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Colgate's Board of Directors believes strongly that good corporate governance accompanies and greatly aids our long-term business success. This success has been the direct result of Colgate's key business strategies, including its focus on core product categories and global brands, people development programs emphasizing "pay for performance" and the highest business standards. Colgate's Board has been at the center of these key strategies, helping to design and implement them, and seeing that they guide the Company's operations.
The Board believes that the Company has consistently been at the forefront of good corporate governance. Reflecting its commitment to continuous improvement, the Board reviews its governance practices on an ongoing basis to ensure that they promote shareholder value. This review has resulted in several recent enhancements, including the adoption of strict director independence standards, which are detailed below along with other highlights of the Company's corporate governance program.
Board Independence and Expertise
Strict Director Independence Standards. Since 1989, the Board of Directors has been comprised entirely of outside independent directors, with the exception of the Chief Executive Officer (the "CEO"). All members of the Personnel and Organization Committee, the Audit Committee and the Nominating and Corporate Governance Committee are independent directors. The Board believes that an independent director should be free of any relationship with Colgate or its senior management that may in fact or appearance impair the director's ability to make independent judgments or compromise the director's objectivity and loyalty to stockholders. Based on this principle, the Board recently adopted new director independence standards, which outline the types of relationships, both personal and professional, between directors and the Company, its senior management and other directors that, if present, would preclude a finding of independence. These standards, which are substantially stricter than those required by the New York Stock Exchange (the "NYSE"), will guide the Board's annual affirmative determinations of independence. To view the standards, click here. Executive Sessions/Presiding Director. The independent directors of the Board meet in executive session without the CEO present at each regularly scheduled Board meeting. The role of presiding director at these sessions is rotated among the independent directors every six months in accordance with an established schedule. The presiding director also serves as a liaison between the independent directors and the CEO and discusses with the CEO, to the extent appropriate, matters discussed during their executive sessions. Audit Committee Independence and Financial Literacy. All members of the Audit Committee are independent directors. The Board has also determined that all members of the Audit Committee are "audit committee financial experts" as that term is defined in the rules of the Securities and Exchange Commission (the "SEC") and that they meet the independence and financial literacy requirements of the NYSE. Board Experience and Diversity. As its present directors exemplify, Colgate values experience in business, education and public service fields, international experience, educational achievement, strong moral and ethical character and diversity. To view Colgate's criteria for Board membership, entitled "Independent Board Candidate Qualifications," click here.
Directors are Stockholders
Director Compensation in Stock. On average, 85 percent of a director's compensation is paid in Colgate stock. Board members also receive stock options each year. Significant Levels of Director Stock Ownership. Board members own significant amounts of Company stock. The Board recently formalized this practice, adopting stock ownership guidelines for directors and officers of the Company. For more information on director stock ownership, please see the table included in "Stock Ownership of Directors and Executive Officers" in Colgate's 2004 Proxy Statement. No Director Pensions. In 1996, the Director Pension Plan was terminated. At the same time, the annual grant of Common Stock under the Stock Plan for Non-Employee Directors was increased to further align the interests of directors with stockholder interests.
Established Policies Guide Governance and Business Integrity
Charters for Board Committees. In 2003, the Personnel and Organization Committee, the Finance Committee and the Nominating and Corporate Governance Committee, under the leadership of the respective committee chairs, reviewed their mission statements. First developed in 1992, long before the SEC or the NYSE recommended such action, these mission statements have been updated and are now presented as committee charters. The Board also recently adopted a revised Audit Committee charter reflecting the increased authority and responsibilities of the committee under new corporate governance rules adopted by the SEC and the NYSE. View the committee charters: Audit Committee, Finance Committee, Nominating and Corporate Governance Committee, P&O Committee. Corporate Governance Guidelines. In connection with the 2003 charter updates, the Board also reviewed and revised its "Guidelines on Significant Corporate Governance Issues." More recent updates reflect the Company's new director independence standards, stock ownership guidelines and committee self-evaluation procedures. First formalized in 1996, the Board believes the updated Corporate Governance Guidelines are state-of-the-art. To view Colgate's Corporate Governance Guidelines, click here. Code of Conduct. The Board sponsors the Company's Code of Conduct, which was first issued in 1987, and Business Practices Guidelines, both of which promote the highest ethical standards in all of the Company's business dealings. The Global Business Practices function, headed by an executive officer, oversees compliance with these standards. The Code of Conduct applies to the Company's directors and employees, including the Chief Executive Officer, the Chief Financial Officer and the Chief Accounting Officer, and satisfies the SEC's requirements for a code of ethics for senior financial officers. The Code of Conduct is updated periodically, most recently in January 2004. To view Colgate's Code of Conduct, click here. - Business Integrity Initiatives. The Board supports the Company's efforts to communicate effectively its commitment to ethical business practices. To further this goal, during 2003, supervisors, managers and executives throughout the Colgate world completed "Business Integrity: Colgate Values at Work." This training experience ensures a thorough and consistent understanding of the Company's ethical business standards as expressed in Colgate's Code of Conduct.
Board Focused on Key Business Priorities
Strategic Role of Board. The Board plays a major role in developing Colgate's business strategy. It reviews the Company's strategic plan and receives detailed briefings throughout the year on critical aspects of its implementation. These include subsidiary performance reviews, product category reviews, presentations regarding R&D initiatives and reports from specific disciplines such as manufacturing and information technology. Succession Planning and People Development. The Board has extensive involvement in this area with special focus on CEO succession. It discusses potential successors to key executives and examines backgrounds, capabilities and appropriate developmental assignments. Regular reviews of professional training programs, benefit programs and career development processes assist the Board in guiding the Company's people development initiatives and efforts to gain a competitive recruitment and retention advantage.
Direct Access to Management
Management Participation at Board Meetings. Key senior managers regularly attend Board meetings. Topics are presented to the Board by the members of management who are most knowledgeable about the issue at hand irrespective of seniority. An open and informal environment allows dialogue to develop between directors and management, which often produces new ideas and areas of focus. - Direct Access to Management. The Board's direct access to management continues outside the boardroom during frequent discussions with corporate officers, division presidents and other employees, usually without the CEO present. Directors are invited to, and often do, contact senior managers directly with questions and suggestions.
Ensuring Management Accountability
Performance-Based Compensation. Colgate has linked the pay of its managers and employees at all levels to the Company's performance. As described in greater detail in the Personnel and Organization Committee Report on Executive Compensation contained in the Company's 2004 Proxy Statement, the Personnel and Organization Committee adheres to this pay-for-performance philosophy, and stock-based incentives comprise a significant component of senior management's overall compensation. CEO Evaluation Process. The Board's evaluation of the CEO is a formal annual process. The CEO is evaluated against the goals set each year, including both objective measures (such as earnings per share) and subjective criteria reflective of the Company's core values. As part of the overall evaluation process, the Board meets informally with the CEO to give and seek feedback on a regular basis.
Board Practices Promote Effective Oversight
Board Size. Designed to maximize board effectiveness, Colgate's By-Laws fix the number of directors between seven and 12. Continuing the Board's practice of being comprised of less than ten directors, nine directors have been nominated for election at the Annual Meeting. Directorship Limits. To devote sufficient time to properly discharge their duties, no director presently serves on more than three other corporate boards. Meeting Attendance. All of the directors attended 100% of the meetings of the Board and the committees on which they served in 2003.
Continuous Improvement through Evaluation
Board Evaluation Process. In 1997, the Board implemented a formal Board evaluation procedure. The Board first evaluates the overall Board performance against certain criteria that the Board has determined are important to its success. These include financial oversight, succession planning, compensation, corporate governance, strategic planning and Board structure and role. The Board then reviews the results of the evaluation and identifies steps to enhance its performance. Board Committee Evaluations. During the past year, the Board's committees also conducted self-evaluations, examining their overall performance against their committee charters. The results of these evaluations were reviewed with the Board, and further enhancements were agreed for each committee. Shareholder Rights Plan - Periodic Evaluation Policy. In 2002, the Board designated a Board committee, made up of independent directors, to evaluate the Company's Shareholder Rights Plan every three years to determine whether it continues to be in the interests of the Company and its stockholders.
External Recognition for Colgate's Governance Practices
High Governance Ratings. In February 2004, Colgate was one of 22 companies to earn the highest rating of 10 from GovernanceMetrics International, an independent governance ratings agency, in its survey of the governance practices of more than 2,100 companies worldwide. Colgate was one of only four companies to achieve this score in the two most recent ratings cycles. Colgate is also among the top rated companies by Institutional Shareholder Services ("ISS"), a provider of proxy voting and corporate governance services. ISS evaluates the quality of corporate boards and governance practices of more than 7,500 companies worldwide. Wharton/Spencer Stuart Award. In 2001, Colgate's Board of Directors was selected by the Wharton School of the University of Pennsylvania and Spencer Stuart to receive their fifth annual "Board Excellence" Award for demonstrated leadership in the area of corporate governance. Business Week Top 10 Boards. On three occasions, most recently in October 2002, the Board has been ranked among the top 10 boards in the U.S. by Business Week. In each case, Colgate was chosen from a group of more than 200 public companies based on Business Week's surveys of institutional investors and leading corporate governance experts. - Corporate Board Member "Champion Board". In September 2002, the Board was named one of five "Champion Boards" by Corporate Board Member. Colgate was chosen by a group of securities analysts, competitors and academics who cited the open interaction among directors and between the Board and management.
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