Corporate Governance Highlights
·		All directors elected annually
·		Majority voting for directors in uncontested elections
·		Holders of 15 percent of our common stock may call a special meeting of shareholders without material restrictions
·		No supermajority voting provisions
·		Formal Disclosure Committee used for financial reporting review and approval
·		Robust Political Contribution Policy provides Board oversight of our limited political contributions and requires disclosure of political expenditures on our corporate website
·		Engaged with more than 300 investors during 2019, and conducted a shareholder outreach program focused on corporate governance, executive compensation and disclosure and related issues
·		Committed to adopt a three percent/3 year/20 percent/20 proxy access bylaw by December 31, 2020 as a result of our shareholder outreach activities
·		Committed to implement in 2021 Board oversight and public disclosure regarding lobbying expenditures
·		Executive stock ownership guidelines support mandatory stock retention requirements and align executives’ interests with shareholders’
·		Short selling, hedging, pledging and margin transactions involving American Water securities prohibited for all directors, executive officers and employees
·		Led by the Audit, Finance and Risk and SETO Committees, the Board is broadly focused on risk assessment, management and mitigation
·		Longstanding commitment to safety, sustainability, environmental leadership and diversity
·		SETO Committee maintained to oversee key safety, environmental, technology and operational functions

Board of Directors Highlights
·		Appropriately sized board (11 members for election in 2020) (as of April 1, 2020)
·		Average tenure of director nominees is approximately 5.5 years (as of April 1, 2020)
·		Average age of director nominees is approximately 62.3 years (as of April 1, 2020)
·		Gender diversity of Board - 45 percent of Board nominees are female (as of April 1, 2020)
·		Board is led by an independent, non-executive chairman
·		Ten out of 11 director nominees, and all committee members, are independent (as of April 1, 2020)
·		Demonstrated continued refreshment of the Board with six out of 11 Board nominees having served for less than four years (as of April 1, 2020)
·		Robust and active director succession and nomination process serves to identify talented and diverse board members
·		Engaged and focused Board and Nominating/Corporate Governance Committee met 12 and six times, respectively, in 2019
·		CEO and executive succession planning discussions conducted throughout the year
·		Annual self-assessments and individual peer assessments conducted by Board and each committee
·		Director education program with dedicated funding supports ongoing director development
·		Stock ownership policy for directors of five times annual cash retainer by fifth anniversary of service
·		Deep engagement with company personnel through off-site board meetings, external stakeholder reception, in-depth reviews of cultural survey results and meetings with “high potential” leaders

 

PROXY STATEMENT SUMMARY			i
THE AMERICAN WATER ANNUAL MEETING			1
Information about this Proxy Statement			1
Location and Time of the Annual Meeting			1
Shares Entitled to Vote			2
Matters to be Voted on at the Annual Meeting			2
How to Vote Shares Registered in Your Own Name			3
How to Vote Shares Held in Street Name			4
Revoking or Changing a Proxy			4
Attending the Annual Meeting in Person			5
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE			6
The Board of Directors			6
Board Committees			6
Board Review of Related Person Transactions			9
Board Leadership Structure			10
Board Role in Risk Oversight			11
Board Role in Succession Planning			12
Board Refreshment and Director Tenure			13
Shareholder Outreach			14
Governance Policies and Procedures			14
Political Contribution Policy			15
Information About Our New Executive Officers			16
PROPOSAL 1: ELECTION OF DIRECTORS			17
Explanation of the Proposal			17
Director Criteria, Qualifications, Experience and Diversity			18
Director Nominees			20
Director Independence			31
Director Evaluations and Assessments			33
Director Compensation			33
Director Compensation Table			34
Non-Employee Director Stock Ownership Requirements			35
Recommendation of the Board			35
PROPOSAL 2: VOTE TO APPROVE, ON AN ADVISORY BASIS, THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS			36

COMPENSATION COMMITTEE REPORT			37
COMPENSATION DISCUSSION AND ANALYSIS			38
Executive Summary			38
Shareholder Advisory Votes			43
Compensation Determinations and Pay Competitiveness in 2019			43
New or Amended Executive Compensation Arrangements			45
2019 Compensation			45
CEO Transition			52
Stock Option Grant Practices			53
Executive Stock Ownership Guidelines and Stock Retention Requirements			53
Policies Prohibiting Hedging, Pledging, Margining and Short Selling			54
Ongoing and Post-Employment Arrangements and Benefit Plans			55
Change in Control Provisions in Equity Plans			58
Recovery of Incentive Compensation			58
Tax and Accounting Considerations			58
EXECUTIVE COMPENSATION			60
2019 Summary Compensation Table			60
2019 Grants of Plan-Based Awards			64
Outstanding Equity Awards at 2019 Fiscal Year-End			65
2019 Option Exercises and Stock Vested			66
Pension Benefits at December 31, 2019			67
Description of Pension and Other Retirement Plans			67
2019 Nonqualified Deferred Compensation			69
Description of the Employee Deferred Compensation Plan			69
Potential Payments on Termination or Change in Control			70
CEO Pay Ratio			76
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION			77

 

EQUITY COMPENSATION PLAN INFORMATION			77
AUDIT, FINANCE AND RISK COMMITTEE REPORT			78
PROPOSAL 3: RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			79
General			79
Fees Paid to Independent Registered Public Accounting Firm			80
Pre-Approval of Services Provided by Independent Registered Public Accounting Firm			80
CERTAIN BENEFICIAL OWNERSHIP MATTERS			81
Security Ownership of Management			81
Security Ownership of Certain Beneficial Owners			83

COMMUNICATIONS, SHAREHOLDER PROPOSALS AND COMPANY INFORMATION			84
Shareholder Communications to the Board			84
Shareholder Proposals and Director Nominations			84
Delivering Proxy Materials Through Electronic Means			85
Householding of Proxy Materials			85
Contacting Us or Our Transfer Agent			86
Where to Find More Information			86
OTHER MATTERS			87
Other Matters to Come Before the Annual Meeting			87
Solicitation of Proxies			87
Status of Information Included in this Proxy Statement			87
APPENDIX A – NON-GAAP FINANCIAL INFORMATION			A-1
DIRECTIONS AND PARKING			B-1

 

Our Board is furnishing this proxy statement in connection with the solicitation of proxies to vote on matters to be submitted at our 2020 Annual Meeting of Shareholders and at any adjournment or postponement of the meeting. The Notice of Annual Meeting, this proxy statement, the accompanying proxy card and our 2019 Annual Report to Shareholders, or the 2019 Annual Report, were first sent or given on or about March 31, 2020 to shareholders of record as of March 17, 2020, which is referred to as the record date.

Throughout this proxy statement, unless the context otherwise requires:

·

references to the “Board” or the “Board of Directors” mean the Board of Directors of American Water Works Company, Inc.;

·

references to “common stock” mean the common stock, par value $0.01 per share, of American Water Works Company, Inc.;

·

references to the “meeting” or the “annual meeting” mean the 2020 Annual Meeting of Shareholders of American Water Works Company, Inc.; and

·

references to “we,” “us,” “our,” the “Company” or “American Water” are to American Water Works Company, Inc., without its subsidiaries.

 

Unless otherwise determined by the Board or the Chairman of the Board, the meeting will be held at 10:00 a.m., Eastern time, on Wednesday, May 13, 2020, at the Company’s corporate headquarters, located at 1 Water Street, Camden, New Jersey 08102-1658. The doors will open at approximately 9:30 a.m., Eastern time.

The health and safety of our shareholders, directors, officers, employees, other attendees, and the public at large, is American Water’s most important concern. We presently intend to hold our annual meeting in person. However, in light of the public health and safety concerns associated with the current coronavirus (COVID-19) outbreak, the Board or the Chairman of the Board may elect under Article II of our Amended and Restated Bylaws to change the location of the meeting and hold it solely via remote communications, also known as a “virtual meeting,” rather than at a physical location. In that case, you would not be able to attend the meeting physically.

If we determine to hold the meeting solely by remote communications, the Company will provide reasonable advance notice of that decision to our shareholders, together with instructions on how shareholders may attend the virtual meeting, by issuing a press release and filing definitive additional soliciting material with the SEC. We will also provide all of this information on the Investor Relations page

of our website. The Notice of Availability, proxy card or voting instruction form that you received would not be updated to reflect the change to a virtual meeting and you would need the 16-digit control number provided to attend the virtual meeting. Thus, it is very important that you retain your Notice of Availability, proxy card or voting instruction form, as applicable, and the related materials, including your assigned 16-digit control number, through the date of the annual meeting.

If you have lost or misplaced your 16-digit control number, please contact our Investor Relations team, at (856) 566-4005.

An audio-only webcast of the meeting can be accessed during the meeting via our Investor Relations website at https://ir.amwater.com. The access information for the webcast presentation will be announced via press release and on our website. If you wish to access the webcast of the meeting, you will need to have the necessary software installed and operating on your computer or other applicable device, together with appropriate access to the Internet to permit transmission of the webcast.

The audio webcast will be archived and available for 30 days after the meeting on our Investor Relations website at https://ir.amwater.com.

 

All shareholders of record as of the record date are entitled to vote at the meeting. As of the close of business on the record date, 181,019,619 shares of our common stock were outstanding. Each outstanding share of common stock entitles the holder of record to one vote on each matter submitted to the vote of shareholders at the meeting. Holders of our options, unvested restricted stock units, or RSUs, and unvested performance stock units, or PSUs, as well as holders of awards as to which the receipt of underlying common stock has been deferred, are not entitled to vote any shares of common stock underlying those awards at the meeting.

Under our Amended and Restated Bylaws, the holders of a majority of the outstanding shares of our common stock at the close of business on the record date must be present at the meeting, either in person or by proxy, to constitute a quorum and to transact business at the meeting. Abstentions and broker non-votes are included in the determination of shares present at the meeting for quorum purposes. See “—How to Vote Shares Held in Street Name” on page 4 of this proxy statement for more information on “broker non-votes.”

 

The internet and telephone voting facilities for shareholders of record will close at 11:59 p.m., Eastern time, on Tuesday, May 12, 2020.

Your signed proxy card, or the proxy you grant via the Internet or by telephone, will be voted in accordance with your instructions. If you own shares that are registered in your own name and return a signed proxy card or grant a proxy via the Internet or by telephone, but do not indicate how you wish your shares to be voted, your shares will be voted:

 

·

“FOR” the election of each of the Board’s 11 director nominees;

·

“FOR” the approval, on an advisory basis, of the compensation of our named executive officers; and

·

“FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2020.

In the absence of instructions to the contrary, proxies will be voted in accordance with the judgment of the person exercising the proxy on any other matter properly presented at the meeting.

If you received more than one proxy card or Notice of Availability, your shares are likely registered in different names or with different addresses, or are held in more than one account. You must separately vote the shares shown on each proxy card or Notice of Availability that you receive in order for all of your shares to be voted at the meeting. For more information regarding the Notice of Availability, please see “Communications, Shareholder Proposals and Company Information—Delivering Proxy Materials Through Electronic Means” on page 85 of this proxy statement.

 

If you hold shares through a brokerage firm, trustee, bank, or other financial intermediary or nominee, which is known as holding shares in “street name,” you will receive a voting instruction form from that broker, trustee, bank or other financial intermediary or nominee, each of which we refer to as an “intermediary”. The form will explain how to direct the voting of your shares through the intermediary, which may include the ability to provide voting instructions via the Internet or by telephone.

If your shares are held in street name through a brokerage firm that is a member of the NYSE, and you want to vote on any of Proposals 1 or 2, you MUST indicate how you wish your shares to be voted. The broker will vote shares held by you in street name in accordance with your voting instructions, as indicated on your signed voting instruction form or by the instructions you provide via the Internet or by telephone. Absent such instructions, NYSE rules would prohibit a broker from exercising discretion to cast a vote with respect to your shares. In that case, a proxy submitted by the broker with respect to your shares would indicate that the broker is unable to cast a vote with respect to the matter, which is commonly referred to as a “broker non-vote.”

Under NYSE rules, Proposal 3 is considered a “routine matter,” and thus a broker would be permitted in its discretion to cast a vote on that proposal as to

your shares in the event that you do not provide the broker with voting instructions. Accordingly, if your shares are held in street name, it is important that you provide voting instructions to the intermediary so that your vote will be counted.

If you hold shares in street name and wish to vote your shares in person at the meeting, you must first obtain a valid legal proxy from the intermediary. To do so, you must follow the instructions provided on your voting instruction form, or, if no such instructions were provided, you must contact the intermediary directly. To attend the meeting in person (regardless of whether you intend to vote your shares in person at the meeting), you must obtain an admission card in advance of the meeting by following the instructions under “—Attending the Annual Meeting in Person” on page 5 of this proxy statement. You would not be able to attend the meeting simply by obtaining a legal proxy without also obtaining an admission card.

If you received more than one voting instruction form or Notice of Availability, your shares are likely registered in different names or with different addresses or are in more than one account. You must separately follow the foregoing voting procedures for each voting instruction form or Notice of Availability that you receive in order for all of your shares to be voted at the meeting.

 

If you own shares in your own name (including shares you may hold through American Water Stock Direct, our dividend reinvestment and direct stock purchase plan), you may revoke any prior proxy, regardless of how your proxy was originally submitted, by:

 

·

sending a written statement to that effect to our Secretary, which must be received by us before the meeting;

·

submitting a properly signed proxy card dated a later date;

·

submitting a later dated proxy via the Internet or by telephone; or

·

attending the meeting in person and voting your shares at the meeting.

Please see “Communications, Shareholder Proposals and Company Information—Contacting Us or Our Transfer Agent” on page 86 of this proxy statement for more information on providing our Secretary with written notice and “—Attending the Annual Meeting in Person” on page 5 of this proxy statement regarding the requirements for attending the meeting in person.

If you hold shares in street name, you should follow the instructions provided on your voting instruction form or contact the intermediary for instructions on how to change your vote.

 

Admission to the annual meeting will be limited to our shareholders or their authorized, legal proxies, and our authorized employees and guests. If you plan to attend the meeting in person, you must have a valid, government-issued photo identification, as well as an admission card. Upon arrival at the annual meeting, you will be asked to present your admission card and government-issued photo identification to enter the meeting. We reserve the right to deny admission to the meeting location to any person who arrives at the meeting location without an admission card and valid, government-issued photo identification in his or her name.

For the safety and security of all attendees at the meeting, you will not be permitted to bring cameras, cell or smart phones, recording equipment, computers, large bags, briefcases or packages into the meeting. If you bring any of these prohibited items to the meeting, you will be required to leave them outside the meeting room until the meeting has concluded.

Under Article II of our Amended and Restated Bylaws, the Board or chairman of the meeting may impose additional reasonable restrictions on the conduct of the meeting and the ability of individuals to attend the meeting in person. These procedures are designed to ensure the safety and security of all attendees at the meeting.

Please see “—Location and Time of the Annual Meeting” for important information about the possible use of a virtual meeting rather than a physical location, due to possible public health and safety impacts associated with the current coronavirus, or COVID-19, outbreak.

If your shares are registered in your name, you will receive an admission card in one of three different ways:

 

·

If you received your proxy materials by mail, your admission card is attached to your proxy card.

·

If you received your proxy materials by e-mail, your admission card is the e-mail, which you must print out and bring with you to the meeting.

·

If you received a Notice of Availability, your admission card is the Notice of Availability with your name on it.

The original admission card attached to your proxy card or the original Notice of Availability with your

name on it must be presented at the meeting. Photocopies of these documents will not be accepted. If you lose your admission card, please contact our Investor Relations department to request a replacement.

If you hold your shares in street name or you hold a valid legal proxy, and you plan to attend the annual meeting, you must send us a timely request for an admission card. We must receive your request no later than Wednesday, May 6, 2020 in order to be timely. Your request must be in the form of a signed cover letter containing the following information:

 

·

Your name, complete mailing address and daytime telephone number;

 

·

A photocopy of your valid, government-issued photo identification;

 

·

If you own shares in street name:

 

§

the number of shares that you own in street name;

 

§

the name, address and telephone number of the intermediary; and

 

§

proof that you own common stock as of the record date, such as:

 

◾

a letter from the intermediary, or

 

◾

a photocopy of a current brokerage or other account statement showing

 

•

your ownership of such shares on the record date, or

 

•

your continuous ownership of such shares before and after the record date.

 

·

If you are a legal proxy holder:

 

§

the number of shares that are the subject of the legal proxy;

 

§

a photocopy of the valid, signed and dated legal proxy; and

 

§

the name, address and daytime telephone number of the shareholder who gave the legal proxy to you.

All communications regarding admission card requests or admission procedures should be addressed to Investor Relations at the address provided on page 86 of this proxy statement.

 

As of the date of this proxy statement, the Board is comprised of 11 members, consisting of ten independent directors and Susan N. Story, our President and Chief Executive Officer. Ms. Story will be retiring from her positions as President, Chief Executive Officer and a member of the Board, effective April 1, 2020. The Board has elected Walter J. Lynch, who joined the Company in 2001 and has served as our Executive Vice President and Chief Operating Officer since 2016, to succeed her in each of these positions effective April 1, 2020.

The Board held 12 meetings during 2019. During the period in 2019 for which each director served as such, he or she attended at least 75 percent of the combined number of Board meetings and meetings of the Board committees on which he or she served. The average attendance for all Board members was 93.4 percent.

The Board has adopted an attendance policy, set forth in our Corporate Governance Guidelines, under

which attendance, whether by telephone or in person, is expected at all Board and committee meetings, except for absences previously excused by the Chairman of the Board or the Chairman of the Nominating/Corporate Governance Committee, or the Nominating Committee, due to extraordinary circumstances. All members of the Board are expected to attend the annual meeting of shareholders, except for absences due to unavoidable or extenuating circumstances. All of the directors then on the Board attended the 2019 annual meeting of shareholders, except for Jeffrey N. Edwards, who was unable to attend due to an unavoidable family conflict.

At most regularly scheduled meetings, the Board meets in executive session, without the presence of any members of management. Our independent, non-executive Chairman of the Board presides over these sessions.

 

As of the date of this proxy statement, the Board has four separately designated standing committees:

 

·   the Audit, Finance and Risk Committee;
·   the Executive Development and
Compensation Committee, or the Compensation Committee;
·   the Nominating Committee; and
·   the SETO Committee.

As needed, each committee sets a time to meet in executive session without management personnel present. The Compensation Committee meets regularly with its independent compensation consultant in executive session. The Audit, Finance and Risk Committee meets regularly in separate executive sessions with, among others:

 

·

our Vice President of Internal Audit;

·

our Chief Compliance Officer;

·

our Executive Vice President, General Counsel and Secretary; and

·

representatives of our independent registered public accounting firm.

Also, each committee has the authority to retain outside advisors, including legal counsel or other experts, as it deems appropriate in its sole discretion and to approve the fees and expenses associated with such advisors.

The membership of each of the standing Board committees as of the date of this proxy statement, including the number of committee meetings held during 2019, are set forth in the table below:

 

The Board has adopted the Related Person Transaction Policy for reviewing, approving and ratifying transactions involving related persons to ensure compliance with our Code of Ethics and applicable law. Subject to certain exceptions, this written policy covers transactions, relationships or arrangements in which American Water or any subsidiary was or is to be a participant and a related person had or will have a direct or indirect material interest. For purposes of this policy, a “related person” is any person who:

 

·

is a current executive officer or director of the Company or any subsidiary;

·

was a former executive officer or director of the Company or any subsidiary during the current or prior fiscal year;

·

is or was a Company or subsidiary director nominee during the current or prior fiscal year;

·

at the time the related person transaction occurred or existed, is or was a current employee (other than an executive officer) of the Company or any subsidiary;

·

at the time the related person transaction occurred or existed, was a beneficial owner of more than five percent of our common stock; or

·

is or was a specified immediate family member, or any other person sharing the household of such person (other than a tenant or employee) of, any of the foregoing.

Permission for a related person transaction may only be granted in writing in advance by the following:

 

·

the disinterested members of the Audit, Finance and Risk Committee or the Board, in the case of transactions involving corporate officers, directors or other employees in specified senior grade levels; and

 

·

our Compliance and Ethics Committee, which is comprised of members of management, in the case of all other employees.

Further, as permitted by the policy, the Compliance and Ethics Committee may, in its discretion, delegate to our Chief Compliance Officer the authority to review and approve related person transactions that are within its authority where the amount involved is less than $5,000. Transactions involving the compensation of our directors or executive officers are not subject to this policy if they are reviewed and properly approved by the Compensation Committee or the independent members of the Board as specified in the Compensation Committee’s charter.

Before any related person transaction is approved, the following factors are to be considered:

 

·

the related person’s interest in the transaction;

·

the dollar value of the amount involved in the transaction;

·

the dollar value of the related person’s interest in the transaction without regard to the amount of any profit or loss;

·

whether the transaction is to be undertaken in the ordinary course of business of American Water;

·

whether the transaction with the related person is proposed to be entered into on terms more favorable to American Water than terms that could have been reached with an unrelated third party;

·

the purpose, and the potential benefits to American Water, of the transaction; and

·

any other information regarding the transaction or the related person that is material in light of the circumstances of the particular transaction.

Approval of a related person transaction under the policy will be granted only if it is determined that, under all of the circumstances, the transaction is in the best interests of American Water and only so long as those interests outweigh any negative effects that may arise from permitting the transaction to occur.

 

For 2019 and until April 1, 2020, Ms. Story has served as our President and Chief Executive Officer. Effective as of April 1, 2020, Mr. Lynch has been appointed to serve as our President and Chief Executive Officer. Mr. Kurz has served as our Chairman of the Board since May 11, 2018.

Our Corporate Governance Guidelines provide that the Chairman of the Board is to be an independent director. We believe that the oversight function of a board of directors is enhanced when an independent director, serving as chairman of the board, is in a position to set the agenda for, and preside over, meetings of the board of directors. We also believe that our leadership structure enhances the active participation of our independent directors.

The Chairman of the Board is responsible for:

 

·

setting the agenda for meetings of the Board, and presiding over Board meetings at which the Chairman of the Board is present;

·

coordinating the work of the Board committees;

·

overseeing the distribution of materials by our Secretary to the members of the Board;

·

serving as the independent director primarily responsible for Board consultations and communications between the Board and shareholders; and

·

performing such other duties as the Board may, from time to time, require to assist it in the fulfillment of its duties.

If the Chairman of the Board ceases to be an independent director, the Board shall select another Chairman of the Board from among the members of the Board who are determined by the Board at that time to be independent directors. The Chairman of the Board is selected, and may be removed from that position at any time, by a majority of the members of the Board.

 

One of the responsibilities of the Board is the oversight of our risk management activities, which is discharged by the Board as well as through the Audit, Finance and Risk Committee, the Compensation Committee and the SETO Committee. In discharging this responsibility, the Board and these committees, with the assistance of management, monitor and evaluate our major enterprise risks and oversee and monitor the design and implementation of guidelines and programs to manage these risks.

Our management has overall responsibility for conducting risk assessments and risk management

strategy and programs. We have an Enterprise Risk Management Committee consisting of various Company executives and business unit employees that manages and oversees day-to-day enterprise risk management responsibilities. The Enterprise Risk Management Committee meets at least six times a year. The Enterprise Risk Management Committee’s areas of focus include competitive, economic, operational (including cybersecurity), financial (including accounting, internal audit, credit, liquidity and tax), legal, compliance, regulatory, health, safety and environmental, political and reputational risks.

 

The Audit, Finance and Risk Committee is responsible for assisting the Board in overseeing the Company’s accounting and disclosure controls, the design and performance of the internal audit, ethics and compliance functions, and the enterprise risk management process, including risk assessments and risk management strategy. The Audit, Finance and Risk Committee also has direct authority over the Company’s independent registered public accounting firm.

In performing these responsibilities, the Audit, Finance and Risk Committee reviews, at least annually, with management our major financial and

operational risk exposures, including any risk concentrations and risk interrelationships, the magnitude and the likelihood of occurrence of risk, and management’s activities to monitor and control these exposures. This committee also reviews our major financial risks, including credit, liquidity, market and funding risks. The Audit, Finance and Risk Committee coordinates oversight of operational risk management with the SETO Committee. The Audit, Finance and Risk Committee also oversees our insurance risk management policies and programs and makes recommendations to the Board regarding the structure and renewal of our directors’ and officers’ liability insurance program.

 

The Compensation Committee assesses potential risks related to our compensation policies and practices. Management conducts and presents to the Compensation Committee for its review an annual risk assessment of our executive compensation, with a particular focus on performance-based compensation. This risk assessment is reviewed with both our internal audit function as well as with the Enterprise Risk Management Committee. In February 2020, an update of this risk assessment, which included our 2019 short-term and long-term performance-based executive compensation, was reviewed with the Compensation Committee. This assessment sought to identify whether

features of our compensation policies and practices could potentially encourage excessive risk-taking.

The risk assessment conducted by management found that our existing short-term and long-term compensation is coupled with compensation design elements and other controls that discourage decision-making focused solely on compensatory consequences. These design elements and controls include, among other things:

 

·

base salaries that are a sufficient component of total compensation to discourage excessive short-term risk taking;

 

·

cash performance-based awards with a maximum payout that is limited to 200 percent of target;

·

the ability of the Compensation Committee to exercise discretion in determining the amount of cash performance-based compensation awarded;

·

the use of long-term performance awards that mitigate against the taking of short-term risks;

·

the implementation of an annual independent audit of our Annual Performance Plan, or APP, targets and award process conducted by our internal audit function;

·

Company-wide and individual performance targets which are dispersed among a variety of financial and non-financial metrics, as well as among short-term and long-term goals;

·

policies and procedures implemented to provide for meaningful checks and balances regarding significant business decisions that may have a compensatory benefit, including the use of a robust vetting process for new business development opportunities and limiting the delegated authority of executives to approve transactions;

·

a compensation recovery policy that would require repayment of incentive compensation in the event of a material restatement of our financial statements under specific circumstances;

·

the use of overlapping vesting and performance periods through annual long-term performance award grants;

·

that we do not currently grant stock options as part of our long-term performance program, thereby discouraging behavior focused on short-term increases in stock prices; and

·

stock ownership guidelines and retention requirements that are applicable to executives and employees of the Company at a specified minimum salary grade (generally vice president) level.

On the basis of its review of our executive compensation programs, management concluded, and advised the Compensation Committee, that the risks of these compensation programs are mitigated and are not reasonably likely to have a material adverse effect on American Water.

 

The SETO Committee reviews and monitors operational risk exposure and risk mitigation strategies with the Audit, Finance and Risk Committee and the Board. In performing these responsibilities, the SETO Committee reviews management’s processes for assessing business continuity risks and developing

related contingency planning. The SETO Committee also reviews physical and cybersecurity threat assessments, including emerging issues and our related initiatives, and coordinates with the Audit, Finance and Risk Committee and the Board on matters related to cybersecurity risk.

 

The Corporate Governance Guidelines provide that a primary responsibility of the Board is planning for the succession of our CEO and other executive officers. The goal of our succession planning process is to identify executive talent at the Company and provide for continuity of effective leadership that can fulfill the long-term requirements of our business. The Corporate Governance Guidelines contemplate a collaborative effort between the Board (and certain of its committees) and the CEO; however, the Board retains full responsibility for the selection of the CEO.

Specifically, the Corporate Governance Guidelines provide that the CEO annually submits to the Board for

its review a succession plan for the CEO and other executive officers. The succession plan includes a determination of key competencies and desired experiences for the particular role, an identification and assessment of internal candidates, development plans for internal candidates and, as appropriate, identification of external candidates. The criteria used to assess potential CEO candidates are formulated by the Board based on the Company’s business strategies, and include the candidates’ experience, as well as strategic and leadership qualities. The CEO must also submit to the Board annually an emergency succession plan to prepare for any unforeseen event that may prevent the

 

CEO from continuing to serve. The Board may review executive development and succession planning more frequently as it deems appropriate.

In this regard, the Board has, in a manner consistent with its responsibilities as described in this section, delegated the day-to-day responsibility for the process of providing a slate of CEO succession candidates for consideration by the Board to the Nominating Committee, with input from the Chairman of the Board and the current CEO. The Board also has delegated authority to the Compensation Committee to collaborate with the CEO to ensure that processes are in place for succession planning and development with respect to other executive officers.

 

As a practical matter, consideration of executive succession planning (especially for the CEO role) occurs throughout the year at Board meetings and involves regular interaction between and among the Board, the President and Chief Executive Officer, the Senior Vice President, Human Resources, and other members of management, as appropriate.

The successions and transitions of Mr. Lynch as our President and Chief Executive Officer effective April 1, 2020 and M. Susan Hardwick as our Executive Vice President and Chief Financial Officer in 2019 were effected in accordance with the foregoing process.

 

Our Corporate Governance Guidelines do not impose term limits on the service of our directors. The Board believes that term limits could result in the loss of directors who have been able to develop, over a period of time, increasing insight into our business and operations, and an institutional memory that benefits the entire membership of the Board as well as management. Instead, the Nominating Committee reviews annually each director’s continuation on the Board, which allows each director the opportunity to confirm his or her desire to continue as a director and provides the Board an opportunity to refresh its membership as and when it deems appropriate.

Our Corporate Governance Guidelines generally restrict a non-employee director who has reached his or her 75th birthday prior to the date of our annual meeting of shareholders from being nominated for

re-election to the Board. However, the Board may, in special circumstances and where deemed in the best interests of the Company, grant an exception to this policy on an annual basis. There are no nominees for director who are 75 years of age or older.

As represented by the director tenure chart above and evidenced by our actual Board refreshment over the past few years, including most recently in 2019, we seek to maintain a continual balance of historical knowledge and experience coupled with directors who have more recently joined the Board, while seeking a variety of perspectives from a highly diverse and effective Board. While we believe that, as currently constituted, the Board is appropriately sized, the Board continually devotes substantive attention and focus on Board succession planning and activities to meet the Board’s future needs.

 

In addition to a robust Investor Relations function which, along with key executives and management, engaged with more than 300 investors in 2019, our shareholder outreach program focuses on corporate governance, executive compensation and disclosure and related issues. Through this outreach program, during and after the 2019 proxy season, we contacted a number of our shareholders who beneficially owned, in the aggregate, greater than 50 percent of our common stock, as well as a leading proxy advisory firm, to better identify and understand the relevant issues that were most important to them. Through these sessions, we:

 

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discussed topics of interest to our shareholders;

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solicited investor viewpoints;

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conveyed our views on those topics; and

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gained a better understanding of areas of mutual consensus.

We received overall positive feedback regarding our corporate governance framework, our Board composition, our proxy statement disclosures, our compensation practices and our Political Contribution Policy, related disclosures and Board oversight. Also, shareholders expressed appreciation for our willingness to seek their views, and more importantly, the desire to establish an ongoing dialogue. The input and insight gleaned from our 2019 shareholder outreach program was shared with management and our Board.

Further, as part of our 2019 shareholder outreach efforts, we engaged in a constructive dialogue with one of our shareholders regarding its view that we should

adopt a bylaw permitting proxy access. As a result of these efforts, we committed to the shareholder that, on or before December 31, 2020, the Board would adopt a bylaw amendment to permit up to 20 shareholders that have beneficially owned at least three percent of our common stock for a period of at least three years to include in our proxy statement, subject to other customary terms, requirements and limitations, nominees for election to the Board up to the greater of two or 20 percent of the members of the Board.

Also, as part of these outreach efforts, we committed to another shareholder that we would, on or before June 30, 2021, report annually to the Board on our lobbying activities and publicly disclose our aggregate lobbying expenditures (as defined under applicable state or federal law and to the extent disclosed to applicable election commissions). We also agreed to provide in our 2021 proxy statement additional disclosure regarding the oversight of our lobbying activities, and that we would include the shareholder in our 2020 shareholder outreach program.

We also want our shareholders to engage in appropriate interaction with our Board members. In this regard, on May 10, 2019, we held a breakfast for our shareholders prior to our 2019 annual shareholder meeting, which was also attended by Board members and members of management.

We intend to continue to engage regularly with shareholders and proxy advisory firms to solicit their input, and we give careful consideration to the feedback we receive.

 

Our Code of Ethics applies to our directors, officers and employees and is designed to promote, among other things:

 

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honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest in personal and professional relationships, and deter wrongdoing or even perceptions of wrongdoing;

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full, fair, accurate, timely and understandable disclosures in periodic reports we are required to file;

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accountability for adhering to the Code of Ethics; and

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compliance with applicable governmental laws, rules and regulations.

Our Code of Ethics provides for the prompt internal reporting of violations to an array of appropriate

 

persons identified in our Code of Ethics and confidential treatment of the reporting person during a compliance investigation to the extent possible. We intend to satisfy the disclosure requirements regarding any amendment to, or waiver from, a provision of the Code of Ethics that applies to our principal executive officer, principal financial officer, or principal accounting officer or controller (or persons performing similar functions) by making disclosures concerning such matters available on the Investor Relations page of our website.

Our Corporate Governance Guidelines set out principles by which the Board will operate and execute its responsibilities in accordance with our

Restated Certificate of Incorporation, our Amended and Restated Bylaws, the listing standards of the NYSE, and applicable laws. Additionally, the Board has adopted charters that govern the operations of the Audit, Finance and Risk Committee, the Compensation Committee, the Nominating Committee and the SETO Committee.

Current copies of all of the foregoing documents are available on our Investor Relations website at https://ir.amwater.com and can also be obtained by sending us a written request. See “Communications, Shareholder Proposals and Company Information—Contacting Us or Our Transfer Agent” on page 86 of this proxy statement.

 

As a company whose regulated operations can be significantly impacted by public policies, we participate responsibly in the political process and make reasonable political contributions consistent with all applicable laws and reporting requirements. We also hold memberships in a variety of industry, trade and business associations, which enable us to understand the views of others and obtain feedback on our positions.

As part of our commitment to good governance principles and transparency, the Board adopted a company-wide Political Contribution Policy effective December 31, 2018. This policy requires that our political contributions, which we define as direct contributions or expenditures to a political party, a candidate for an elected office or his or her political campaign, or a political action committee (“PAC”) (subject to the exclusions referenced below) be made only:

 

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by the American Water Works Company, Inc. Employee Federal PAC (the “Federal PAC”), or

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to, or through, a PAC sponsored by or associated with one of our subsidiaries or lines of business (a “Subsidiary PAC”).

All political contributions by the Company must be approved in advance by our CEO. Political contributions by the Company’s subsidiaries must first be approved by the subsidiary’s or line of business’s president, or similar officer. This pre-approval requirement does not apply to contributions by the

Federal PAC or a Subsidiary PAC, which are governed by the PAC’s own charter, policies and procedures. The policy does not regulate or apply to our employees’ own political contributions.

Beginning in 2019, we disclosed annually on our website, within 180 days after the end of the preceding fiscal year, the following information regarding our political contributions:

 

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the payor, recipient, date and amount of each direct political contribution we made, and the title of the person approving it;

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the payor, recipient, date and amount of each political contribution made by the Federal PAC and each Subsidiary PAC; and

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the payor, recipient and amount of each payment made to a trade association or tax-exempt organization during the last fiscal year, which, individually or in the aggregate, exceeded $50,000, if the association or organization provided a written statement that some or all of our payments were used for non-deductible political or lobbying purposes, as well as the amount reported by the association or organization as attributable to these non-deductible activities.

Our governance and disclosure efforts regarding political contributions were recognized by the Center for Political Accountability’s 2019 CPA-Zicklin Index,

 

which placed us in the top quartile among all of the S&P 500 companies and named us as the fourth-best improved company in the index compared to 2018.

Political contributions, as defined under this policy, do not include amounts spent in connection with a core business function, such as a water or wastewater system acquisition, defense of a condemnation action filed against us, or other activities that impact or affect the operation of our business, unless made to support a political party, a candidate for an elected office or his or her political campaign. A payment to a trade

association or tax-exempt organization (other than a PAC, a Section 527 organization, or a similar entity) is also not a political contribution under this policy, even if any portion of the payment is used for political purposes.

The Board will review this policy at least annually and will also review and approve in advance the public disclosures required by the policy. Shareholders may currently view the policy and our political contribution disclosures through our Investor Relations website at https://ir.amwater.com.

 

In accordance with our Restated Certificate of Incorporation and Amended and Restated Bylaws, the number of directors is fixed from time to time by the Board. There are currently 11 directors on the Board.

On the recommendation of the Nominating Committee, the Board has nominated for election to the Board the following persons:

 

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Jeffrey N. Edwards

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Martha Clark Goss

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Veronica M. Hagen

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Kimberly J. Harris

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Julia L. Johnson

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Patricia L. Kampling

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Karl F. Kurz

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Walter J. Lynch

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George MacKenzie

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James G. Stavridis

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Lloyd M. Yates

Each of these nominees is currently a member of the Board, except that Mr. Lynch has been elected to the Board effective as of April 1, 2020. If elected, each nominee would hold office until the date of the 2021 annual meeting of shareholders, or until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. Proxies may not be voted for more than these 11 nominees. Susan N. Story, who will retire as our President and Chief Executive Officer and will step down as a director effective April 1, 2020, will not be standing for re-election at the annual meeting.

Each director nominee identified in this proxy statement has confirmed that he or she is willing and able to serve as a director, if elected. Should any of the nominees, prior to the meeting, become unavailable to serve as a director for any reason, the Board may either reduce the number of directors to be elected or select another nominee recommended by the Nominating Committee. If another nominee is selected, all proxies will be voted for the substitute nominee.

In accordance with our Amended and Restated Bylaws and our Corporate Governance Guidelines, prior to this meeting, each incumbent director nominee will submit a contingent resignation in writing to the Chairman of the Board or the Secretary of American Water. The resignation becomes effective only if the director fails to receive a sufficient number of votes for re-election at the meeting, assuming a quorum is present and the Board accepts the resignation. In an uncontested election of directors, if any incumbent director nominated for re-election does not receive the vote of at least the majority of the votes cast at any meeting for the election of directors at which a quorum is present, the Nominating Committee will make a recommendation to the Board on whether to accept or reject such tendered resignation, or whether other action should be taken. The Board will act on the tendered resignation, taking into account the Nominating Committee’s recommendation, and publicly disclose, by a press release, a filing with the SEC, or other broadly disseminated means of communication, its decision regarding the tendered resignation and the rationale behind the decision of the Board within 90 days from the date of the certification of the election results.

With respect to a tendered resignation, the Nominating Committee, in making its recommendation, and the Board, in making its decision, may each consider any factors or other information that it considers appropriate and relevant. The director who tenders his or her resignation will not participate in the recommendation of the Nominating Committee or the decision of the Board with respect to his or her resignation. If a director’s resignation is not accepted by the Board, such director will continue to serve until the 2021 annual meeting of shareholders and until his or her successor is duly elected, or his or her earlier death, resignation or removal. If a director’s resignation is accepted by the Board, then the Board, in its sole discretion, may fill any resulting vacancy or may decrease the size of the Board.

 

We believe that the backgrounds and qualifications of our directors, considered as a group, should provide a composite mix of experience, knowledge and abilities that will enable the Board to fulfill its responsibilities. Therefore, the Nominating Committee considers diversity in identifying nominees for directors. In this regard, the Nominating Committee views diversity in a broad sense, including on the basis of skills, experience, age, race, gender and ethnicity. The Board believes in balancing the value that longevity of director service can bring to our company with the value of new ideas and insights that can come through new members. In addition, our Corporate Governance Guidelines provide that directors must be persons of good character and thus must possess all of the following personal characteristics:

 

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Integrity: Directors must demonstrate high ethical standards and integrity in their personal and professional dealings.

 

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Accountability: Directors must be willing to be accountable for their decisions as directors.

 

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Judgment: Directors must possess the ability to provide wise and thoughtful counsel on a broad range of issues.

 

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Responsibility: Directors must interact with each other in a manner which encourages responsible, open, challenging and informed discussion.

 

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High Performance Standards: Directors must have a history of achievement which reflects high standards for themselves and others.

 

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Commitment and Enthusiasm: Directors must be committed to, and enthusiastic about, their performance for American Water as directors, both in absolute terms and relative to their peers.

 

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Courage: Directors must possess the courage to express views openly, even in the face of opposition.

The Board strives to have members with knowledge, experience and skills in the following core competencies:

 

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accounting and finance

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business judgment

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management

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crisis response

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industry knowledge

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utility regulation

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leadership, including in other public companies

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strategy/vision

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technology

In this regard, in evaluating a candidate’s experience and skills, the Nominating Committee will consider qualities such as an understanding of the water industry, utilities, marketing, finance, customer service, utility and environmental regulation, cybersecurity and public policy issues. The Nominating Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. In addition, the Board is committed to having directors who add tangible value to American Water with a diversity of ideas, approaches and experiences and the interpersonal capacity to foster effective communication within the Board and with management.

Annually, the Nominating Committee reviews the profile, engagement and performance of each director to determine whether he or she should be renominated for board service. The Nominating Committee also considers whether, in light of our strategy or trends in our market environment, new skill sets or experiences would benefit our company and our shareholders.

The process followed by the Nominating Committee to identify and evaluate candidates includes requests to members of the Board and others for recommendations, meetings from time to time to evaluate biographical information and background material relating to potential candidates, and interviews of selected candidates by members of the Nominating Committee and other members of the Board. The Nominating Committee may engage a third party to assist in the search for director candidates or to assist in gathering information regarding a director candidate’s background and experience. If the Nominating Committee engages a third party, that committee would approve the fee that American Water pays for these services.

 

When evaluating the recommendations of the Nominating Committee, the Board should take into account all factors it considers appropriate, which may include:

 

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whether the candidate is committed to the highest ethical standards;

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whether the candidate has special skills, expertise and background that would complement the attributes of the existing directors, taking into consideration the communities and geographies in which the Company operates;

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whether the candidate has achieved prominence in his or her business, governmental or professional activities, and has built a reputation that demonstrates the ability to make the kind of important and sensitive judgments that the Board is called upon to make;

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whether the candidate will effectively, consistently and appropriately take into account and balance the legitimate interests and concerns of all of our shareholders and our other stakeholders in reaching decisions, rather than advancing the interests of a particular constituency;

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whether the candidate possesses a willingness to challenge management while working constructively as part of a team in an environment of collegiality and trust; and

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whether the candidate will be able to devote sufficient time and energy to the performance of his or her duties as a director.

The following is a description of the specific skill sets and areas of expertise that the Board believes are relevant to the current members of the Board:

 

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Financial Services and Capital Markets: The capital-intensive nature of our regulated operations requires Board members with knowledge and experience in financial services and the capital markets.

 

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Utilities and Customer Service: Because the significant majority of our operations consists of providing water and wastewater utility services to customers, knowledge and understanding of the utility industry and related customer service issues are critical to the Board’s oversight role.

 

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Cybersecurity: Because cybersecurity threats pose a key risk for us, we have sought to have expertise in this area on our Board.

 

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Public Company CEO and Board Membership: We believe that Board members should be very familiar with public company leadership structures and handling issues relevant to public companies.

 

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U.S. Military: One of our market-based businesses provides water and wastewater services to U.S. military bases and their residents under long-term contracts; thus, having Board experience, knowledge and contacts with all branches of the U.S. military directly supports this business.

 

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Global Operations: While we operate exclusively within the United States, we believe that directors with global operational experience offer additional breadth and depth of knowledge and experience.

 

The NYSE’s listing standards require that:

 

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a majority of our directors and all of the members of the Nominating Committee satisfy the NYSE’s independence standards applicable to all directors;

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all of the members of the Audit, Finance and Risk Committee satisfy the NYSE’s independence standards applicable to audit committee members; and

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all of the members of the Compensation Committee satisfy the NYSE’s independence standards applicable to compensation committee members.

Applying these standards, the Board determined in February 2020 that ten of the 11 directors then serving on the Board, consisting of Mses. Goss, Hagen, Harris, Johnson and Kampling and Messrs. Edwards, Kurz, MacKenzie, Stavridis and Yates, qualify as independent. Due to his employment positions with the Company, the Board also determined that Mr. Lynch would not be independent, effective upon his election to the Board as of April 1, 2020.

The Board also determined that each of Mses. Goss and Kampling, and Messrs. Edwards, MacKenzie and Yates, satisfies the NYSE’s independence standards for audit committee members, and that each of Mses. Goss, Hagen, Harris and Johnson satisfies the

NYSE’s independence standards for compensation committee members.

For a director to be considered independent under the NYSE listing standards, a director cannot have any of the disqualifying relationships enumerated by those standards. Furthermore, the NYSE listing standards state that a director is not independent unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). In making this determination, the Board considers all relevant facts and circumstances when assessing the materiality of any relationship of a director with the Company, not only from the standpoint of the director but also from that of persons or organizations with which the director has an affiliation. Material relationships can include, for example, commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships.

To assist the Board in considering whether a director has a material relationship with us, the Board has adopted categorical standards of material director relationships. Under these standards, which are based in part on the disqualifying relationships enumerated by the NYSE’s listing standards, a director will not be deemed independent if any of the following relationships exist:

 

Each year, directors complete a targeted questionnaire to assess the performance of the Board and each of the standing committees. The questionnaire elicits quantitative and qualitative ratings in key areas of Board operation and function and seeks subjective comments from each director. Each committee member completes questions to evaluate how well the committees on which he or she serves are functioning and to provide suggestions for improvement.

Since 2017, the Board utilized a peer review process by which each director was asked to provide feedback on a number of characteristics of each of the other directors, including background, leadership, preparation, focus on shareholder interests, participation and independence.

In addition, annually, members of our executive leadership team comprised of senior executives of the

Company who regularly interact with the Board and the committees are solicited to provide their input and perspective on the operation of the Board and how the Board might improve its effectiveness.

Finally, our Chairman also interviews each director individually to obtain his or her assessment of director performance, Board dynamics and the effectiveness of the Board and its committees, and to discuss the results of the peer review process and his or her responses to these questions.

A summary of the responses to the questionnaires and the responses received from senior management’s feedback is reviewed by the Chairman. The summary and related responses with respect to the Board and each committee is ultimately discussed in executive session in meetings of the Board and each respective committee.

 

For calendar year 2019, Semler Brossy Consulting Group LLC, or Semler Brossy, the Compensation Committee’s independent compensation consultant, reviewed American Water’s non-employee director pay program for market competitiveness.

The data provided by Semler Brossy indicated that equity compensation paid to our non-employee directors was slightly below the median of our 2019 peer group, and that our Chairman’s total director compensation was in line with median levels for non-executive chairmen among those peers. As a

result of this data, the Board approved an increase in the annual equity compensation from $125,000 to $135,000, bringing the equity compensation paid to our non-employee directors from below the median to the 75th percentile of our 2019 peer group, as defined in “Compensation Discussion and Analysis—Compensation Determinations and Pay Competitiveness in 2019” beginning on page 43 of this proxy statement. The director compensation change took effect on May 10, 2019. We do not pay our directors a separate fee for attendance at Board or committee meetings.

 

Equity compensation for our non-employee directors is paid in the form of stock units under our 2017 Omnibus Plan. The actual number of stock units granted is based on the closing price of our common stock on the date of grant, which is typically the date the director is elected to the Board. The stock units vest on the date of grant and the shares underlying the stock units are distributed to the directors approximately 15 months after the date of grant, subject to earlier distribution in the event of a change in control or the termination of the director’s service on the Board, or in accordance with the director’s irrevocable election to defer distribution of all of his or her shares of common stock to a later time.

To the extent that a dividend is paid on our common stock prior to the time that shares of common stock may be distributed, the value of the dividend that would have been paid if the stock units had been outstanding shares of common stock is credited to an account for the director. Such dividend equivalents are payable to the director in a lump sum, in cash and without interest, and are paid when shares of common stock are distributed to the director.

Non-employee directors are reimbursed for expenses incurred in attending Board and committee meetings and expenses incurred for attending up to one director continuing education program each year.

 

The following table presents information regarding compensation paid in 2019 to each person who served as our non-employee director during that year. The table does not include amounts paid for reimbursement of travel expenses related to attending Board and committee meetings or any reimbursement

of director educational expenses, and does not include compensation paid to Ms. Story. See “Executive Compensation” beginning on page 60 of this proxy statement for information relating to Ms. Story’s compensation.