PRINCIPLES OF CORPORATE GOVERNANCE
The primary responsibility of the Board of Directors (sometimes referred to herein as the "Board") is to foster the long-term success of Northrop Grumman Corporation (the "Company"), consistent with representing the interests of the stockholders. In accordance with this philosophy, the Board of Directors has adopted Principles of Corporate Governance, which reinforce the Company's values by promoting responsible business practices and good corporate citizenship. The Board of Directors reviews these principles no less frequently than annually to determine whether they can be improved upon or if they should be modified in response to changed circumstances. The Company's Principles of Corporate Governance can be found in their entirety on the Company's website (www.northropgrumman.com) and are available in print to any stockholder who requests them. Over the years, the Board of Directors has modified these principles, and will continue to do so if the directors believe that changes to these principles will advance the best interests of the stockholders.
Role of the Board and Director Responsibilities
The day-to-day business and affairs of the Company are conducted by its employees and officers, under the direction of the chief executive officer ("CEO") and the oversight of the Board. In discharging the obligation of oversight, directors are encouraged and expected to ask questions of and raise issues with management as part of their careful and cautious oversight. To that end, directors should be entitled to rely on the honesty and integrity of the Company's senior executives and its outside advisors and auditors. The Board recognizes that the long-term interests of the Company and its stockholders are advanced when they take into account the concerns of interested third-parties including employees, customers, suppliers, government officials and the public at large.
The Board of Directors' general oversight responsibilities include, but are not limited to, the following:
- Review, approval, and monitoring of the Company's long-range business strategies and significant corporate actions;
- Oversight and evaluation of management's performance;
- Senior executive succession planning;
- Policies to maintain the integrity of the Company, including the integrity of the financial statements, compliance with law and ethics, and the integrity of relationships with customers and suppliers; and
- Providing advice and counsel to management.
Directors are encouraged to communicate freely amongst themselves.
Independence of Directors
It is the objective of the Board of Directors that at least 75% of its members qualify as independent directors under the applicable rules of the New York Stock Exchange and the Securities and Exchange Commission, and in accordance with the Company's categorical standards set forth below ("Independent Directors")
A director may be deemed not to have a material relationship with the Company if he or she:
- Has not within the prior three years been a director, executive officer or trustee of a charitable organization that received annual contributions from the Company exceeding the greater of $1 million, or 2% of the charitable organization's annual gross revenues, where the gifts were not normal matching charitable gifts, did not go through normal corporate charitable donation approval processes or were made "on behalf of" a Company director;
- Has not within the prior three years been employed by, a partner in or otherwise affiliated with any law firm or investment bank in which the director's compensation was contingent on the services performed for the Company or in which the director personally performed services for the Company and the annual fees paid by the Company during the preceding fiscal year did not exceed the greater of $1 million or 2% of the gross annual revenues of such firm; and
- Has not within the prior three years owned, and has no immediate family member who owned, either directly or indirectly as a partner, stockholder or officer of another company, more than 5% of the equity of an organization that has a business relationship with (including significant purchasers of goods or services), or more than 5% ownership in, the Company.
Chairperson of the Board
The Company's Bylaws establish the position of Chairperson of the Board. The Board believes that it is in the best interests of the Company and its stockholders for the Board to have the flexibility to determine the best director to serve as Chairperson of the Board. The Chairperson of the Board will generally be an independent director or the CEO. If the Chairperson is an independent director, he or she may have the title non-executive Chairman, non-executive Chairwoman, non-executive Chair or non-executive Chairperson. An independent Chairperson shall:
- Serve as a liaison between the CEO and the Independent Directors;
- Advise on the quality, quantity and timeliness of the information sent to the Board;
- Prepare the agendas of the Board meetings and assist the Chairpersons of each standing committee with preparation of agendas for the respective committee meetings, taking into account the requests of other Board and committee members;
- Set an appropriate schedule for Board meetings to assure that there is sufficient time for discussion of all agenda items;
- Along with the Chair of the Governance Committee, interview all Board candidates and make recommendations to the Governance Committee and the Board;
- Have the authority to call meetings of the Independent Directors; and
- If requested by major stockholders, ensure that he or she is available for consultation and direct communication.
Lead Independent Director
If the Chairperson is not independent, the Independent Directors shall designate from among them a Lead Independent Director. If so designated, the Lead Independent Director shall:
- Subject to Section 3.13 of the Bylaws, preside at all meetings of the Board at which the Chairperson is not present, including executive sessions of the Independent Directors;
- Serve as liaison between the Chairperson and the Independent Directors;
- Advise on the quality, quantity and timeliness of the information sent to the Board of Directors;
- Provide the Chairperson with input as to the preparation of the agendas of the Board and Committee meetings, taking into account the requests of the other Board and committee members;
- Advise the Chairperson on the appropriate schedule of Board meetings to assure that there is sufficient time for discussion of all agenda items;
- Have the authority to call meetings of the Independent Directors;
- Interview, along with the Chairperson and the Chair of the Governance Committee, all Board candidates and make recommendations to the Committee and the Board; and
- If requested by major stockholders, ensure that he or she is available for consultation and direct communication.
The size of the Board will be set in accordance with the Company's Certificate of Incorporation and Bylaws and the directors will be elected annually by the stockholders. Stockholders may propose director candidates to the Governance Committee in writing, accompanied by a description of the proposed nominee's relevant biographical information and qualifications, and an indication of the consent of the proposed nominee. The stockholder recommendation should be addressed to the Governance Committee in care of the Corporate Secretary. The Governance Committee will evaluate candidates recommended by stockholders in the same manner as candidates identified through other means. Stockholders may also directly nominate Board candidates in accordance with the procedures set forth in the Company's Bylaws. Between annual meetings of stockholders, the Board has authority under the Company's Certificate of Incorporation and Bylaws to fill director vacancies and new directorships.
Nominees for election will be reviewed by the Governance Committee. In evaluating potential candidates the Governance Committee may consider the following criteria (which are re-assessed from time to time):
- High personal and professional integrity;
- Relevant educational and professional background;
- Ability to represent the best interests of all stockholders; and
- Willing to submit to a background check necessary for obtaining a top secret clearance.
In accordance with the Company's Bylaws, if none of the Company stockholders provides the Company notice of an intention to nominate one or more candidates to compete with the Board's nominees in a director election, or if the stockholders have withdrawn all such nominations by the tenth day before the Company mails its Notice of Annual Meeting to the stockholders, a nominee must receive more votes cast for than against his or her election or re-election in order to be elected or re-elected to the Board. The Board expects a director to tender his or her resignation if he or she fails to receive the required number of votes for re-election.
The Board shall nominate for election as director only candidates who agree to tender, promptly following the annual meeting at which they are elected as director, resignations that will be effective upon (i) the failure to receive the required vote at any future meeting at which they face re-election and (ii) Board acceptance of such resignation. In addition, the Board shall fill director vacancies and new directorships only with candidates who agree to tender, promptly following their appointment to the Board, the same form of resignation tendered by other directors in accordance with this principle. A resignation tendered in accordance with this paragraph must provide that it may not be withdrawn unless the Board eliminates this principle on majority voting in director elections.
If an incumbent director fails to receive the required vote for re-election, the Governance Committee will consider whether the Board should accept the director's resignation and will submit a recommendation for prompt consideration by the Board. The Board expects the director whose resignation is under consideration to abstain from participating in any decision regarding that resignation. The Board will also request that all directors who are not considered "Independent Directors" pursuant to these Principles of Corporate Governance abstain from participating in the decision regarding the resignation unless the Board determines that the participation of one or more of such directors is necessary under the circumstances. The Governance Committee and the Board may consider any factors they deem relevant in deciding whether to accept a resignation, including, without limitation, any harm to the Company that may result from accepting the resignation, the underlying reasons for the vote against the director, and whether action in lieu of accepting the resignation would address the underlying reasons for such votes against the director.
The Board will decide whether to accept or reject a resignation within 90 days following certification of the election results by the inspector of elections, unless the Board determines that compelling circumstances require that the Board take additional time to consider the resignation. The Company will disclose the Board's decision (including, if applicable, the reasons for rejecting a resignation) in a periodic or current report that will be filed with the SEC within four business days of such decision.
All new directors receive an orientation, which is individually designed for each director taking into account his or her experience, background, education, and committee assignments. This orientation includes one-on-one meetings with senior management and extensive written materials on the Company and its various products and operations.
The Company maintains a list of continuing director education opportunities, and all directors are encouraged to periodically attend, at the Company's expense, director continuing education programs offered by various organizations.
The Company has a retirement policy whereby a director will retire at the annual meeting following his or her 72nd birthday.
Directors should not serve on more than four other boards of publicly traded companies in addition to the Company's Board without the approval of the Chairperson of the Governance Committee. A director who is a full time employee of the Company may not serve on the board of more than two other public companies unless approved by the Board. Directors should advise the Chairperson of the Board and the Chairperson of the Governance Committee prior to accepting an invitation to serve on another board.
When a director's principal occupation or business association changes substantially during his or her tenure as a director, the Board expects that director to tender his or her resignation for consideration by the Governance Committee and the Board. The Governance Committee will recommend to the Board the action, if any, to be taken with respect to the resignation.
The Board has established four standing committees to assist it in effectively discharging its responsibilities: Audit; Compensation; Governance; and Policy. Each of the four standing committees consists solely of Independent Directors.
The Board of Directors, with recommendations from the Governance Committee, appoints the members and chairperson of the committees. These appointments are based on an analysis of the skills, experience and other qualities of each individual director in relation to the requirements of the particular committee. Committee membership is reviewed annually and members are rotated as appropriate. Each standing committee has its own charter which sets forth the purposes, goals and responsibilities of the committees. The charters are published on the Company's website.
The Board may, from time to time, establish and maintain additional standing or ad hoc committees as it deems appropriate.
Board and Committee Meetings and Executive Sessions
On an annual basis, the Board of Directors holds an extended meeting to review the Company's long-term strategy for each of its businesses, as well as for the Company as a whole.
The Board holds its meetings at other Company locations on a regular basis to provide the directors with in-depth review of the business at that location, a first-hand view of the operations and an opportunity for the Board members to interact with management at the facility.
The Board, with no members of management present (including directors who are also officers of the Company), meets in executive session following each in-person Board meeting and on other occasions as needed. The non-executive Chairperson or the Lead Independent Director presides over the executive sessions. The Audit Committee meets in executive session with management, the independent auditor and the Vice President of Internal Audit regularly. The Compensation Committee also meets in executive session on a regular basis. All other committees are given the opportunity to meet without management present as they deem necessary.
The Chairperson, in consultation with the Lead Independent Director, if any, and committee chairpersons, will establish the agenda for each Board meeting. Any other member of the Board is free to suggest the addition of any other item(s). The chairpersons of the committees will coordinate committee meeting agendas with appropriate members of management. Other committee members are free to suggest additional agenda items.
Standards of Business Conduct
Ethics and values are central to the Company's identity. The Board expects all directors, officers, employees and representatives to act ethically at all times and to avoid conflicts of interest or the appearance of a conflict of interest. The Company has adopted Standards of Business Conduct which apply to all directors, officers, employees, consultants, agents, contract labor and anyone who represents the Company in any capacity. The Standards of Business Conduct are available on the Company's website.
Directors' Common Stock Ownership and Compensation
To encourage directors to have a direct and material cash investment in shares of common stock of the Company, directors who are not employees must defer at least $120,000 of their annual retainer into Company stock to be placed in a stock unit account. The deferred stock is distributed to the director upon termination of his or her service on the Board.
The Compensation Committee reviews and recommends to the Board non-employee director compensation. The Compensation Committee consults with outside advisors to design forms and amounts that are appropriate for attracting quality individuals to serve on the Board.
Evaluation and Succession Planning
Every year the Board of Directors conducts an assessment of its performance and at the conclusion of the evaluation process discusses its results. The Board also considers the performance of each individual director on a regular basis.
Senior members of management are invited to make presentations to the Board or committees to provide management insight into items being discussed by the Board or committees and to bring managers with high potential into contact with the Board. In addition, Board members always have free access to all other members of management and employees of the Company.
The Board of Directors believes that providing for continuity of leadership is critical to the success of the Company. Therefore, processes are in place to:
- Annually evaluate the CEO based on a specific set of performance objectives;
- Annually provide the Compensation Committee with an assessment of persons considered potential successors to certain management positions and report and discuss the results of these reviews with the Board; and
- Support continuity of top leadership, including CEO succession.