“Good reason” is defined in the agreement as a material diminution in the executive’s salary or target bonus, in his authority, duties or responsibilities, or in the budget over which he retains authority, causing the executive to report to anyone other than the Board, a material change in geographic location at which the executive must perform services, or any breach by the Company of the employment agreement.
“Cause” is defined in the agreement as an intentional tort causing substantial loss, damage or injury to the Company, any serious crime or intentional, material act of fraud or dishonesty against the Company, the commission of a felony that results in other than immaterial harm to the Company’s business or to the reputation of the Company or the executive; habitual neglect of the executive’s reasonable duties, disregard of written, material policies of the Company that causes other than immaterial loss, damage or injury to the property or reputation of the Company, or any material breach of the executive’s obligation to not disclose confidential information or to assign intellectual property developed during employment.
Under the terms of Mr. Jelinek’s 2016fiscal 2017 performance-vested RSU award, (“PRSU”), in the event of termination of his employment for any reason other than cause, if the Compensation Committee of the Board determines that the performance goals established for the PRSU award hashave been met, Mr. Jelinek will receive the shares underlying the PRSU,award, subject to the long service and quarterly vesting provisions generally applied for terminations in connection with RSU awards as described above. The table above shows the estimated incremental amounts Mr. Jelinek would receive in respect of his 2016 PRSU2017 award in connection with a hypothetical termination of employment as of Augustat December 31, 2015.2017.
No member of the Compensation Committee is an executive officer or former officer of the Company. In addition, no executive officer of the Company served on the board of directors of any entity whose executive officers included a director of the Company.
conditions comparable to those applicable to employees ofwhat has occurred historically. His current consulting arrangement with the Company similarly situated. No family membersis described above under “Compensation of executive officers or directors are executive officers of the Company.Directors."
These relationships and related transactions were approved by the Audit Committee. The charter of the Audit Committee requires the Committee to review and approve all related-person transactions that are required to be disclosed under Item 404(a) of Regulation S-K. There were no transactions required to be reported in this Proxy Statement since the beginning of fiscal 20152017 where this policy did not require review, approval or ratification or where this policy was not followed.
No family members of executive officers or directors are executive officers of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under SEC rules, the Company’s directors, executive officers and beneficial owners of more than 10% of the Company’s equity securities are required to file periodic reports of their ownership, and changes in that ownership, with the SEC. Based solely on its review of copies of these reports and representations of such reporting persons, the Company believes that during fiscal 2015,2017, such SEC filing requirements were satisfied, except that seven reports concerning ten transactions wereone report was inadvertently filed late for Mr. Portera.Sinegal.
Report of the Audit Committee
October 9, 201511, 2017
To the Board of Directors:
We have reviewed and discussed with management the Company’s audited consolidated financial statements as of and for the fiscal year ended August 30, 2015.September 3, 2017. We have discussed with the independent auditors the matters required to be discussed by Auditing Standard No. 16,1301, as adopted by the Public Company Accounting Oversight Board, and the matters required to be reported to the Audit Committee by the independent registered public accounting firm pursuant to SEC Regulation S-X, Rule 2.07.
We have received the written disclosures and the letter from the independent auditors required by the Public Company Accounting Oversight Board regarding the independent auditors’ communications with this Committee concerning independence and have discussed with the independent auditors their independence. Based on the reviews and discussions referred to above, we recommendrecommended to the Board that the audited consolidated financial statements referred to above be included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 30, 2015.September 3, 2017.
Charles T. Munger, Chair
Susan L. Decker
Daniel J. Evans
Code of Ethics for Senior Financial Officers
The Board has adopted a Code of Ethics for Senior Financial Officers. A copy of the Code of Ethics may be obtained at no charge by sending a written request to the Corporate Secretary, 999 Lake Drive, Issaquah, Washington 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, from this code to the chief executive officer, chief financial officer, or controller, we will disclose (on our website at www.costco.com through the Investor Relations page or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies.
INDEPENDENT PUBLIC ACCOUNTANTS
Information Regarding Our Independent Auditors
KPMG has served as our independent auditors since May 13, 2002. Upon recommendation of the Audit Committee, the Board has appointed KPMG as our independent auditors for the fiscal year 20162018.
Services and Fees of KPMG
The following table presents fees for services rendered by KPMG for fiscal 20152017 and fiscal 20142016:
| | | | 2015 | | 2014 | | 2017 | | 2016 |
Audit fees | | $ | 6,251,000 |
| | $ | 5,662,000 |
| | $ | 7,056,000 |
| | $ | 6,215,000 |
|
Audit-related fees | | 392,000 |
| | 387,000 |
| | 275,000 |
| | 359,000 |
|
Tax fees | | 322,000 |
| | 655,000 |
| | 644,000 |
| | 642,000 |
|
All other fees | | 170,000 |
| | 18,000 |
| | 178,000 |
| | 191,000 |
|
Total | | $ | 7,135,000 |
| | $ | 6,722,000 |
| | $ | 8,153,000 |
| | $ | 7,407,000 |
|
KPMG was paid fees for the following types of services during fiscal 20152017:
•Audit Fees consist of fees paid for the audit of the Company’s annual consolidated financial statements included in the Annual Report on Form 10-K and review of interim condensed consolidated financial statements included in the quarterly reports on Form 10-Q and for the audit of the Company’s internal control over financial reporting. Audit fees also include fees for any services associated with statutory audits of subsidiaries and affiliates of the Company, and with registration statements, reports and documents filed with the SEC.
•Audit-Related Fees consist of fees for audits of financial statements of certain employee benefit plans, audits and attest services not required by statute or regulations and accounting consultations about the application of generally accepted accounting principles to proposed transactions.
•Tax Fees consist of fees for the review or preparation of international income, franchise, value-added tax or other tax returns, including consultations on such matters, assistance with studies supporting amounts presented in tax returns, and consultations on various tax compliance matters.
•All Other Fees consist of fees for certain regulatory certifications, attestation reports at international locations, and executive education courses provided to Company employees.
Audit Committee Preapproval Policy
All services to be performed for the Company by KPMG must be pre-approved by the Audit Committee or a designated member of the Audit Committee, as provided in the committee’s written policies. All services provided by KPMG in fiscal 20152017 were pre-approved by the Audit Committee.
Annual Independence Determination
The Audit Committee has determined that the provision by KPMG of non-audit services to the Company in fiscal 20152017 is compatible with KPMG’s maintaining its independence.
PROPOSAL 2:
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
Subject to ratification by the shareholders at the Annual Meeting, the Board, upon recommendation of the Audit Committee, has selected KPMG to audit the consolidated financial statements of the Company and its subsidiaries for the fiscal year ending August 28, 2016.September 2, 2018. KPMG has issued its reports, included in the Company’s Form 10-K, on the audited consolidated financial statements of the Company and internal control over financial reporting for the fiscal year ended August 30, 2015September 3, 2017. KPMG has served the Company as independent auditors since May 13, 2002. Representatives of KPMG are expected to be present at the Annual Meeting, will have the opportunity to make a statement, if they desire to do so, and will be available to respond to appropriate questions.
Vote Required
The affirmative vote of a majority of the votes cast on this proposal will constitute ratification of the appointment of KPMG.
The Audit Committee and Board of Directors unanimously recommend that you vote FOR Proposal 2.
PROPOSAL 3:
ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION
As required by Section 14A of the Securities Exchange Act of 1934, we are asking for your advisory (non-binding) vote on the following resolution (“say on pay”):
“Resolved, that the shareholders approve, on an advisory basis, the compensation of the Company’s Named Executive Officers as disclosed in the Compensation Discussion and Analysis, the accompanying compensation tables, and the related narrative disclosure in this Proxy Statement.”
TheIn 2017, following an advisory vote of the shareholders on frequency, the Board willdetermined to continue to include say on pay votes in the Company’sCompany's proxy materials annually until the next required shareholder vote on the frequency of such votes. frequency.
The Board and the Compensation Committee, which is composed of independent directors, expect to take into account the outcome of the say on pay vote when considering future executive compensation decisions to the extent they can determine the cause or causes of any significant negative voting results.
As described in detail under “Compensation Discussion and Analysis,” our compensation programs are designed to motivate our executives to create a successful company. If fully earned based on the achievement of performance targets, equity compensation in the form of restricted stock units that are subject to further time-based vesting is the largest component of executive compensation. We believe that our compensation program, with its balance of short-term incentives (including cash bonus awards and performance conditions for awards of restricted stock units) and long-term incentives (including equity awards that vest over periods up to five years) and share ownership guidelines reward sustained performance that is aligned with long-term shareholder interests. Shareholders are encouraged to read the Compensation Discussion and Analysis, the accompanying compensation tables, and the related narrative disclosure.
The Board of Directors unanimously recommends that you vote FOR the approval, on an advisory basis, of the compensation of our Named Executive Officers as disclosed in the Compensation Discussion and Analysis, the accompanying compensation tables, and the related narrative disclosure.
SHAREHOLDER PROPOSALS
PROPOSAL 4: SIMPLE MAJORITY VOTE
In response to a shareholder proposal, if properly presented at the meeting, the Company will hold a vote on the following:
PROPOSAL 4:RESOLVED, Shareholders request that our board take each step necessary so that each voting requirement in our charter and bylaws that calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws. This means the closest standard to a majority of the votes cast for and against such proposals consistent with applicable laws. It is important that our company take each step necessary to adopt this proposal topic. It is also important that our company take each step necessary to avoid a failed vote on this proposal topic.
PROXY ACCESS FOR SHAREHOLDERSShareowners are willing to pay a premium for shares of companies that have excellent corporate governance. Supermajority voting requirements have been found to be one of six entrenching mechanisms that are negatively related to company performance according to “What Matters in Corporate Governance” by Lucien Bebchuk, Alma Cohen and Allen Ferrell of the Harvard Law School (https://papers.ssrn.com/sol3/papers.cfm7abstract_kN593423).
RESOLVED: Shareholders of Costco Wholesale Corporation (the "Company") askSupermajority requirements are used to block initiatives supported by most shareowners but opposed by a status quo management. For example, the boardclassification of directors (the "Board") to adopt, and present for shareholder approval, a "proxy access" bylaw. Such a bylaw shall requireat our company may be altered or eliminated only by an amendment approved by two-thirds of the Company to include in proxy materials prepared for a shareholder meeting at which directors arevotes entitled to be elected the name, Disclosure and Statement (as defined herein) of any person nominated for election to the boardcast by a shareholder oreach voting group (the "Nominator") that meets the criteria established below. The Company shall allow shareholdersentitled to vote on such nominee onamendment. Consider that being a classified Board contributes to the Company's proxy card.
The numberfact that the average length of shareholder-nominated candidates appearing in proxy materials shall not exceed one quarterdirector tenure was over 14 years as of the directors then serving. This bylaw, which shall supplement existing rights under Company bylaws, should provide that a Nominator must:date this proposal was submitted.
a) have beneficially owned 3% or moreOur prior proposal on this topic at Costco in 2014 received 65% of the Company's outstanding common stock continuouslyvote in favor. We waited patiently for at least three years before submittingour Board to implement the nomination;
b) give the Company, within the time period identified in its bylaws, written noticewill of the information required bymajority but they did not do so. This proposal topic won from 74% to
99% support at Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill, Macy’s and Ferro. Currently a 1%-minority can frustrate the bylaws and any Securities and Exchange Commission (SEC) rules about (i)will of our 66%-shareholder majority. In other words a 1%-minority could have the nominee, including consentpower to being named in the proxy materials andprevent shareholders from improving our corporate governance.
Please vote to serving as director if elected; and (ii) the Nominator, including proof it owns the required shares (the "Disclosure"); and
c) certify that (i) it will assume liability stemming from any legal or regulatory violation arising out of the Nominator's communications with the Company shareholders, including the Disclosure and Statement; (ii) it will comply with all applicable laws and regulations if it uses soliciting material other than the Company's proxy materials; and (iii) to the best of its knowledge, the required shares were acquired in the ordinary course of business and not to change or influence control at the Company.enhance shareholder value:
The Nominator may submit with the Disclosure a statement not exceeding 500 words in support of the nominee (the "Statement"). The Board shall adopt procedures for promptly resolving disputes over whether notice of a nomination was timely, whether the Disclosure and Statement satisfy the bylaw and applicable federal regulations, and the priority to be given to multiple nominations exceeding the one-quarter limit.
Supporting Statement: The SEC's proxy access Rule 14a-11 (https://www.sec.gov/rules/final/2010/33-9136.pdf), which was to apply to all companies subject to SEC proxy rules, was vacated after a 2011 decision in Business Roundtable v. SEC that the SEC had failed to conduct an adequate cost-benefit analysis. Therefore, proxy access rights must be established on a company-by-company basis. Subsequently, CFA Institute's ProxyAccess in the United States: Revisiting the Proposed SEC Rule (http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2014.n9.1) performed a cost-benefit analysis and found proxy access:
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◦ | Would "benefit both the markets and corporate boardrooms, with little cost or disruption." |
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◦ | Has the potential to enhance board performance, raising US market capitalization by up to $140.3 billion |
Enhance shareholder value.Simple Majority Vote for:
Proxy Access for Shareholders - Proposal 4
BOARD OF DIRECTORS' RESPONSE
RecommendationUnder Costco Wholesale’s governing documents, a simple majority-vote standard generally applies to all matters submitted to a shareholder vote. This standard means that a proposal is approved if the number of votes cast in favor exceeds the number of votes cast against or, to the extent required by Washington law, the proposal is approved by a majority of the outstanding shares. The one exception is that, as permitted by Washington law, approval by two-thirds of the shares outstanding is required to amend our Articles of Incorporation with respect to classification of the Board. Since the Company went public in 1985, its Articles have required that directors be elected for three-year terms and that approximately one-third of the board seats are up for election every year. The Board believes that this classified board structure is an integral component of the Company’s long-term approach to the creation of shareholder value and has contributed significantly to the Company’s long-term operational success and delivery of strong shareholder returns. The Board also believes that any change to the classified board structure should occur only pursuant to a vote that is representative of a broad base of the Company’s shareholders.
In 2014, shareholders voted on a binding proposal to amend the Articles to declassify the Board. This proposal failed not only to achieve the two-thirds threshold necessary to approve the amendment, it failed to obtain the vote of even a majority of shares outstanding. Absent broad shareholder support to declassify, the Board continues to believe that the classified structure should be retained, as should the two-thirds voting requirement designed to ensure that there is a broad consensus of shareholder support before that structure is changed.
In 2014, shareholders voted in favor of a proposal similar to the current “simple majority vote proposal.” In response, the Board proposed amendments to the Company’s Articles to eliminate supermajority requirements other than that concerning amendment of the classified board provision. Those amendments were approved by the shareholders in 2015.
The Board recommends that shareholders vote against the proposal, for the following reasons, which are discussed in more detail below:
The Costco model for shareholder value creation is grounded in a long-term approach that includes the Company’s classified board structure. This model has been proven to return value as Costco has demonstrated sustained, strong financial performance under its classified board.
The classified board structure is designed to safeguard against short-term shareholders agitating for changes inconsistent with long-term value creation. The article cited by the proponent ignores recent studies finding that classified boards do not negatively impact firm value.
THE COSTCO MODEL IS GROUNDED IN A BOARD THAT IS COMMITTED TO A LONG-TERM APPROACH
The Costco model uses a long-term approach to generate growth in shareholder value. The Company is guided by directors who have dedicated themselves to three-year terms on the Board. The Board knows that transitory increases in Costco’s share price might be achieved if prices were raised, wages were cut, suppliers were pressed for onerous terms, and the balance sheet were burdened with significant leverage. These are changes that short-term shareholders or short-term board members might seek. But the Costco Board, with its long-term commitment focus, has determined that such actions would damage the long-term value of the Company by harming relationships with members, employees, and suppliers.
THE COSTCO MODEL HAS PROVEN ITS ABILITY TO CREATE VALUE
The proponent of this proposal does not allege that the Company’s economic performance or its returns to shareholders have been unsatisfactory or that the challenged voting requirement has actually impeded performance. To the contrary, under the classified board structure, Costco has demonstrated sustained, strong financial performance. Net sales have grown at an annualized rate of 12.4% since Costco Wholesale was taken public in 1985. Net income has grown at an annualized rate of 12.8% over that same period.
Total shareholder return (TSR), which includes share price appreciation and dividends, has been exemplary:
Source: FactSet, Market data as of December 4, 2017. Key Comparable Companies include Kroger, Target and Wal-Mart; Large Cap Retailers include Best Buy, Kohl’s, Lowe's and Walgreens.
The Board has been vigilant in seeing capital returned to shareholders. Since 2004, the Company has raised its annual dividend from forty cents to $2 and repurchased approximately $8.56 billion of the Company’s shares. In May 2017, the Company paid a special cash dividend of over $3 billion, or $7 per share. The Company also paid special cash dividends of $5 in 2015 and of $7 in 2012.
COSTCO’S LONG-TERM FOCUS EXTENDS TO ITS EMPLOYEES AND MEMBERS
The Company seeks to develop long-term relationships with employees. Those working in the Company’s membership warehouses receive pay and benefits more generous than their counterparts at competitors. This long-term investment in its workforce has benefited the Company with greater loyalty, and the Company consequently benefits through what it believes to be the lowest employee turnover rates and the lowest “shrink” (inventory loss) rate in the industry.
In addition, equity grants are a meaningful portion of compensation for over 5,000 employees (including more than2,000 managers and assistant managers in our distribution centers and membership warehouses in the United States). Equity grants vest over periods up to five years, which provides long-term incentives to recipients. For senior management in fiscal 2017, over 70% of compensation was in the form of equity. In addition, relative compensation measures indicate the Company’s senior management is generally compensated below the peer median.
The Company is also recognized for its long-term approach to its members. Through its investments in lower pricing - seeking to bring goods to market with the lowest cost, through expense control and minimal mark-ups - the Company has developed what it believes to be a very strong reputation among its members for offering low prices. The Board and the Company have consistently determined that instead of raising short-term margins it is better to build loyalty among Costco members by charging lower prices. That strategy has resulted in over 87% of members globally renewing their memberships.
THE CLASSIFIED BOARD STRUCTURE IS DESIGNED TO PROTECT SHAREHOLDER INTERESTS AGAINST INVESTORS WITH SHORT-TERM INTERESTS
The Board has studied the potential benefits and harms of declassification for over a decade, including various studies of companies with classified boards (discussed below). While reviewing these studies over the years, and recognizing that the potential adverse impacts of a classified board cited in some of the studies may be relevant for some companies, the Board has noted the gap between those adverse possibilities and the very positive experiences of Costco shareholders under the Company's classified structure.
The Board continues to believe that the classified board structure serves as a safeguard against short-term shareholders agitating for changes inconsistent with a long-term value creation. The Board recognizes that the classified structure could delay the success of an acquisition proposal that has broad shareholder support, but is opposed by the Board. The Board also acknowledges that there may be situations where the Board and some shareholders do not agree about what a full and fair acquisition proposal might be. The Board believes, however, that the risk of any value loss through a delay in a transaction is outweighed by the protection that the structure provides against abusive or improvident tactics. The current voting standard requires broad shareholder support before a fundamental change is adopted that could impact the Company’s mission and long-term objectives.
RECENT STUDIES FIND THAT THE CLASSIFIED BOARD STRUCTURE DOES NOT HAVE A NEGATIVE IMPACT ON FIRM VALUE
The proponent cites a 2004 paper claiming that supermajority voting requirements and classified boards negatively impact firm valuations and shareholder returns. The proponent fails, however, to recognize relevant subsequent research, literature, and debate, specifically, the purported value of declassification. More recent studies conducted on firms that had declassified their boards found that declassification is associated with either a decline in firm value1 or had no significant impact on firm value.2 These studies sparked a response3 that was also criticized as ignoring evidence that firm values declined after declassifications at companies targeted by the project.4
APPROVAL PROCESS
Shareholder approval of this proposal would not itself amend the Articles. No amendment would occur unless authorized by the Board and then approved by the shareholders through an affirmative vote of not less than two-thirds of the outstanding shares entitled to vote generally in the election of directors.
For the reasons set forth above, the Board of Directors on Proposal 4
The Board of Directors does not oppose proxy access in principle. The current proposal, however, contains features (as discussed below) that are not in alignment with the limited adoptions of proxy access that have occurred in the United States thus far or the Company’s specific attributes, track record, and governance. The Boardunanimously believes that implementation of proxy access should be developed in a deliberate, methodical fashion that involves further engagement with shareholders, a review of continuing marketplace developments, and consideration of intended and potentially unintended consequences. Accordingly, the Nominating and Governance Committee of the Board will consider these and other factors and recommend a form of access suitable for the Company. Following that recommendation, the Board intends to adopt or propose a form of proxy access appropriate for the Company and its shareholders by the 2017 annual meeting. In the meantime, the Board continues to be open to receiving input from shareholders regarding board composition, governance practices, and value-creation opportunities. In light of these factors, the Board believes that proxy access in the form of Proposal 4this proposal is not in the best interests of ourthe Company and its shareholders and recommends that you vote against it.AGAINST Proposal 4. Proxies solicited by the Board of Directors will be voted AGAINST this proposal unless a shareholder has indicated otherwise in voting the proxy.
PROPOSAL 5: SUPPLY CHAIN POLICY ON PRISON LABOR
In response to a shareholder proposal, if properly presented at the meeting, the Company will hold a vote on the following:
WHEREAS Financial and operational risks related to the sale of This Proposal Are Problematic.
The Board believes thatgoods produced with prison labor, such as reputational damage, litigation, and supply chain disruption, can adversely affect shareholder value; Our company’s Supplier Code of Conduct prohibits illegal prison labor: “The use of prison or convict labor must be consistent with laws where the proxy access framework advocatedmerchandise is manufactured, and with the laws where it is imported”; Prison labor is legally permissible in the proposalUnited States and other countries where Costco goods are sourced. Inmates
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1 K. J. Martijn Cremers & Simone M. Sepe, Board Declassification Activism: The Financial Value of the Shareholder Rights Project, June 2017 (specifically studying the results of companies that declassified their boards in response to the project’s proposals); K.J. Martijn Cremers et al., Staggered Boards and Long-Term Value, Revisited, July 2017, Journal of Financial Economics (forthcoming); K.J. Martijn Cremers & Simone M. Sepe, The Shareholder Value of Empowered Boards, 68 Stan. L. Rev. 67 (2016).
2 Yakov Amihud et al., Settling the Staggered Board Debate, Sept. 8, 2017.
3 Lucian A. Bebchuk & Alma Cohen, Recent Board Declassifications: A Response to Cremers and Sepe, May 2017.
4 K. J. Martijn Cremers & Simone M. Sepe, Board Declassification Activism: Why Run Away from the Evidence, June 2017.
make numerous consumer products on behalf of companies, such as produce, office chairs, clothing, and packaging materials. Companies enjoy low overhead costs and potentially other benefits such as tax breaks; Watchdogs assert that prison labor is often deployed in an inhumane manner that fails to providebalance cost savings to companies against treatment of prisoners; Although slavery and involuntary servitude were abolished by the appropriate balance13th Amendment, an exception was made for “punishment for crime.” Although some U.S. prisoners may receive wages ranging from $0.23 to $1.15 per hour, in the U.S. and safeguardsworldwide many inmates are forced to prevent proxy contestswork for no pay at all, and in unsafe or unhealthy conditions; The use of prison labor in supply chains can undermine a retailer's reputation. In 2015, Whole Foods experienced significant backlash when customers learned that would be highly disruptive, distracting managementprisoner-made products were sold in stores; Although the Company’s supplier code of conduct leads to occasional audits of suppliers for certain potential issues, it lacks sufficient attention to the use of prison labor. Careful review of our supply chain for prison labor could help Costco ensure that risk to its reputation and shareholder value is minimized by demonstrating effective company oversight.
RESOLVED Shareholders of Costco urge the Board from the core business:
The proposal contemplatesof Directors to adopt a percentage of the Board (25%) being available for proxy access candidates that is unacceptably high and not in accordance with market trends.
The proposal could requirepolicy committing the Company to: a) Survey all suppliers to include any qualifying shareholders’ nomineesidentify sources of prison labor in the Company’s proxy statement regardlesssupply chain; b) Develop and apply additional criteria or guidelines for suppliers regarding the use of whetherprison labor; and c) Report to shareholders no later than June 30, 2018, at reasonable cost and omitting proprietary information, on Costco’s progress in implementing the shareholders intendpolicy.
SUPPORTING STATEMENT The Proponent recommends that the company’s progress report include:
Summary of results of the supplier survey, including actual and/or potential sources of prison labor identified, and in particular any use of:
a) Suppliers who employ prison labor with compulsory, uncompensated, or severely undercompensated work programs,
b) Suppliers who employ prison labor from privately-run prisons;
•Summary of new criteria and guidelines for the use of prison labor;
Methodologies to file their own proxy statementbe used to track, audit, and engagemeasure supplier performance;
Nature and extent of consultation with relevant stakeholders in connection with the policy development and implementation.
Examples of topics for possible guidelines or criteria could include: consideration of a proxy contest.minimum wage and/or overtime pay for inmate laborers, safety/health conditions, supplier-provided job-matching programs for inmates upon release.
BOARD OF DIRECTORS' RESPONSE
Since its inception, the Costco Supplier Code of Conduct has prohibited prison labor that is unlawful in the country where it is performed. In 2016, United States law concerning importation of goods made with “convict labor or/and forced labor or/and indentured labor under penal sanction” was strengthened, with the elimination of an exception that had been broadly applied to allow such imports where domestically produced supply was not sufficient to meet domestic demand.
In early 2017, the Company began a closer examination of the use of lawful prison labor in its supply chain. This was a product of the recent changes in U.S. law and an awareness of greater concerns among some U.S. consumers.
After examining this issue more deeply, we have come to understand its complexity and the positions that have been articulated in favor of and in opposition to the use of even lawful prison labor. Supporters maintain that legal prison labor programs offer participants an opportunity that is more attractive than idle or other time spent in confinement, opportunities for compensation and restitution, and an opportunity for rehabilitation with the potential for employment after confinement. Those opposed to legal prison labor programs cite challenges in assuring that participation is truly voluntary, the absence of private-sector levels of compensation, unsafe working conditions, and other flaws. Some opponents also link the issue of legal prison labor to debates around the use of incarceration generally. The Company has not identified any consensus on the correct approach.
As part of enforcing its Code of Conduct, Costco conducts thousands of audits annually around the globe with qualified independent third parties. In addition, its buying and quality assurance staffs spend countless hours visiting production facilities as part of the process of bringing quality merchandise to our members. Through
these efforts, we have not seen significant levels of prison labor in our supply chain. We have seen it occasionally in the United States, in the agricultural products segment, where it is permitted by federal and state laws.
The Company is committed under its Code of Conduct to “protecting the working rights and safety of the people who produce, process or harvest the Merchandise it sells” and appreciates that certain of its members might have particular concerns in this area. The Company accordingly is developing changes to the Code of Conduct with respect to lawful prison labor, which it expects to finalize by no later than June 2018. These changes will articulate more specific requirements concerning, among other things, assuring that such labor is provided in voluntary fashion, is fairly compensated, and rendered under appropriate working conditions. We will also take due account of risks associated with the use of prison labor under the laws of the United States and other countries where we import goods and countries from which we source goods. The revised requirements will be enforced in the same fashion as other requirements in our Code of Conduct, primarily through the use of independent third-party audits. We will closely monitor our experiences in this area and may determine to institute more restrictive policies as a result.
If adopted and implemented, the shareholder proposal does not require shareholder nomineeswould impose unnecessary restrictions and burdens on the Company. The Company believes that a requirement to survey each of its over 20,000 suppliers around the globe concerning prison labor would be independent or to satisfy applicable lawcostly, time-consuming and fails to require that shareholder nominees have no affiliations with a competitor or others
who opposeunnecessary, in light of the experience the Company has (through prior audits and other measures) concerning the low incidence of lawful prison labor in its supply chain. In light of these factors and the Company’s best interests. The burdenexisting procedures and its commitments as outlined above, the Board of proxy contests against director candidates who, if elected, could causeDirectors believes that implementing the Company toproposal would not be out of compliance with independence requirementsan effective and to violate the law, could harm shareholders.
The proposal does not require nominating shareholders to have held and retain voting and investment powerprudent use of the shares used to establish eligibility to nominate a director. UnderCompany’s time and resources.
For the reasons set forth above, the Board of Directors unanimously believes that this proposal a shareholder could have a net short positionis not in the Company’s stock and still be entitled to make a nomination.
The proposal does not require nominating shareholders to certify that they are not seeking to effect a change in control of the Company. Proxy access is intended to give shareholders an opportunity to have their nominees for election included in the Company’s proxy materials. It should not be used as a mechanism for taking control of the Board under circumstances where shareholders are not appropriately compensated for surrendering that control.
The proposal does not require nominating shareholders to retain ownership of their shares through the meeting date, so a nominating shareholder could sell all of its shares prior to the meeting date, which would misalign thebest interests of the nominating shareholder and Company shareholders.
The proposal does not cap the number of shareholders that could constitute a group for purposes of the 3% threshold, which could allow hundreds of shareholders to act together and administratively burden the Company.
The Board believes that the failure of the proposal to provide these safeguards could result in proxy access nominations being used or threatened in a manner that would be harmful to the Company and our shareholders.
The Proposal Fails to Recognize the Company’s Existing Governance Practices that Reinforce the Board’s Alignment with and Accountability to Shareholders.
The proposal does not articulate any specific concerns regarding our governance or performance, and does not take into account the Board’s actions to develop corporate governance policies that serve to promote responsiveness to shareholders:
Shareholders are able to communicate directly with the Board on relevant topics, including Board composition and performance.
Shareholders may submit for consideration names of potential director candidates directly to the Nominating and Governance Committee.
Under existing SEC rules and state law, shareholders can directly nominate and solicit proxies for their own director candidates at shareholder meetings.
Shareholders may call special meetings at which they can nominate director candidates or propose other business.
To enhance their alignment with the interests of shareholders, our independent directors’ compensation consists primarily of restricted stock unit awards that vest over a three-year period, and the directors must maintain a specified level of stock ownership.
The Board has overseen superior performance and returns to shareholders by the Company, while maintaining modest levels of executive compensation and market-leading compensation for the workforce at our membership warehouses.
We maintain an open director nomination process accessible to all shareholders. Our shareholders have consistently elected directors nominated by our Board and have not found it necessary to advance opposing candidates in elections or even advance candidates for consideration by the Nominating and Governance Committee.
The Proposal Fails To Recognize How the Company’s Nomination Procedure Serves the Interests of the Company and Its Shareholders.
The Board actively reviews and refreshes its membership. Led by the independent directors of the Nominating and Governance Committee, the Board has been actively engaged in a Board refreshment program to nominate independent directors who meet the evolving needs of the Company, which has resulted in the appointment of two new independent directors in 2015. The Nominating and Governance Committee evaluates
the Board and, in making decisions on the Board’s composition, considers tenure, performance, contributions, experience, skill set, and commitment. New directors have been added to the Board as the Company’s operations have evolved and diversified, while we have also retained directors with extensive knowledge of the Company’s background, executives, business models, and performance. As a result of these processes, the Board effectively oversees our management and operations and has guided our Company to the long-term success and benefit of our shareholders: over the long-term Costco Wholesale has consistently outperformed the NASDAQ composite, producing higher returns in the past three, five, and ten-year periods.
The Proposal Could Undermine Costco’s Long-Term Approach to Creating Shareholder Value.
Implementation of proxy access on the terms of the proposal could threaten the long-term focus that has traditionally characterized the Company’s relationship with its customers, employees, and suppliers, to the detriment of operations, performance, and returns to shareholders. Costco’s long-term approach to creating shareholder value has resulted in consistent long-term growth in the financial and operating performance of the Company and returns to shareholders. The following table shows the Company’s superior performance in generating total shareholder return (including share price appreciation and dividends). The Board believes that continuity among directors has played a significant role in producing these returns.
Adoption of Proxy Access in the Form Proposed Could Discourage Qualified Individuals From Agreeing to Serve on the Company’s Board.
A decision to implement a form of proxy access should be made in a careful manner, only after a demonstration that it will enhance shareholder value and does not create risks that are disproportionate. Although some companies have adopted proxy access, there continues to be a variety of viewpoints among investors and commentators about the value of proxy access in creating shareholder value and about how it should be structured. In addition, proxy access remains untried in execution in the United States. Directors who have the option to serve on multiple boards might choose a company that will not present the burdens and uncertainties associated with potentially contested elections under proxy access.
Input From Shareholders.
As part of a process of engagement among the Board of Directors, management, and certain shareholders (including most of the Company’s ten largest shareholders), discussions were held concerning (among other things) proxy access. Those discussions revealed a lack of unanimity among these shareholders concerning whether or not proxy access should be adopted at all and, if it were to be adopted, what the features should be.
The Board recognizes that the ability to elect directors is a fundamental right. The Company’s existing corporate governance practices empower shareholders and protect that right. The Board intends over the coming year to continue to monitor developments on proxy access, and the Company will continue to discuss proxy access developments with its shareholders as part of its regular engagement program. The Board intends to adopt or propose a form of proxy access by the 2017 annual meeting. The interval will be used to evaluate the vote on the shareholder proposal, seek additional feedback from shareholders, and observe other developments concerning proxy access during 2016, including the form in which it may be adopted by other companies. In the meantime, shareholders who hold views on whether a specific nominee or nominees should be included in the proxy statement for the 2017 annual meeting are encouraged to use existing mechanisms to provide input to the Nominating and Governance Committee and the Board.
The Board of Directors unanimously recommends that you vote AGAINST Proposal 4.5. Proxies solicited by the Board of Directors will be voted AGAINST this proposal unless a shareholder has indicated otherwise in voting the proxy.
The Company will, upon oral or written request, provide the name and address of the proponents of each shareholder proposal and the number of shares they hold . Requests may be sent to the Corporate Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027, or submitted by calling (425) 427-7766.
OTHER MATTERS
Neither the Board nor management intends to bring before the Annual Meeting any business other than the matters referred to in the Notice of Meeting and this Proxy Statement. If any other business should properly come before the Annual Meeting, or any adjournment thereof, the persons named in the proxy will vote on such matters according to their judgment.
SHAREHOLDER PROPOSALS FOR THE 20172019 ANNUAL MEETING
In order forFor a shareholder proposal to be included in the proxy statement for the 20172019 annual meeting, of shareholders, it must comply with SEC Rule 14a-8 and be received by the Secretary of the Company, at the address below, no later than August 20, 2016. Proposals may17, 2018.
To be mailed toproperly brought before the 2019 annual meeting of shareholders, a notice of a proxy access nomination under section 2.1 of our bylaws must be received by the Secretary of the Company, toat the attentionaddress below, no earlier than July 18, 2018, and no later than the close of business (5:30 p.m. Pacific Time) on August 17, 2018. Any such notice must meet the Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. other requirements set forth in our bylaws.
A shareholder who intends to present a proposal at the Company’s 2019 annual meeting, in 2017, other than pursuant to Rule 14a-8 or a proxy access director nomination, must comply with the requirements as set forth in our Bylaws,bylaws, which provide that the Company must receive notice of such intentionintentions must be received by the Secretary of the Company, at the address notedset forth below, no earlier than October 1, 2016,2, 2018, and no later than October 31, 2016,November 1, 2018, and such proposal must be a proper matter for shareholder action under Washington corporate law, or management of the Company will have discretionary voting authority at the 20172019 annual meeting with respect to any such proposal without discussion of the matter in the Company’s proxy statement.
Notices of intention to present proposals or nominate directors at the 2019 annual meeting, and all supporting materials required by our bylaws, must be submitted by mail to the Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027.
The Company reserves the right to reject, rule out of order, or take other appropriate action with respect to any proposal that does not comply with these and other applicable requirements. The submission of a shareholder proposal or proxy access director nomination does not guarantee that it will be included in our proxy statement.
ANNUAL REPORT TO SHAREHOLDERS AND FORM 10-K
The fiscal 20152017 Annual Report to Shareholders (which is not a part of our proxy soliciting materials) is being mailed with this Proxy Statement to those shareholders that received a copy of thewere mailed proxy materials in the mail.materials. For those shareholders that received the Notice of Internet Availability of Proxy Materials, this Proxy Statement and our fiscal 20152017 Annual Report to Shareholders are available at www.costco.com, through the Investor Relations page. Additionally, and in accordance with SEC rules, you may access our Proxy Statement at www.proxyvote.com, a “cookie-free” website that does not identify visitors to the site. A copy of the Company’s Annual Report on Form 10-K filed with the SEC will be provided to shareholders without charge upon written request directed to Investor Relations. The Company makes available on or through our website free of charge our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after filing.
GENERAL INFORMATION
List of Shareholders of Record. A list of shareholders of record entitled to vote at the Annual Meeting will be available at the Annual Meeting and for ten business days prior to the Annual Meeting between the hours of 9:00 a.m. and 4:00 p.m., Pacific time, at the office of the Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. A shareholder may examine the list for anya legally valid purpose related to the Annual Meeting.
Electronic Delivery. The Company is incorporated under Washington law, which specifically permits electronically transmitted proxies, provided that the transmission set forth or be submitted with information from which it can reasonably be determined that the transmission was authorized by the shareholder. The electronic voting procedures provided for the Annual Meeting are designed to authenticate each shareholder by use of a control number to allow shareholders to vote their shares and to confirm that their instructions have been properly recorded.
Householding Information. As permitted by SEC rules, the Company will deliver only one Annual Report or Proxy Statement to multiple shareholders sharing the same address unless the Company has received contrary instructions from one or more of the shareholders.instructions. The Company will, upon written or oral request, deliver a separate copy of the Annual Report or Proxy Statement to a shareholder at a shared address to which a single copy of the Annual Report or Proxy Statement was delivered and will include instructions as to how the shareholder can notify the Company that the shareholder wishes to receive a separate copy of the Annual Report or Proxy Statement in the future. Registered shareholders wishing to receive a separate Annual Report or Proxy Statement in the future or registered shareholders sharing an address wishing to receive a single copy of the Annual Report or Proxy Statement in the future may contact the Company’s Transfer Agent: Computershare, Inc., 250 Royall St., Canton, MA 02021; (800) 249-8982.
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By order of the Board of Directors, |
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John Sullivan |
Senior Vice President, General Counsel and Secretary |