ILLINOIS TOOL WORKS INC.
The Company's by-laws provide that the chairman is the chief executive officer of the Company and that in the chairman's absence or disability, a vice chairman selected by the Board assumes all duties and responsibilities of that office. (In the event of the absence or disability of both the chairman and the vice chairmen, the chairman of the executive committee assumes all the duties and responsibilities of the office of the chairman.)
The Board of Directors can amend the by-laws, as particular circumstances warrant, including adding the office of president and providing that the president or another officer be chief executive were the Board to determine that splitting the offices of chairman from chief executive was in the best interests of the Company and its stockholders.
Although the current policy of the Board is reflected in the by-laws, the Board believes that it is in the best interests of the Company and its stockholders to re-determine the question of separating the offices of chairman and chief executive officer each time the Board elects a new chief executive officer. It is the sense of the Board, based on the Company's previous experience in splitting the two offices back in the late 1960's and the early 1980's, that the two offices should not be separated.
The lead director is to preside at all executive sessions of the Board of Directors and to be an avenue for communications with independent directors. If the Company has a non-executive chairman, then the chairman shall be the lead director. The lead director shall serve for a one-year term and must be an independent director, elected by a majority of the independent directors. The lead director will:
The name of, and means of contacting, the lead director will be made public in the Company’s proxy statement for the annual meeting of stockholders.
The basic responsibility of the directors is to exercise their business judgment to act in what they reasonably believe to be in the best interests of the Company and its stockholders and employees.
Directors are expected to prepare adequately for and regularly attend meetings of the Board and Board committees on which they serve. Directors are also encouraged to attend the annual meeting of stockholders.
Directors must disclose to the Board any potential conflict of interest of which they are aware that they may have with respect to a matter under discussion and, if appropriate, refrain from voting or exit the meeting on a matter on which they may have a conflict.
The Board has Audit, Compensation, Corporate Governance and Nominating, Executive and Finance Committees. The Board has the flexibility to form a new committee or disband a current committee, except to the extent required by Securities and Exchange Commission or New York Stock Exchange regulations. Only independent directors meeting the requirements of the New York Stock Exchange listing standards, as determined by the Board in its business judgment, may serve on the Audit, Compensation, and Corporate Governance and Nominating Committees.
After receiving recommendations from the Corporate Governance and Nominating Committee and in consultation with the chairman, the Board designates the members of the committees taking into account their particular experience and knowledge of the Company and the preferences of individual Board members. With respect to committee assignments, there are significant benefits attributable to continuity, experience gained in service on particular committees, and utilizing most effectively the individual talents of Board members.
Subject to the requirements of any applicable committee charter, the chairman of each committee, in consultation with its members and management, determines the frequency of the meetings of the committee.
Additional committee meetings can be and have been called at the request of any member of the committee.
The chairman of each committee, taking into account recommendations of committee members and in consultation with management, establishes the agenda for each committee meeting.
Minutes of each committee meeting are reviewed by all directors at their next Board meeting to assure that they remain fully apprised of topics discussed and actions taken. In addition, the chairmen of the Audit, Compensation, and Corporate Governance and Nominating, and other committees report regularly at Board meetings on matters considered by their committees.
The chairman establishes the agenda for each Board meeting, and the corporate secretary distributes it during the week prior to the meeting so that the directors are apprised of the principal matters to be considered; provided that the chairman may add items to the agenda after such distribution to the extent he or she determines it is appropriate to do so.
Each director may recommend agenda items and is encouraged to raise at any Board meeting subjects that are not on the agenda for that meeting.
At least one Board meeting per year will be an extended Board meeting during which the Board will review long-term strategic plans and discuss principal issues and risks that are expected to affect the Company in the future.
Information and data important to the Board's understanding of the issues to be discussed at the Board meeting is distributed to each director in the week prior to the Board meeting. Management makes every attempt to provide material in concise but comprehensive form consistent with the Board's desire for the information. When there is no prior distribution of information, the Board will be provided ample time to consider and deliberate on any action to be taken.
The senior officers of the Company regularly attend Board meetings. The chairman may also, as particular circumstances warrant, invite other managers to attend all or part of Board meetings, such as when they (i) can provide additional insight into the items being discussed; or (ii) have potential as future leaders within the Company.
The non-management directors shall schedule regular executive sessions without management. Executive sessions will be chaired by the lead director. In the lead director’s absence, a chairman of one of the Board committees shall serve on a rotating basis. At least once a year, the independent directors shall schedule an executive session including only independent directors.
Directors have complete access to the Company’s management, counsel and auditors and other independent advisors, as the directors deem necessary and appropriate. It is assumed that the directors will exercise their judgment so that such contact is not distracting to the business, and the chairman is appropriately advised of any such contact.
The Corporate Governance and Nominating Committee shall establish director compensation guidelines and review them as appropriate. Management may suggest changes in Board compensation to the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee shall make recommendations with respect to director compensation to the full Board. The full Board must discuss and approve changes to director compensation.
In recommending director compensation, the Corporate Governance and Nominating Committee takes director fees of comparable companies into account. The Corporate Governance and Nominating Committee will review the status of Board compensation in relation to other large companies at least annually.
A meaningful portion of director compensation is in common stock of the Company in order to further the direct correlation of directors' and stockholders' economic interests.
When determining the form and amount of director compensation and the independence of a director, the Board and the Corporate Governance and Nominating Committee will scrutinize charitable contributions that are made to organizations with which a director is affiliated and any consulting contracts with, or other indirect compensation to, such director.
The Board itself determines its size, although it is the sense of the Board that a desirable number of members are between 9 and 11. The Board, however, would consider a somewhat larger size in order to accommodate the availability of an outstanding candidate(s) or to provide for a reasonable transition where, for example, incumbent directors are nearing mandatory retirement age. In the event of a vacancy on the Board, the directors may either fill the vacancy or decrease the size of the Board, in accordance with the terms of the Company’s Certificate of Incorporation.
As a matter of policy a majority of the directors are independent and the chief executive officer is a director. Board membership is by no means necessary or a prerequisite to any higher executive position within the Company.
A majority of the directors shall meet the New York Stock Exchange listing standards for independence, as determined by the Board in its business judgment. The Board will apply the Categorical Standards for Director Independence, attached as Exhibit A hereto, in making determinations as to independence of directors. The Board will consider on a case-by-case basis the materiality of any relationships between the Company and a director not addressed by the Categorical Standards for Director Independence.
Whether a former chief executive officer of the Company continues to be a director is a matter to be decided in each individual instance. It is assumed that when the chief executive officer no longer holds that position, resignation from the Board should be offered at the same time. Whether the individual continues to serve on the Board is a matter for discussion at that time with the Board and the new chief executive officer.
The Corporate Governance and Nominating Committee is responsible for reviewing on at least an annual basis the appropriate skills and characteristics required of Board members in the context of the current make-up of the Board. This assessment should include skills (such as an understanding of technologies pertinent to the Company's businesses, production, marketing, finance, regulation and public policy), international background and experience, age, diversity, etc.—all in the context of an assessment of the perceived needs of the Board at that point in time.
The Corporate Governance and Nominating Committee screens and recommends nominees for director to the full Board. After receiving recommendations for nominations from the Corporate Governance and Nominating Committee, the Board nominates or elects candidates for director.
The Board does not believe that its members should be prohibited from serving on boards and/or committees of other organizations, and the Board has not adopted any guidelines limiting such activities. However, the Corporate Governance and Nominating Committee and the Board will take into account the nature of and time involved in a director’s service on other boards in evaluating the suitability of individual directors and making its recommendations to Company stockholders. Service on boards and/or committees of other organizations should be consistent with the Company’s conflict of interest policies.
The invitation of the Corporate Governance and Nominating Committee to join the Board is usually extended by the chairman of the Board of Directors or the chairman of the Corporate Governance and Nominating Committee.
Each of the Audit Committee, Compensation Committee and the Corporate Governance and Nominating Committee performs a self-evaluation which occurs on an ongoing basis, at each scheduled meeting, informally through conversations, comments and questions among committee members.
The Corporate Governance and Nominating Committee is responsible for coordinating and overseeing an annual evaluation process of the Board’s performance and procedures, including an evaluation of individual directors. The collective evaluation conclusions shall be reported by the chairman of the Corporate Governance and Nominating Committee to the full Board for discussion. Based on the comments and further discussion, the Board will make an assessment specifically reviewing areas in which the Board and/or management believe improvements could be made to increase the effectiveness of the Board. Results of the assessment will also be used in evaluating skills and attributes desired in potential director candidates.
The Compensation Committee shall evaluate the chief executive officer annually in light of corporate goals and objectives (including performance of the business, accomplishment of long-term strategic objectives, development of management, etc.) established by the Compensation Committee. The evaluation should be communicated to the chief executive officer by the chairman of the Compensation Committee. The Compensation Committee shall recommend the chief executive officer’s compensation based on this evaluation, which compensation shall be approved by the independent Board members.
The Board will establish and review such formal or informal policies and procedures, as it considers appropriate, regarding succession planning and principles for selection of the chief executive officer. (There is also available, on a continuing basis, the chief executive officer's recommendation as to a successor should he or she be unexpectedly unable to continue to serve.) The chief executive officer reports at least annually to the Board on succession planning.
Periodic reports are given to the Board on the Company's program for management development.
The Company’s by-laws establish a majority vote standard for uncontested elections of directors and a plurality vote standard for contested elections of directors. The Board expects a director to tender his resignation if he fails to receive the required number of votes for re-election. The Corporate Governance and Nominating Committee shall make a recommendation to the Board on whether to accept or reject a resignation, or whether other action should be taken. The Board shall act on the Committee’s recommendation no later than 90 days following the date of the Company’s annual meeting. The Board shall nominate only a candidate who agrees to comply with this resignation procedure. In addition, the Board shall fill a director vacancy and a new directorship only with a candidate who agrees to comply with this resignation procedure. Any director who tenders his resignation pursuant to this provision will not participate in the Committee’s recommendation or Board consideration regarding the tendered resignation.
The Board does not believe in term limits. While term limits could help ensure that there are fresh ideas and viewpoints available to the Board, they hold the disadvantage of losing the contribution of directors who have been able to develop, over a period of time, increasing insight into the Company, its culture, management and operations and, therefore, provide an increasing contribution to the Board as a whole.
A director may not stand for re-election, and an individual may not be nominated as a director, after his or her 75th birthday, except in rare circumstances approved by the Board.
Individual directors who change the position they held when they were elected to the Board (other than through normal retirement) should offer to resign from the Board. There should, however, be an opportunity for the Board, through the Corporate Governance and Nominating Committee, to review the continued appropriateness of Board membership under these circumstances.
The Board believes that management speaks for the Company. While individual Board members may, from time to time, meet or otherwise communicate with various constituencies that are involved with the Company, it is expected that Board members would do this with the knowledge of management and, absent unusual circumstances, only at the request of management.
Management reports annually to the Board on the status of the Company's current and potential environmental liabilities.
The Company will conduct, or provide access to, appropriate orientation for new directors and ongoing programs for existing directors. This orientation program may include presentations designed to familiarize directors with the Company and its strategic plans, its significant financial, accounting and risk management issues, its Statement of Principles of Conduct, compliance programs and other controls, its senior management, and its internal and independent auditors. The program may also address procedures of the Board, directors’ responsibilities, the Corporate Governance Guidelines and Board committee charters. Directors are encouraged but not required to attend these and other appropriate continuing education programs.
Approved by the Illinois Tool Works Inc. Board of Directors: December 10, 2010
CATEGORICAL STANDARDS FOR DIRECTOR INDEPENDENCE
To be considered independent, a director of the Company must meet all of the following Categorical Standards for Director Independence. In addition, a director who is a member of the Company’s Audit Committee must meet the heightened criteria set forth below in Section IV to be considered independent for the purposes of membership on the Audit Committee. These categorical standards may be amended from time to time by the Company’s Board of Directors.
Directors who do not meet these categorical standards for independence can also make valuable contributions to the Company and its Board of Directors by reason of their knowledge and experience.
In addition, if a director meets the standards set forth below, a director will not be considered independent unless the Board of Directors of the Company affirmatively determines that the director has no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). In making its determination, the Board of Directors shall broadly consider all relevant facts and circumstances. Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others. For this purpose, the Board does not need to reconsider relationships of the type described in Section III below if such relationships do not bar a determination of independence in accordance with Section III below.
An “immediate family member” includes a person’s spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such person’s home. When considering the application of the three-year period referred to in each of paragraphs III.1 through III.5 below, the Company need not consider individuals who are no longer immediate family members as a result of legal separation or divorce, or those who have died or become incapacitated.
includes any subsidiary in its consolidated group.
The following standards have been established to determine whether a director of the Company is independent:
1 For purposes of this Item 3 only, the term “immediate family
member” shall mean a spouse, minor child or stepchild, or an adult child or
stepchild sharing a home with the director.
IV. Standards for Audit Committee Members
In addition to satisfying the criteria set forth in Section III above, directors who are members of the Company’s Audit Committee will not be considered independent for purposes of membership on the Audit Committee unless they satisfy the following criteria: