Committee Charter

 

•

Microsoft Finance Code of Professional Conduct

•

Microsoft Standards of Business Conduct

 

•

Stock Ownership and Holding Requirements for Microsoft Corporation Executives

 

•

Executive Compensation Recovery Policy

 

•

Compensation Consultant Independence Standards

 

•

Amended and Restated Articles of Incorporation

 

•

Bylaws of Microsoft Corporation

We will provide any of the foregoing information without charge upon written request to MSC 123/9999, Office of the Corporate Secretary, Microsoft Corporation, One Microsoft Way, Redmond, WA 98052-6399.

 

Since 2000, the roles of chairman and chief executive officer have been held separately. Mr. Gates serves as Chairman and Mr. Ballmer serves as Chief Executive Officer. The Board of Directors does not have a policy as to whether the chairman should be an independent director, an affiliated director, or a member of management. When the chairman is an affiliated director or a member of Company management, or when the independent directors determine that it is in the best interests of the Company, the independent directors will annually appoint a lead independent director.

Mr. Hastings has served as lead independent director since December 2010. The lead independent director coordinates the activities of the independent directors, may call meetings of the independent directors, coordinates with the chief executive officer and corporate

secretary to set the agenda for Board meetings, chairs executive sessions of the independent directors, is available for consultation with shareholders as appropriate, and performs the other duties specified in the Corporate Governance Guidelines or assigned from time to time by the Board. Mr. Hastings has announced he will not seek re-election at the 2012 Annual Meeting. The Board will appoint a new lead independent director at its regular meeting held in conjunction with the Annual Meeting.

Our Board believes its current leadership structure is appropriate because it effectively allocates authority, responsibility, and oversight between management and the independent members of our Board. It does this by giving primary responsibility for the operational leadership and strategic direction of the Company to

 

our chief executive officer, while enabling the lead independent director to facilitate our Board’s independent oversight of management, promote communication between management and our Board, and support our Board’s consideration of key governance matters. The Board believes its programs for overseeing risk, as

described in this Part 2 under “Risk oversight,” would be effective under a variety of leadership frameworks and therefore do not materially affect its choice of structure. See “Shareholder communication with directors” in this Part 2 for information about how to communicate with the lead independent director.

 

Our Corporate Governance Guidelines provide that a substantial majority of our directors will be independent. Our Board of Directors has adopted director independence guidelines to assist in determining each director’s independence. These guidelines are available on our website at www.microsoft.com/investor/independenceguidelines. 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.

Under the director independence guidelines, the Board of Directors must affirmatively determine a director has no relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. To facilitate this determination, annually each director completes a questionnaire that provides information about relationships that might affect the determination of independence. Management provides the Governance and Nominating Committee and our Board with relevant 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.

Based on the review and recommendation by the Governance and Nominating Committee, the Board of Directors analyzed the independence of each director and determined that Messrs. Luczo, Marquardt, Noski, and Thompson, Ms. Dublon, and Drs. Panke and Klawe 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. In making this determination, our Board considered that certain Board members have in the past and may in the future invest in investment funds of which Mr. Marquardt is a general partner or that are managed directly or indirectly by the firm of which Mr. Marquardt is a partner and that the Company may at times invest in businesses in which such funds have invested.

 

The Governance and Nominating Committee annually reviews with the Board of Directors the applicable skills and characteristics required of Board nominees, considering current Board composition and Company circumstances. In making its recommendations to our Board, the Governance and Nominating Committee considers, among other things, the qualifications of individual director candidates. The Committee retains any search firms and approves payment of their fees.

The Governance and Nominating Committee works with our Board to determine the appropriate 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 in business, education, and public service. Characteristics expected of all directors include independence, integrity, high personal and professional ethics, sound business judgment, and the ability and willingness to commit sufficient time to the Board. In evaluating the suitability of

individual Board members, our Board takes into account many factors, including general understanding of marketing, finance, and other disciplines relevant to the success of a large publicly traded company in today’s business environment; understanding of our business and technology; educational and professional background; personal accomplishment; and geographic, gender, age, and ethnic diversity. Our Board evaluates each individual in the context of the Board as a whole, with the objective of recommending a group that can best perpetuate the success of our business and represent shareholder interests through the exercise of sound judgment using its diversity of experience.

In determining whether to recommend a director for re-election, the Governance and Nominating Committee considers the director’s past attendance at meetings, participation in and contributions to the activities of the Board, and the results of the most recent Board self-evaluation.

 

The Governance and Nominating Committee assesses the effectiveness of its efforts to maintain an effective and diverse Board of Directors in the course 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 shareholders meeting, and

 

•

obtaining or performing an assessment of the Committee’s own performance.

Shareholders have previously elected each of the directors submitted at the 2012 Annual Meeting, except Messrs. Luczo and Thompson. The Governance and Nominating Committee retained the search firm of Spencer Stuart to help identify director prospects, perform candidate outreach, and provide other related services. The director search firm recommended Mr. Thompson for membership

on the Board. Mr. Thompson was appointed to the Board in February 2012. The Governance and Nominating Committee recommended Mr. Luczo for membership on the Board. Mr. Luczo was appointed in May 2012.

Director candidates submitted by shareholders

The Governance and Nominating Committee will consider 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. A shareholder who wishes to nominate a candidate must follow the procedures described in Sections 1.3, 1.13, and 1.14 of our Bylaws.

 

Shareholders may contact an individual director, the lead independent director, our Board of Directors as a group, or a specified Board committee or group, including the non-employee directors as a group, by the following means.

Email:   AskBoard@microsoft.com

Mail:     MSC 123/9999

                 Office of the Corporate Secretary

              Microsoft Corporation

              One Microsoft Way

              Redmond, WA 98052-6399

Each communication should specify the applicable addressee or addressees to be contacted. Management

will initially receive and process communications before forwarding them to the addressee(s). We also may refer communications to other departments in Microsoft. We generally will not forward to the directors a communication that is primarily commercial in nature, relates to an improper or irrelevant topic, or requests general information about Microsoft.

Concerns about accounting or auditing matters or possible violations of our Standards of Business Conduct should be reported pursuant to the procedures outlined in the Microsoft Standards of Business Conduct, which is available on our website at www.microsoft.com/mscorp/legal/buscond.

 

We are a global software company with extensive operations in the United States and many foreign countries. In fiscal year 2012, we purchased approximately $27 billion of goods and services from third parties. We have approximately 94,000 employees and the authority to purchase goods and services is widely dispersed. Because of these far-reaching activities, there are transactions and business arrangements with businesses and other organizations in which one of our directors, executive officers, or nominees for director, or their immediate families, or a greater than 5% owner of our stock, may also be a director, executive officer, or investor,

or have some other direct or indirect material interest. We will refer to these relationships generally as related-party transactions.

Related-party transactions have the potential to create actual or perceived conflicts of interest between Microsoft and its directors and executive officers or their immediate family members. The Audit Committee has established a written policy and procedures for review and approval of related-party transactions. If a related-party transaction subject to review directly or indirectly involves a member of the Audit Committee (or an immediate family member

 

or domestic partner), the remaining Committee members will conduct the review. In evaluating a related-party transaction involving a director, executive officer, or their immediate family members, the Audit Committee considers, among other factors:

 

•

the goods or services provided by or to the related party,

 

•

the nature of the transaction and the costs to be incurred by Microsoft or payments to Microsoft,

 

•

the benefits associated with the transaction and whether comparable or alternative goods or services are available to Microsoft from unrelated parties,

 

•

the business advantage Microsoft would gain by engaging in the transaction,

 

•

the significance of the transaction to Microsoft and to the related party, and

 

•

management’s determination that the transaction is in the best interests of the Company.

To receive Audit Committee approval, a related-party transaction must have a Microsoft business purpose and be on terms that are fair and reasonable to Microsoft, and as favorable to the Company as would be available from non-related entities in comparable transactions. The Audit Committee also requires that the transaction meet the same Company standards that apply to comparable transactions with unaffiliated entities.

The following are transactions in which Microsoft was or is a party, in which the amount involved exceeded $120,000, and in which a director, director nominee, executive officer, holder of more than 5% of our common stock, or any member of the immediate family of any of the

foregoing persons had or will have a direct or indirect material interest.

As in prior years, during fiscal year 2012 the Company engaged in business transactions with Corbis Corporation, a company that provides digitized images and production services. Mr. Gates is the sole shareholder of Corbis. Microsoft paid Corbis approximately $320,000 in fiscal year 2012 as licensing fees for digital images to be used in Microsoft’s products, services, and marketing materials. Those licenses were entered into at arm’s length, and are similar to license agreements Microsoft enters into from time to time with other providers of digital images. The terms of the Corbis transactions were established by Corbis and the business group at Microsoft seeking to use the digital images. We believe the terms were no less favorable to Microsoft than those offered by Corbis to other large customers. Mr. Gates was not involved in negotiating these agreements or setting price or other terms, either on behalf of Microsoft or Corbis.

The Audit Committee reviewed and approved these arrangements.

In addition, Mr. Gates has extensive personal holdings in private and public companies where he is not involved in management or daily operations. Microsoft may do business with these companies in the ordinary course. Mr. Gates also owns several business entities that purchase technology consulting services from Microsoft. The business described in this paragraph is conducted at arm’s length on terms that are available to unrelated parties. The business is not material to Microsoft or Mr. Gates.

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers, and persons who own more than 10% of our common stock to file reports of their ownership and changes in ownership of our common stock with the SEC. Our employees prepare

these reports for our directors and executive officers using information obtained from them and from Microsoft’s records. We believe our executive officers met all applicable Section 16(a) filing requirements during fiscal year 2012.

 

The following table describes, as of September 14, 2012, the beneficial ownership of our common stock by all directors, our chief executive officer, our chief financial officer, and the three other highest paid executive officers for fiscal year 2012, and our directors and all executive officers as a group.

In computing the number and percentage of shares beneficially owned by each person, we include any shares of common stock that could be acquired within 60 days of September 14, 2012 by the exercise of options or the vesting of stock awards. These shares, however, are not counted in computing the percentage ownership of any other person.

 

		Steven A. Ballmer Age 56   Director since 2000

Mr. Ballmer has led several Microsoft divisions during the past 32 years, including operations, operating systems development, and sales and support. In July 1998, he was promoted to President, a role that gave him day-to-day responsibility for running Microsoft. He was named Microsoft’s Chief Executive Officer in January 2000, assuming full management responsibility for the Company.

Public company directorships in the last five years:

 

•

Microsoft Corporation

Qualifications:

Mr. Ballmer has deep knowledge of the Company’s history, strategies, technologies, and culture. Mr. Ballmer has been the driving force behind the strategies and operational excellence that resulted in revenue tripling and operating income doubling since he became Chief Executive Officer in 2000. His leadership of diverse business units and functions before becoming Chief Executive Officer gives Mr. Ballmer powerful insight into the product development, marketing, finance, and operations aspects of the Company.

		William H. Gates III Age 56   Director since 1981

Mr. Gates, a cofounder of Microsoft, has served as Chairman since our incorporation in 1981. Mr. Gates retired as an employee effective July 1, 2008, but continues to serve as an advisor on key development projects. Mr. Gates served as Chief Software Architect from January 2000 until June 2006, when he announced his two-year plan for transition out of a day-to-day full-time employee role. Mr. Gates served as our Chief Executive Officer from 1981 until January 2000, when he resigned as Chief Executive Officer and assumed the position of Chief Software Architect.

Public company directorships in the last five years:

 

•  Microsoft Corporation		•  Berkshire Hathaway Inc.

Qualifications:

As a founder of Microsoft, Mr. Gates has unparalleled knowledge of the Company’s history, strategies, technologies, and culture and is considered a technology visionary. As Chairman and Chief Executive Officer of the Company from its incorporation in 1981 to 2000, he grew Microsoft from a fledgling business into the world’s leading software company, in the process creating one of the world’s most prolific sources of innovation and powerful brands. As Chief Software Architect from 2000 to 2006, and through 2008 when he retired as an employee of Microsoft, Mr. Gates set in motion many of the technological and strategic programs that animate the Company today. His work overseeing the Bill and Melinda Gates Foundation provides global insights relevant to the Company’s current and future business opportunities and a keen appreciation of stakeholder interests.

 

		Dina Dublon Age 59   Director since 2005

Ms. Dublon served on the faculty of the Harvard Business School during the 2011-12 academic year. From December 1998 until her retirement in September 2004, Ms. Dublon served as Executive Vice President and Chief Financial Officer of JPMorgan Chase & Co. Prior to being named Chief Financial Officer, she held numerous positions at JPMorgan Chase & Co., including Corporate Treasurer, Managing Director of the Financial Institutions Division, and head of asset liability management. Ms. Dublon joined Chemical Bank’s capital markets group as a trainee on the trading floor in 1981. Before joining Chemical Bank, Ms. Dublon worked for the Harvard Business School and Bank Hapoalim in Israel. Born in Brazil, Ms. Dublon holds a B.A. in economics and mathematics from the Hebrew University in Jerusalem and an M.S. from the Business School at Carnegie Mellon University.

Public company directorships in the last five years:

 

• Microsoft Corporation • PepsiCo, Inc.		• Accenture Ltd.

Qualifications:

Ms. Dublon’s distinguished career in the financial services industry culminated in her service as Executive Vice President and Chief Financial Officer of JPMorgan Chase & Co. This experience at a major financial services firm gives her a keen grasp of how effectively to deploy a global corporation’s assets and optimize its capital structure. She is expert in financial and accounting matters and the operation of public capital markets. Her extensive public company board experience with major global corporations includes service as a member or chair of board compensation, audit, and finance committees. Through her tenure on the boards of Accenture and PepsiCo, she understands how to take advantage of strategic opportunities in business technology and retail sectors that are critical for Microsoft’s success. Ms. Dublon also brings an important perspective gained from her significant experience working with non-profit organizations focusing on women’s issues and initiatives.

 

		Maria M. Klawe, Ph.D. Age 61   Director since 2009

Since 2006, Dr. Klawe has been President of Harvey Mudd College, a private liberal arts college in Claremont, California that focuses on engineering, science, and mathematics. Dr. Klawe served as Dean of Engineering and a Professor of Computer Science at Princeton University from 2003 to 2006, and held several positions at the University of British Columbia from 1988 to 2002 including Dean of Science, Vice President of Student and Academic Services, and head of the Department of Computer Science.

Public company directorships in the last five years:

 

• Microsoft Corporation		• Broadcom Corporation

Qualifications:

As a distinguished technologist and academic leader in the field of computer science and mathematics, Dr. Klawe brings a unique perspective to the Microsoft Board of Directors. She understands the basic science that underlies our technologies, the research and development process, and the interests and needs of the academic institutions and students that feed our talent pipeline. These same institutions are also a major consumer of our products and services as they incubate future generations of innovation. Her extensive leadership background at several renowned colleges and universities gives her experience with the many operational and administrative challenges that complex organizations face.

 

 

		Stephen J. Luczo Age 55   Director since 2012

Mr. Luczo has been a director of Seagate Technology PLC (“Seagate”), since 2000, and has served as President and Chief Executive Officer of Seagate since January 2009. He joined Seagate in 1993 as Senior Vice President of Corporate Development. In 1997, he was promoted to President and Chief Operating Officer at Seagate Technology, Inc., and was promoted to Chief Executive Officer in 1998. He was appointed chairman of the board in 2002. He resigned his position as Chief Executive Officer in 2004, but retained his position as chairman of the board. From 2006 to 2009, he was a private investor. He rejoined Seagate as President and Chief Executive Officer in January 2009. Prior to joining Seagate, Mr. Luczo was senior managing director of the global technology group of an investment banking firm.

Public company directorships in the last five years:

 

• Microsoft Corporation		• Seagate Technology PLC

Qualifications:

As President and Chief Executive Officer of Seagate, a global leader in hard disk drives and storage solutions, Mr. Luczo brings substantial leadership experience in the field of hardware design and manufacturing, and cloud storage for consumers and enterprises. Mr. Luczo has direct responsibility for Seagate’s strategy and operations, and his capabilities include executive leadership, global commerce and knowledge of competitive strategy, technology and competition. With his early career based in investment banking, Mr. Luczo also brings to the Board significant mergers and acquisitions and financial experience related to business and financial issues facing large companies.

 

		David F. Marquardt Age 63   Director since 1981

Mr. Marquardt is a founding general partner of August Capital, a venture capital firm formed in 1995, and has been a general partner of various Technology Venture Investors entities, which are private venture capital limited partnerships, since 1980. In addition to his public company board service, Mr. Marquardt also serves on the boards of various privately-held companies.

Public company directorships in the last five years:

 

• Microsoft Corporation		• Openlane, Inc. (former)
• Seagate Technology PLC (former)

Qualifications:

Mr. Marquardt has a long, successful career in venture capital focusing on the technology industry. He has significant experience in the operation of public and private capital markets. As evidenced by his early investment in Microsoft, Sun Microsystems, Inc., Seagate Technology PLC, and numerous other technology startups and growth companies over three decades, Mr. Marquardt understands how breakthrough innovation is translated into business success. As an original venture investor in Microsoft and long-time director, he provides unique historical perspective based on his extensive knowledge of both the Company’s business and history. The breadth and depth of Mr. Marquardt’s knowledge about software and hardware business drawn from his diverse experience as a board member and investor in numerous public and private technology companies is a significant asset to the Company.

 

 

		Charles H. Noski Age 60   Director since 2003

Mr. Noski served as Vice Chairman of Bank of America Corporation from June 2011 until September 2012. From May 2010 through June 2011, he served as Executive Vice President and Chief Financial Officer of Bank of America Corporation. From 2003 to 2005, Mr. Noski served as Corporate Vice President and Chief Financial Officer of Northrop Grumman Corporation and served as a director from 2002 to 2005. Mr. Noski joined AT&T in 1999 as Senior Executive Vice President and Chief Financial Officer and was named Vice Chairman of AT&T’s board of directors in 2002. Mr. Noski retired from AT&T upon completion of its restructuring in November 2002. Prior to joining AT&T, Mr. Noski was President, Chief Operating Officer, and a member of the board of directors of Hughes Electronics Corporation, a publicly traded subsidiary of General Motors Corporation in the satellite and wireless communications business. He is Chairman of the Financial Accounting Standards Advisory Council of the FASB, a member of the AICPA and FEI, and a past member of the Standing Advisory Group of the PCAOB.

Public company directorships in the last five years:

 

• Microsoft Corporation		• Avery Dennison Corporation
• Avon Products, Inc.		• Morgan Stanley (former)
• Air Products and Chemicals, Inc. (former)		• Automatic Data Processing, Inc. (former)
• Merrill Lynch & Co. (wholly-owned subsidiary of Bank of America Corporation) (former)

Qualifications:

With his extensive background in finance, accounting, risk, capital markets, and business operations, Mr. Noski has a unique portfolio of business skills. He has served as a senior executive officer or head of a business unit of a major public company in a variety of contexts. A large part of Mr. Noski’s executive experience has been in the technology sector, including multinational telecommunications companies. His service with leading organizations in the accounting and auditing fields reflects his expertise in finance and accounting matters. Mr. Noski has served on a wide range of public company boards in the technology, industrial, and finance fields.

 

		Helmut Panke, Ph.D. Age 66   Director since 2003

Dr. Panke served as Chairman of the Board of Management of BMW Bayerische Motoren Werke AG from 2002 through 2006. From 1999 to 2002, he served as a member of the Board of Management for Finance. From 1996 to 1999, Dr. Panke was a member of the Board of Management for Human Resources and Information Technology. In his role as Chairman and Chief Executive Officer of BMW (US) Holding Corp. from 1993 to 1996, he was responsible for the company’s North American activities. He joined BMW in 1982.

Public company directorships in the last five years:

 

• Microsoft Corporation		• Singapore Airlines Limited
• UBS AG		• Bayer AG (supervisory board)

Qualifications:

Dr. Panke brings a global perspective to the Microsoft Board of Directors. His almost 25-year career at BMW culminated in leading the company from 2002 to 2006, giving him experience as chief executive officer of a major international public corporation. In addition, his extensive résumé at BMW includes leadership roles in a variety of business disciplines including finance, information technology, worldwide human resources, and operations. Dr. Panke understands product manufacturing processes, how to manage a company through business cycles and intense competition, and how to build and sustain a globally recognized and respected brand. His service on the boards of other prominent international companies enhances his ability to contribute insights on achieving business success in a diverse range of geographies, economic conditions, and competitive environments.

 

		John W. Thompson Age 63   Director since 2012

Mr. Thompson currently serves as Chief Executive Officer of Virtual Instruments, a privately held company whose products are designed to ensure the performance and availability of applications deployed in virtualized and private cloud computing environments. Since 2009, Mr. Thompson has been an active investor in early-stage technology companies in Silicon Valley. Mr. Thompson served as Chairman and Chief Executive Officer of Symantec Corp., helping transform Symantec into a leader in security, storage, and systems management solutions. Mr. Thompson stepped down as Chief Executive Officer of Symantec in 2009, and stepped down from Symantec’s board of directors in 2011. Previously, Mr. Thompson held a number of leadership positions at IBM, including sales, marketing, software development, and general manager of IBM Americas. He was a member of IBM’s Worldwide Management Council.

Public company directorships in the last five years:

 

•Microsoft Corporation		•United Parcel Service
•Seagate Technology PLC (former)		•Symantec Corporation (former)

Qualifications:

Mr. Thompson has a wealth of leadership experience in the technology industry, including areas such as cloud computing and information security that are important to Microsoft’s strategic direction. As Chief Executive Officer of Virtual Instruments, he understands the critical importance of performance and reliability in enterprises’ physical, virtual and cloud computing environments. During his 10-year tenure as Chief Executive Officer of Symantec, Mr. Thompson oversaw its transformation into a leader in security, storage, and systems management solutions for individual consumers and large enterprises. Through his senior leadership experiences at Virtual Instruments, Symantec, and IBM, he has expertise in sales, marketing, technology and operations, including managing a large workforce and overseeing international business operations. Mr. Thompson’s experience also includes service as a director of other large public companies.

 

Our Board of Directors holds regularly scheduled quarterly meetings. Typically, committee meetings occur the day before the Board meeting. During one quarter each year, the committee and Board meetings occur on a single day so that the evening and following day can be devoted to the Board’s annual retreat, which includes presentations and discussions with senior management about Microsoft’s long-term strategy. In addition to 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 eight times during fiscal year 2012.

All of our directors attended 75% or more of the aggregate of all Board of Directors meetings and meetings of the committees on which they served during the last fiscal year. Directors are encouraged to attend the Annual Meeting of Shareholders. Five of the nine directors then on the Board attended the 2011 Annual Meeting.

 

In fiscal year 2012, our Board had five standing committees (number of fiscal year 2012 meetings in parentheses): an Audit Committee (9), a Compensation Committee (7), a Governance and Nominating Committee (5), a Finance Committee (3), and an Antitrust Compliance Committee (3).

As part of the Board’s annual review of its governance structure, in July 2012 the Board reorganized its committees to streamline its structure to provide more effective and efficient oversight of matters delegated to the committees.

The Antitrust Compliance Committee was replaced by the Regulatory and Public Policy Committee. The new committee retains oversight of the Company’s competition law compliance and also is responsible for overseeing the Company’s policies and programs that relate to certain legal, regulatory, and compliance matters including privacy and security, business operations risks related to business continuity, and public policy and corporate citizenship including public issues of significance to the Company and its stakeholders that may affect the Company’s operations, performance, or

reputation. The Board dissolved the Finance Committee. The Audit Committee assumed the Finance Committee’s responsibilities related to tax planning and compliance, the Company’s investment policies, and the management of portfolio investment risk with the remaining responsibilities of the Finance Committee related to capital structure, capital deployment, dividend and stock repurchase policies having been assumed by the full Board.

Each committee has a written charter. The table below provides current membership for each of the Board committees. In December 2011, Mr. Noski was appointed to the Governance and Nominating Committee replacing Mr. Marquardt. In May 2012, Mr. Thompson was appointed to the Compensation Committee replacing Mr. Hastings, and Mr. Luczo was appointed to the Audit Committee. In July 2012, members of the Antitrust Compliance Committee transitioned to the new Regulatory and Public Policy Committee and Mr. Thompson joined the committee, Dr. Panke transitioned off the Compensation Committee, and Mr. Marquardt joined the Governance and Nominating Committee.

 

Below is a description of each standing committee. Each committee has authority to engage legal counsel or other advisors or consultants as it deems appropriate to carry out its 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 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 risk assessment and risk management, and assessing the steps management has taken to control these risks,

 

•

reviewing with management policies, practices, compliance, and risks relating to our investment portfolio,

 

•

overseeing, with the Regulatory and Public Policy Committee, privacy, security, business continuity, and operational risks relevant to our information technology environment, and

 

•

reviewing compliance with significant applicable legal, ethical, and regulatory requirements.

The Audit Committee is responsible for the appointment, compensation, retention, and oversight of the independent auditor engaged to issue audit reports on our financial statements and internal control over financial

reporting. The 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. The Board of Directors has determined that each Committee member has sufficient knowledge in financial and auditing matters to serve on the Committee. In addition, the Board has determined that Ms. Dublon, Mr. Luczo, Mr. Noski, and Dr. Panke are “audit committee financial experts” as defined by SEC rules.

Compensation Committee

The primary responsibilities of the Compensation Committee are to:

 

•

assist our Board of Directors in establishing the annual goals and objectives of the chief executive officer,

 

•

recommend to the independent members of our Board the compensation of the chief executive officer,

 

•

oversee an evaluation of the performance of the Company’s other executive officers and approve their compensation,

 

•

oversee and advise our Board on the adoption of policies that govern executive officer compensation programs and other compensation-related polices,

 

•

assist the Board in overseeing plans for executive officer development and succession, and

 

•

oversee administration of our equity-based compensation and other benefit plans.

 

Our senior executives for human resources and compensation and benefits support the Compensation Committee in its work. The Committee may delegate to senior management the authority to make equity compensation grants to employees who are not executive officers. The Compensation Committee periodically reviews the compensation paid to non-employee directors, and makes recommendations to our Board of Directors for any adjustments.

The Compensation Committee Charter describes the specific responsibilities and functions of the Compensation Committee. See Part 4 – “Named Executive Officer compensation – Compensation discussion and analysis” for more information about the Committee’s work.

Compensation consultant

The Committee retains Semler Brossy Consulting Group, LLC to advise the Committee on marketplace trends in executive compensation, management proposals for compensation programs, and executive officer compensation decisions. Semler Brossy also evaluates compensation for the next levels of senior management and equity compensation programs generally. It also consults with the Committee about its recommendations to the Board of Directors on chief executive officer and director compensation.

Consultant independence

Semler Brossy is directly accountable to the Committee. To maintain the independence of the firm’s advice, Semler Brossy does not provide any services for Microsoft other than those described above. The Committee has adopted Compensation Consultant Independence Standards, which can be viewed at www.microsoft.com/investor/compconsultant. This policy requires that the Committee annually assess the independence of its compensation consultant. A consultant satisfying the following requirements will be considered independent. The consultant (including each individual employee of the consultant providing services):

 

•

is retained and terminated by, has its compensation fixed by, and reports solely to the Committee,

 

•

is independent of the Company,

 

•

will not perform any work for Company management except at the request of the Committee chair and in the capacity of the Committee’s agent, and

 

•

does not provide any unrelated services or products to the Company, its affiliates, or management, except for surveys purchased from the consultant firm.

In performing the annual assessment of the consultant’s independence, the Committee considers the nature and

amount of work performed for the Committee during the year, the nature of any unrelated services performed for the Company, and the amount of fees paid for those services in relation to the firm’s total revenues. The consultant annually prepares for the Committee an independence letter providing appropriate assurances and confirmation of the consultant’s independent status pursuant to the policy. The Committee believes that Semler Brossy has been independent during its service for the Committee.

Governance and Nominating Committee

The principal responsibilities of the Governance and Nominating Committee are to:

 

•

annually establish the process for conducting the review of the chief executive officer’s performance,

 

•

determine and recommend the slate of director nominees for election to our Board of Directors,

 

•

identify and recommend candidates to fill director vacancies occurring between annual shareholder meetings,

 

•

review the composition of Board committees,

 

•

annually evaluate the performance and effectiveness of the Board, and

 

•

monitor adherence to, review, and recommend changes to our corporate governance framework.

The Committee annually reviews the charters of Board committees and, after consultation with the respective committee chairs, makes recommendations, if necessary, about changes to the charters. The Governance and Nominating Committee Charter describes the specific responsibilities and functions of the Committee.

Regulatory and Public Policy Committee

The principal responsibilities of the Regulatory and Public Policy Committee are to:

 

•

review and advise the Board and management about legal, regulatory, and compliance matters concerning competition and antitrust, privacy, security, employment, and immigration laws,

 

•

review and advise the Board and management about the Company’s business continuity programs,

 

•

oversee, with the Audit Committee, privacy, security, business continuity, and operational risks relevant to our information technology environment, and

 

•

review our policies and programs that relate to matters of corporate citizenship, including human rights, corporate social responsibility, environmental sustainability, the annual public policy agenda, and political activities and expenditures.

 

During fiscal year 2012, Mr. Ballmer received no compensation for serving as a director. He, like all directors, is eligible to be reimbursed for reasonable expenses incurred in attending Board and committee meetings.

Each year the Compensation Committee reviews compensation paid to non-employee directors and makes

recommendations for adjustments, as appropriate, to the full Board of Directors. Our objective for compensation to directors is to pay at or near the median of the Dow 30, to award the majority of compensation in equity, and to make meaningful adjustments every few years, rather than smaller adjustments that are more frequent. No changes were made to director compensation for fiscal year 2012.

 

The Company pays for reimbursement of reasonable expenses incurred in connection with Board-related activities.

The annual Board retainer is paid quarterly in arrears. Quarterly periods are measured beginning on the date of the annual shareholders meeting and each three months after that date. At the end of each quarterly period, we pay 25% of the total annual retainer to each director serving as of the last day of the service period.

Directors may elect to defer and convert to equity all or part of their annual cash retainer, and to defer receipt of all or part of their annual equity retainer under the Deferred Compensation Plan for Non-Employee Directors. Amounts deferred are maintained in bookkeeping accounts that are deemed invested in Microsoft common stock, and dividends paid on the deferred equity are deemed to be invested in our common stock. We calculate the number of shares credited by dividing each quarterly amount deferred by the closing market price of our common stock on the originally scheduled payment date. Accounts in the plan are distributed in shares of Microsoft common stock, with payments either in

installments beginning on separation from Board service or in a lump sum amount paid no later than the fifth anniversary after separation from Board service.

To align the interests of our directors and shareholders, our Board of Directors believes that directors should have a significant financial stake in Microsoft. Under the Corporate Governance Guidelines, each director should own Microsoft shares equal in value to a minimum of three times the base annual retainer payable to a director. Directors should achieve this ownership level within five years after the director becomes a Board member. Stock deferred under the Deferred Compensation Plan for Non-Employee Directors counts toward the minimum ownership requirement. As of the end of fiscal year 2012, each of our Directors complied with our stock ownership policy.

Mr. Ballmer, an employee director, is excluded from the following table because we fully describe his compensation in Part 4 – “Named Executive Officer compensation – Summary compensation table” and in Part 4 – “Named Executive Officer compensation – Components of compensation and fiscal year 2012 awards.”

 

Stock options are excluded from the table above. Outstanding stock options held by Messrs. Gilmartin and Marquardt as of June 30, 2012 are described in the footnotes to the table in Part 2 – “Corporate governance at Microsoft – Information regarding beneficial ownership of principal shareholders, directors, and management.”

In addition, to assist directors in developing an in-depth understanding of our businesses, products, and services, and to facilitate the efficient operation of the Board of

Directors through use of computing devices that feature Microsoft software, upon request, directors are provided a personal computer and associated peripherals for their use while they serve on our Board. Each year, directors also may receive a Windows Phone, an Xbox gaming and entertainment console, peripherals, and gaming software, Microsoft computer peripherals, and Microsoft software and service subscriptions with an aggregate value of up to $5,000 per director.

 

This compensation discussion and analysis provides information about our fiscal year 2012 compensation program for our fiscal year 2012 Named Executive Officers (collectively “Named Executive Officers” or “NEOs”):

 

•

Steven A. Ballmer, our Chief Executive Officer (and our principal executive officer)

 

•

Peter S. Klein, our Chief Financial Officer (and our principal financial officer)

 

•

Kurt D. DelBene, our President, Microsoft Office Division

 

•

Steven J. Sinofsky, our President Windows and Windows Live Division

 

•

B. Kevin Turner, our Chief Operating Officer

The contents of this compensation discussion and analysis are organized into three sections:

Section 1 – Performance and pay

Section 2 – Compensation setting process and decisions for fiscal year 2012

Section 3 – Other compensation policies and information

Section 1 – Performance and pay

Fiscal year 2012 corporate performance

Company-wide performance

In fiscal year 2012, we continued to drive solid business results even as we invested to reach the threshold of the largest launch wave in our history. We reported:

 

•

$74.26 billion in revenue as adjusted,* an increase of 6% (GAAP revenue of $73.72 billion)

 

•

$28.50 billion in operating income as adjusted,* an increase of 5% (GAAP operating income of $21.76 billion)

 

•

$2.78 diluted earnings per share as adjusted,* an increase of 5% (GAAP diluted earnings per share of $2.00)

 

•

$31.6 billion in cash flow from operations, an increase of 17%, reflecting continued discipline in controlling costs

•

$10.7 billion returned to shareholders through dividends and stock buybacks

 

*

Revenue adjusted for revenue deferrals from sales of Windows 7 with an option to upgrade to Windows 8 Pro at a discounted price (the “Windows Upgrade Offer”). Operating income and EPS adjusted for Windows Upgrade Offer deferral and goodwill impairment. EPS adjusted also for tax settlement benefit in the third quarter of fiscal year 2011. Please see Annex A to this proxy statement for a reconciliation of non-GAAP and GAAP financial measures presented.

Business segment highlights

Financial and operating results in our businesses reflected continuing product momentum.

 

•

Server and Tools revenue grew 12% over fiscal year 2011 as we delivered new versions of significant products, such as SQL Server 2012 and System Center 2012.

 

•

Microsoft Business Division revenue grew 7% over fiscal year 2011. Two years after launch, Office 2010 adoption by businesses continued to grow. Office is installed on more than 1 billion PCs worldwide.

 

•

Windows & Windows Live Division revenue declined 3% in fiscal year 2012, or 1% adjusting for the impact of the Windows Upgrade Offer. Windows 7 adoption continued with more than 50% of worldwide enterprise desktops running Windows 7.

 

•

Online Services Division revenue grew 10% in fiscal year 2012. Operating loss increased $5.5 billion primarily due to a $6.2 billion goodwill impairment charge. Excluding the impairment charge, OSD operating performance improved by 27%. Bing introduced social search, and achieved organic U.S. search market share of 15.6% in June 2012, up 120 basis points from June 2011. Including Yahoo! properties, U.S. market share was approximately 26% in June 2012, down 100 basis points from 2011.

 

•

In the Entertainment and Devices Division we integrated Skype, which contributed to an 8% increase in revenue over fiscal year 2011. Although the console market

 

declined in fiscal year 2012, Xbox 360 ended fiscal year 2012 as the top-selling console in the U.S. for 18 consecutive months, with 47% market share. We released an update to Xbox Live and membership increased more than 15% year over year.

Preparing to deliver the new era of devices and services

 

We delivered these results while preparing a pipeline of new and updated products that will launch in the year ahead. This is significant in our strategic evolution as we transform user experiences through the adoption of cloud computing combined with the richness of smart, connected devices. Our work in 2012 led to the offerings we are launching in fiscal year 2013 that will enable experiences that seamlessly connect PCs and mobile and other devices through the cloud.

 

•

We made available the Release Preview of the Windows 8 operating system on May 31, 2012 and completed its development with release to manufacturing on August 1, 2012. Windows 8 will launch on October 26, 2012. Through Windows 8’s intuitive, touch-based interface and easy access to users’ favorite services, applications, and content, our goal is to provide users with a consistent and compelling experience on a variety of PCs and mobile devices.

 

•

Complementing the variety of OEM hardware that will be available to run Windows 8, in June 2012 we introduced the Surface, a set of Microsoft-designed and manufactured hardware devices that combine the power of our Windows 8 software and the feel of premium hardware.

 

•

On July 16, 2012, we unveiled the customer preview of the new Microsoft Office, our suite of productivity applications optimized to work with Windows 8 delivering advances in cloud, mobility, and social features.

 

•

On June 20, 2012, we unveiled the next version of our Windows Phone operating system, Windows Phone 8, which will be based on the same core technologies that power Windows 8. This will enable a wave of new mobile scenarios for consumers, developers, and IT professionals.

 

•

On August 1, 2012, we released to manufacturing Windows Server 2012, a cloud-optimized server operating system designed to help businesses create

private and hybrid clouds, and Visual Studio 2012, an update to our developer tools. We launched both of these products in September.

 

•

On June 4, 2012, we introduced Xbox SmartGlass for Xbox 360, which will connect phones, PCs, and tablets with our console to enable more interactive and engaging entertainment.

Named Executive Officer pay and performance

 

In our 2011 compensation discussion and analysis, we noted that for fiscal year 2012 we changed our rewards program by increasing base pay and total pay opportunity broadly across the Company in response to the increasingly competitive technology labor market. The Compensation Committee also evaluated the compensation opportunity for our executive officers for fiscal year 2012 and agreed it was necessary to increase their incentive compensation targets to remain competitive with other outside employment opportunities. The increase did not apply to our chief executive officer. More information about the market for talent is provided below in Section 2 – “Compensation setting process and decisions for fiscal year 2012.”

As explained in Section 2, the Compensation Committee and independent directors review an array of quantitative and qualitative measures before applying their judgment to determine NEO pay for the year. As a result, incentive plan pay is not tied directly to any specific set of metrics. Nevertheless, the relationship between total direct compensation (base salary plus cash and stock-based incentive compensation) and key financial results demonstrates the alignment we have established between pay and business performance.

From 2008 to 2012, changes in total direct compensation for our NEOs generally tracked changes in our operating income. Over time, we expect operating income and total direct compensation to trend together; in any given year there may be some variability. The table below illustrates this relationship. Similarly, the decisions of the Compensation Committee and Board result in incentive plan awards for Named Executive Officers that vary within a given year and from year-to-year. For example, awards ranged from, 96% to 140%, 90% to 132%, and 90% to 125% of target in fiscal years 2010, 2011, and 2012, respectively.