- Proposal 1 - "Election of Directors":
There is a single slate of nominees, the nominees appear qualified, and we recommend a vote "FOR" this Proposal. However, see our corporate governance comments above. We believe that in the future, a shareholder proposal should be put forward which provides for a meaningful election of directors (e.g. multiple nominees for each seat).
If in the future, insider Thomas G. Stemberg continues to serve as the Chairman of the Company, we recommend that clients withhold votes from him upon re-election. We believe that there is an inherent potential conflict in having an insider serve as the Chairman of the Board. Consequently, we prefer that companies separate the roles of the Chairman and CEO and that the Chairman be independent to further ensure board independence and accountability. Further, votes should likewise be withheld from insider Thomas Stemberg, independent outside directors Brenda C. Barnes, Mary Elizabeth Burton and Basil Anderson if they continue to serve on their four other directorships. We prefer that directors should serve only a maximum of three other directorships to ensure the effective and prudent exercise of their fiduciary duties as directors.
We note the independence of the standing key Board committees. Also, all of the directors attended at least 75% of the aggregate meetings held in fiscal year 2003.
We also note the presence of a classified board of directors. Staggered terms for directors increase the difficulty for shareholders of making fundamental changes to the composition and behavior of a board. We prefer that the entire board of a company be elected annually to provide appropriate responsiveness to shareholders.
- Proposal 2 - "Approval of Staples 2004 Stock Incentive Plan":
The stockholders are being asked to approve the Company's 2004 Stock Incentive Plan (the “2004 Plan”) that will provide stock compensation to associates, executive management and directors based on level of responsibility, company performance and other factors.
The 2004 Plan, if approved by the stockholders, would authorize up to 23,000,000 shares of common stock representing (i) 18,000,000 new shares, and (ii) 5,000,000 shares currently available for issuance under the Amended and Restated 1992 Equity Incentive Plan (the “1992 Plan”). The 2004 Plan provides for the grant of non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) and other stock-based awards. No more than 50% of the total number of shares of common stock covered by the Plan may be issued pursuant to awards that are not options or stock appreciation rights. No more than 1,150,000 shares in the aggregate of common stock available under the 2004 Plan may be subject to awards made to directors who are not also associates of the Company. The maximum number of shares with respect to which awards may be granted to any participant under the 2004 Plan may not exceed 2,300,000 shares per calendar year.
We believe that approval of the 2004 Plan will continue to use equity compensation to attract, retain and motivate talented associates, executive management and directors and align further the interests of associates, executive management and directors with stockholders by continuing the Company's commitment to linking associate, executive management and director compensation to its stock’s long term performance. As of the Record Date, the Company had 498,181,991 shares of common stock outstanding. We recommend a vote "FOR" this Proposal.
- Proposal 3 - "Approval of Staples' Amended and Restated 1998 Employee Stock Purchase Plan":
The stockholders of the Company are being asked to approve the Amended and Restated 1998 Employee Stock Purchase Plan (the “Restated ESPP”) to, among other things, increase the total number of shares of common stock authorized for issuance under the 1998 Employee Stock Purchase Plan in effect prior to the adoption of the proposed amendment and restatement (the “Existing ESPP”), from 8,400,000 shares to 10,500,000 shares.
The Restated ESPP is intended to replace and supersede the Existing ESPP. The Restated ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code. The Restated ESPP permits associates of the Company or any designated subsidiary to purchase discounted shares of common stock in a series of one or more offerings.
Under the Restated ESPP, an eligible associate may participate by filing a completed authorization for payroll deduction at least 14 days prior to the applicable offering commencement date authorizing the Company to deduct not more than 10% of his compensation during the offering period. The associate would then be deemed to have been granted an option on the applicable offering commencement date to purchase (1) the largest number of whole shares of common stock that does not exceed the number that is obtained by dividing (A) $12,500 by (B) the fair market value of common stock on the applicable offering commencement date, or such other lower number of shares. If the offering is any period other than six months, the $12,500 amount will be adjusted proportionately to reflect the length of the offering period. Under the terms of the Restated ESPP, the option price is an amount equal to 85% of the lesser of the fair market value per share of Staples common stock on the first business day of an offering period or the last business day of such period.
We believe that approval of the Restated ESPP would be an important element in attracting and retaining associates who are expected to contribute to the Company's growth and success. As of the Record Date, the Company had 498,181,991 shares of common stock outstanding. We recommend a vote "FOR" this Proposal.
- Proposal 4 - "Approval of Staples' Amended and Restated International Employee Stock Purchase Plan":
The stockholders of the Company are being asked to approve the Amended and Restated International Employee Stock Purchase Plan (the “Restated IESPP”) to, among other things, increase the total number of shares of common stock authorized for issuance under the International Employee Stock Purchase Plan in effect prior to the adoption of the proposed amendment and restatement (the “Existing IESPP”), from 250,000 shares to 850,000 shares.
An eligible associate may participate in the Restated IESPP by enrolling a payroll deduction of not more than 10% of his compensation during the offering period. The associate would then be deemed to have been granted an option on the applicable offering commencement date to purchase (1) the largest number of whole shares of common stock that does not exceed the number that is obtained by dividing (A) $12,500 by (B) the fair market value of common stock on the applicable offering commencement date, or (2) such other lower number of shares as determined by the Board of Directors or the Compensation Committee prior to the offering commencement date. If the offering is any period other than six months, the $12,500 amount will be adjusted proportionately to reflect the length of the offering. Under the terms of the Restated IESPP, the option price is an amount equal to 85% of the lesser of the fair market value per share of Staples common stock on the first business day of an offering period or the last business day of such period. No associate may be granted an option under the Restated IESPP if, immediately after the grant, the associate would own stock and/or hold outstanding options to purchase stock possessing 5% or more of the total voting power or value of all classes of stock. In addition, no associate may be granted an option under the Restated IESPP the right to purchase stock under all of the stock purchase plans at a rate that exceeds $25,000 of the fair market value of such stock for each calendar year.
We believe that approval of the IESPP will advance the interests of the Company’s stockholders by enhancing the its ability to attract, retain and motivate persons who make or are expected to make important contributions to the Company by providing such persons with equity ownership opportunities. As of the Record Date, the Company had 498,181,991 shares of common stock outstanding. We recommend a vote “FOR” this Proposal.
- Proposal 5 - "Ratification of Selection of Independent Auditors":
The Audit Committee has chosen Ernst & Young LLP to serve as the Company's auditors for fiscal year 2004. We have seen no evidence that its integrity, professionalism or independence is in question. We note, however, that fiscal 2003 aggregate fees billed to the Company for Audit Fees amounted to $1,900,000, Audit-Related Fees amounted to $61,000 and Tax Fees amounted to $5,500,000. We recommend a vote "AGAINST" this Proposal.
- Proposal 6 - "Shareholder Proposal on Shareholder Rights Plan":
The shareholders of the Company are being asked to consider this proposal that requests the Board to redeem the shareholder rights plan that was adopted in 1994 unless such plan is approved by a majority vote of shareholders to be held as soon as may be practicable.
In 1994 the Company’s Board of Directors adopted a shareholder rights plan, commonly known as a “poison pill”, without shareholder approval. This plan is an anti-takeover device that can adversely affect shareholder value by discouraging takeovers that could be beneficial to shareholders.
Poison pills amount to major de facto shifts of voting rights away from shareholders to management on matters pertaining to the sale of the corporation. They give target Boards of directors absolute veto power over any proposed business combination, no matter how beneficial it might be for the shareholders.
Accordingly, we believe that the redemption or any matter on poison pills should be submitted to shareholder vote. Poison pills that are not submitted to shareholder approval could lead to management entrenchment and abuse. Consequently, poison pills limit the chances of the company to receive legitimate tender offers that could increase and maximize stockholder value. As such, we recommend a vote "FOR" this Proposal.
- Proposal 7 - "Shareholder Proposal on Shareholder Input on Poison Pills":
The shareholders are being asked to act on this proposal that requests the Board to submit the adoption, maintenance or extension of any poison pill to a shareholder vote as a separate ballot item at the earliest next shareholder election. Additionally once adopted any dilution or removal of this proposal is requested to be submitted to a shareholder vote as a separate ballot item at the earliest next shareholder election.
Accordingly, we believe that the adoption, extension or any matter on poison pills should be submitted to shareholder vote. Poison pills that are not submitted to shareholder approval could lead to management entrenchment and abuse. Consequently, poison pills limit the chances of the company to receive legitimate tender offers that could increase and maximize shareholder value. As such, we recommend a vote "FOR" this Proposal.
- Proposal 8 - "Shareholder Proposal on Commonsense Executive Compensation":
The shareholders of the Company are being asked to approve a proposal that requests Board to replace the current system of compensation for senior executives with the Commonsense Executive Compensation program which includes the following features:
(1) Salary — The CEO's salary should be targeted at the mean of salaries paid at peer group companies, not to exceed $1,000,000 annually. No senior executive should be paid more than the CEO.
(2) Annual Bonus — The annual bonus paid to senior executives should be based on well-defined quantitative and qualitative performance measures. The maximum level of annual bonus should be capped at 100% of salary.
(3) Long-Term Equity Compensation — Long-term equity compensation to senior executives should be in the form of restricted shares, not stock options. The value of the restricted share grant should not exceed $1,000,000 on the date of grant.
(4) Severance — The maximum severance payment to a senior executive should be no more than one year’s salary and bonus.
(5) Disclosure — Key components of the executive compensation plan should be outlined in the Compensation Committee’s report to shareholders, with variances from the Commonsense program explained in detail.
After reviewing the details of the Commonsense Executive Compensation, as presented above, we believe that this proposal would impair the Compensation Committee's ability to strengthen the linkage between compensation and performance for shareholders and, therefore, would compromise its ability to establish compensation programs that are designed to focus employees on enhancing total return for shareholders.
The Committee must be able to adopt plans to meet the needs of the Company dictated by the market, not by a set of absolute standards. Approval of the proposal could put the Company at a competitive disadvantage in attracting and retaining the most qualified and experienced executives. Therefore, we recommend a vote "AGAINST" this Proposal.
- Proposal 9 - "Shareholder Proposal on Auditor Independence":
The shareholders of the Company are being asked to vote on this proposal that requests the Board of Directors and its Audit Committee to adopt a policy stating that the public accounting firm retained by the Company to audit the financial statements will perform only “audit” and “audit-related” work for the Company and not perform services generating “tax fees” and “all other fees” as categorized under U.S. Securities and Exchange Commission (“SEC”) regulations.
Fee disclosures indicate that the Company paid the firm retained to audit the financial statements more for non-audit services than for the audit work. Specifically, the Company paid more in combined fees for “audit-related,” “tax” and “all other” work performed by the audit firm than it did for the “audit” work performed by the firm. We believe this imbalance is unhealthy and a potential threat to auditor independence at the Company. Further, when this imbalance occurs we believe it is time for the Board’s Audit Committee to adopt a policy that addresses the issue.
The issue of auditor independence has been a major concern for investors. In response to numerous incidences of accounting fraud that shook the foundations of the corporate financial auditing and reporting system, both Congress and the SEC have responded with important reforms. We believe that the Company and its Audit Committee should adopt a policy that limits the public accounting firm retained to audit the Company’s financial statements to performing only “audit” and “audit-related” work. We believe that limiting the audit to providing only audit and audit-related services would be another positive step in protecting auditor independence. We recommend a vote "FOR" this Resolution.
