CORPORATE GOVERNANCE

GUIDELINES ON SIGNIFICANT CORPORATE GOVERNANCE ISSUES

These guidelines are being published in this Proxy Statement to inform stockholders of the Board's current thinking with respect to selected corporate governance issues considered to be of significance to stockholders. The guidelines are only guidelines and not rigid rules. The Board will continue to assess the appropriateness and efficacy of the guidelines and it is likely that changes to the guidelines will occur from time to time.

SELECTION AND COMPOSITION OF THE BOARD

1. BOARD MEMBERSHIP CRITERIA

The Nominating Committee periodically reviews (at least annually) the mix of skills, experience levels and backgrounds of present and potential Board members in light of anticipated needs.

2. SELECTION AND ORIENTATION

The Nominating Committee reviews qualifications of potential candidates and recommends director nominees to the full Board. The Nominating Committee may receive suggestions for candidates from individual Board members, including the CEO, as well as from stockholders of the Company. The Nominating Committee has adopted a policy regarding factors to be considered in selecting director nominees which include: the nominee's intelligence, judgment, foresight, personal character, experience and achievements; the overall composition of the Board; having a majority of independent directors on the Board; and representation of a diversity of backgrounds and expertise which are most needed and beneficial to the Board and the Company.

3. EXTENDING THE INVITATION TO A POTENTIAL DIRECTOR TO JOIN THE BOARD

The invitation to join the Board should be extended by the Board itself or by the Chairman of the Nominating Committee.

BOARD LEADERSHIP

4. SELECTION OF CHAIRMAN AND CEO

The Board should be free to make this choice any way that seems best for the Company at a given point in time. Therefore, the Board does not have a policy, one way or the other, on whether or not the role of the Chief Executive and Chairman should be separate and, if it is to be separate, whether the Chairman should be selected from the non-employee directors or be an employee.

5. LEAD DIRECTOR CONCEPT

The Company has no "lead outside director." If a meeting of outside directors concerns a Committee matter, the Committee chairperson would normally chair the meeting. Any member of the Board may act to convene the Board as necessary or desirable in the event the CEO is incapacitated.

6. SIZE OF BOARD

As of the date of the 1999 Annual Meeting, there will be 13 Kmart Board members. Management, the Board and the Nominating Committee have indicated that a size of 13-15 members is about right.

7. MIX OF INSIDE AND OUTSIDE DIRECTORS

On matters of corporate governance, the practice is to involve the full Board. The CEO is currently the only member of management on the Board. As of the date of the 1999 Annual Meeting, there will be 12 outside directors. There is no By-law on the number of outside directors on the Board; however, the By-laws limit membership on the Audit Committee, Compensation and Incentives Committee, Finance Committee and Nominating Committee to outside directors only (Article IV, Sections 2, 3 and 4).

8. BOARD DEFINITION OF WHAT CONSTITUTES INDEPENDENCE FOR OUTSIDE DIRECTORS

The Nominating Committee has adopted the following definition of "independent director" for purpose of evaluating director nominees: a director who is outside of management and free from any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment as a Board member including, without limitation, any relationship that involves payments to a director from the Company other than compensation for services as a director.

9. DIRECTORS WHO CHANGE THEIR PRESENT JOB RESPONSIBILITIES

The Board has adopted a policy that any director who has a significant change in occupation, retires from principal employment or is unavailable for active participation due to health, change of residence or similar reason (except for short duration) shall submit an offer of resignation from the Board. Action on such conditional offer of resignation is by Board resolution, upon recommendation of the Nominating Committee.

10. TERM LIMITS

The Board has adopted a policy that (1) no outside director shall be nominated for re-election after having served four 3-year terms (disregarding partial terms), (2) no director shall be nominated for re- election at an annual stockholders meeting coinciding with or next following his or her 70th birthday and (3) inside directors (other than the CEO) shall retire on the date of their retirement or termination of employment.

11. RETIREMENT AGE

Outside directors must retire upon expiration of their term of office following their 70th birthday.

12. BOARD COMPENSATION REVIEW

The Company's Executive Vice President of Human Resources monitors director compensation in relation to other large U.S. companies on an ongoing basis and advises the Compensation and Incentives Committee if changes are appropriate. The Committee is also assisted as needed by an independent compensation consultant. Changes in Board compensation are approved by the Board, upon recommendation of the Compensation and Incentives Committee.

13. EXECUTIVE SESSIONS OF OUTSIDE DIRECTORS

Outside directors meet separately, or with the CEO, from time to time, as determined by the outside directors and/or CEO. This includes an evaluation of CEO performance at least annually.

14. ASSESSING THE BOARD'S PERFORMANCE

The Board regularly surveys its members to assess the Board's contribution as a whole and to specifically review areas in which the Board and/or management believes a better contribution could be made. The purpose is to increase the effectiveness of the Board, not to target individual Board members.

15. BOARD INTERACTION WITH INSTITUTIONAL INVESTORS, THE PRESS, CUSTOMERS, ETC.

The Board believes that management generally should speak for the Company. While individual Board members may, from time to time, meet or otherwise communicate with various constituencies that are involved with Kmart, it is expected that Board members would do this with the knowledge of management and, in most instances, at the request of management.

BOARD RELATIONSHIP TO SENIOR MANAGEMENT

16. REGULAR ATTENDANCE OF NON-DIRECTORS AT BOARD MEETINGS

The General Counsel and the Secretary are the only non-directors present at each Board meeting for its duration. The officers who compose the Management Executive Committee attend all meetings for operational, financial and related presentations. Other presenters attend on an invitation basis for their presentation(s).

17. BOARD ACCESS TO SENIOR MANAGEMENT

Board members have complete access to Kmart management. It is assumed that Board members will use judgment to be sure that this contact is not distracting to the Company and that such contact, if in writing, be copied to the CEO. Furthermore, the Board encourages management to, from time to time, bring managers into Board meetings who: (a) can provide additional insight into the items being discussed because of personal involvement in these areas, and/or (b) represent managers with future potential that senior management believes should be given exposure to the Board.

MEETING PROCEDURES

18. SELECTION OF AGENDA ITEMS FOR BOARD MEETINGS

The CEO, in consultation with the other Board members and members of management, establishes the agenda for each Board meeting. Each Board member is free to suggest the inclusion of item(s) on the agenda.

19. BOARD MATERIALS DISTRIBUTED IN ADVANCE

It is the sense of the Board that information and data that is important to the Board's understanding of the business be distributed in writing to the Board before the Board meets. Management will make every attempt to see that this material is as brief as possible while still providing the desired information.

20. BOARD PRESENTATIONS

As a general rule, presentations on specific subjects should be sent to Board members in advance so that Board meeting time may be conserved and discussion time focused on questions that the Board has about the material. On those occasions in which the subject matter is too sensitive to put on paper, the presentation will be discussed at the meeting.

COMMITTEE MATTERS

21. NUMBER OF COMMITTEES

There are currently five standing Board committees: Audit, Compensation and Incentives, Executive, Finance and Nominating. The Board may form, merge or dissolve a Committee as the Board determines, depending on circumstances.

22. COMMITTEE ASSIGNMENT AND ROTATION

The Board has adopted a three year tenure policy for Committee chairpersons unless it is determined in a particular instance that a longer tenure is in the best interests of the Board or the Company. Committee assignments are evaluated and rotated as appropriate at five year intervals or sooner if there is a change in Board membership. Under the Company's By-laws, membership on the Audit, Compensation and Incentives, Finance and Nominating Committees is limited to outside directors only. All Committee changes are approved by the Board, upon recommendation of the Nominating Committee.

23. FREQUENCY AND LENGTH OF COMMITTEE MEETINGS

Committee meetings are normally held on the day preceding, or the morning of, each regularly scheduled Board meeting. Committee meetings are scheduled a year in advance. Changes to the schedule are made as needed by the Committee chairperson in consultation with appropriate members of management.

24. COMMITTEE AGENDA

The chairperson of the Committee in consultation with the appropriate members of management will develop the Committee's agenda. A preliminary annual schedule of Committee agenda subjects is issued each year. The final agenda is set by the Committee chairperson in consultation with appropriate members of management prior to each meeting.

LEADERSHIP DEVELOPMENT

25. FORMAL EVALUATION OF THE CHIEF EXECUTIVE OFFICER

The Compensation and Incentives Committee has adopted a policy of reviewing the CEO's annual compensation and performance evaluation with all outside directors. The outside directors then meet with the CEO to discuss the evaluation. The evaluation is based on criteria such as performance of the business, accomplishment of long-term strategic objectives, development of management, etc. The evaluation is used by the Compensation and Incentives Committee in the course of its deliberations when considering the compensation of the CEO.

26. SUCCESSION PLANNING

The CEO meets annually with the outside directors to report on succession planning.

27. MANAGEMENT DEVELOPMENT

The CEO meets annually with the outside directors to report on management development.