Company Name: 3M Co.
Public Availability Date: February 16, 2006
Document Sections:
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
January 6, 2006
Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
100 F. Street, N.E.
Washington, DC 20549
BY EMAIL: cfletters@sec.gov
Re: 3M Company Securities Exchange Act of 1934 - Rule 14a-8 Stockholder Proposal
of United Brotherhood of Carpenters Pension Fund
Ladies and Gentlemen:
This letter notifies the staff of the Division of Corporation Finance (the
"Staff") that 3M Company ("3M") intends to omit from its proxy statement and
form of proxy for 3M's 2006 Annual Meeting of stockholders (collectively, the
"2006 Proxy Materials") a stockholder proposal (the "Proposal") and statement in
support thereof submitted by United Brotherhood of Carpenters Pension Fund (the
"Proponent"). Copies of the Proposal and accompanying cover letter, as well as
related correspondence with the Proponent, are attached hereto as Exhibit A.
In accordance with Rule 14a-8(j) of the Exchange Act, enclosed are six copies of
this letter and its attachments. By copy of this letter, 3M notifies the
Proponent of its intention to omit the Proposal from its 2006 Proxy Materials.
Also pursuant to Rule 14a-8(j), this letter is being filed with the Securities
and Exchange Commission (the "Commission") no later than 80 calendar days before
3M intends to file its definitive 2006 Proxy Materials with the Commission. 3M
agrees to promptly forward to the Proponent any Staff response to 3M's no-action
request that the Staff transmits by facsimile to 3M.
3M respectfully requests that the Staff concur in our view that the Proposal may
be excluded from the 2006 Proxy Materials for the reasons set forth in this
letter. To the extent that the reasons for omitting the Proposal are based on
matters of law, this letter also constitutes an opinion of counsel that Rule
14a-8(j)(2)(iii) requires.
I. The Proposal
The Proposal requests 3M's Board of Directors' Compensation Committee to
"establish a pay-for-superior-performance standard in the Company's executive
compensation plan for senior executives ("Plan"), by incorporating the following
principles into the Plan:
1. The annual incentive component of the Company's Plan should utilize financial
performance criteria that can be benchmarked against peer group performance, and
provide that no annual bonus be awarded based on financial performance criteria
unless the Company exceeds the median or mean performance of a disclosed group
of peer companies on the selected financial criteria;
2. The long-term equity compensation component of the Company's Plan should
utilize financial and/or stock price performance criteria that can be
benchmarked against peer group performance, and any options, restricted shares,
or other equity compensation used should be structured so that compensation is
received only when Company performance exceeds the median or mean performance of
the peer group companies on the selected financial and stock price performance
criteria; and
3. Plan disclosure should allow shareholders to monitor the correlation between
pay and performance established in the Plan."
This Proposal does not take into account what 3M's executive compensation plans
are, and as applied to 3M's plans, is incoherent and subject to multiple
interpretations. Consequently, the Proposal is vague and indefinite and thus may
be excluded under Rule 14a-8(i)(3) and 14a-8(i)(6).
II. Background on 3M's Executive Compensation Philosophy and Practices
The Compensation Committee (the "Committee") of the Board of Directors believes
that providing appropriate motivation of the Company's executives and effective
leadership are essential for establishing 3M's preeminence in the markets it
serves and creating an attractive investment for stockholders. The Committee is
responsible to the Board for ensuring that Company executives are highly
qualified and are compensated in a manner that aligns the interests of
executives and stockholders. Consistent with this philosophy, the following core
principles provide a framework for the Company's executive compensation
programs:
Total compensation must be competitive to attract the best talent to 3M;
motivate employees to perform at their highest levels; reward outstanding
achievement; and retain those individuals with the leadership abilities and
skills necessary for building long-term stockholder value;
A significant portion (targeted at 65 percent to 89 percent) of an executive's
total compensation is variable and at risk and tied to both the annual and
long-term financial performance of the Company, such as economic profit and
stock price appreciation; and
Stock ownership is emphasized so that executives manage from an owner's
perspective. The Committee believes that broad and deep employee stock ownership
effectively aligns the interests of employees with those of stockholders and
strongly motivates executives to build stockholder value. The Committee has
established specific stock ownership guidelines for key management employees and
has created programs that encourage employees to have an ownership interest in
the Company.
The Committee annually surveys the executive compensation practices of large
industrial companies that are likely competitors for executive talent. The
Committee's objective of maintaining the total compensation at a competitive
level has resulted in short-term compensation (base salary and profit sharing)
being at or very close to the median and long-term compensation (Performance
Unit Plan and stock options) in the 50thto 75thpercentile, with more
variability and risk based on Company performance.
Executive compensation is linked to Company performance compared to specific
financial and nonfinancial objectives. These objectives range from achieving
earnings and sales growth targets to upholding the Company's Statement of
Corporate Values (which include customer satisfaction through superior quality
and value, attractive investor return, ethical business conduct, respect for the
environment, and employee pride in the Company).
The compensation program for executive officers consists of the following
components: base salary, quarterly profit sharing, three-year performance unit
plan, stock options, and (in appropriate circumstances) restricted stock. The
Committee determines the amount of compensation under each component of
executive compensation granted to the executive officers to achieve the
appropriate ratio between performance-based compensation and other forms of
compensation, and to reflect the level of responsibility of the executive
officer.
Base Salary - The Committee establishes base salaries annually in relation to
base salaries paid by companies included in the compensation surveys. Base
salary for an executive officer is established each year based on (1) a
compensation range corresponding to the executive's responsibilities and (2) the
executive's overall individual job performance.
Quarterly Profit Sharing - Profit sharing is variable compensation based on
the quarterly economic profit of the Company and its business units. Economic
profit is defined as quarterly net operating income minus a charge for operating
capital used by the business. The economic profit measurement is directly
related to the creation of stockholder value since it emphasizes the effective
use of capital and solid profitable growth. Compensation paid under the profit
sharing plan fluctuates based on Company performance.
Three-year Performance Unit Plan - The Performance Unit Plan is variable
compensation based on the Company's long-term performance. The amount payable
with respect to each performance unit granted is determined by and is contingent
upon attainment of the performance criteria selected each year by the
Compensation Committee (from a set of available performance criteria approved by
the Company's stockholders) over the applicable three-year performance period
(each year weighted equally).
The performance criteria selected by the Compensation Committee for
performance units granted during 2005 were designed to focus management
attention on two key factors that create stockholder value: Economic Profit
Growth and organic Sales Growth compared to the worldwide industrial production
index over three years.
"Economic Profit Growth" is the percentage amount by which the Economic Profit
of the Company for a year exceeds the Economic Profit of the Company for the
immediately preceding year;
"Sales Growth" is the percentage amount by which the Company's worldwide
organic sales growth (sales growth adjusted for acquisitions, inflation and
currency effects) exceeds worldwide real sales growth as reflected in the
Industrial Production Index ("IPI") as published by the U.S. Federal Reserve
Board. Since the IPI reflects the growth of companies in many of the same
markets as 3M, the index provides a good way to compare 3M's performance to the
performance of the competitive marketplace.
The amount payable for each performance unit granted in 2005 is linked to the
performance criteria of Economic Profit Growth and Sales Growth. The amount
payable may be anywhere from $0 to $360 per unit, depending on the performance
of the Company during the three-year performance period ending on December 31,
2007. Payment for the units granted in 2005 will be made no later than March 15,
2008, in the form (at the discretion of the Committee) of cash, stock, or a
combination of cash and stock.
Stock Options and Restricted Stock - The objectives of the Management Stock
Ownership Program are to help the Company attract and retain outstanding
employees, and to promote the growth and success of the Company's business by
aligning the financial interests of these employees with the other stockholders
of the Company. The Program authorizes the Committee to grant stock options,
restricted stock, stock appreciation rights, and other stock awards to employees
of the Company. Currently, the Committee makes annual grants of stock options
under the Program to the executive officers. These options have an exercise
price equal to the market price of the Company's common stock on the grant date,
and generally expire ten years after the grant date. Stock options encourage
executives to become owners of the Company, which further aligns their interests
with those of the stockholders. These options only have value to the recipients
if the price of the Company's stock appreciates after the options are granted.
Currently, the Committee has made grants of restricted stock under the Program
only to selected executive officers and other employees in appropriate
circumstances. These circumstances have included the hiring of new executive
officers as well as the need to retain current executive officers. These shares
of restricted stock vest over periods ranging from one to ten years after the
grant date, which encourage the executives to remain employed by the Company
until the shares have vested.
III. Reasons for Exclusion - The Proposal Is Vague And Indefinite And Thus May
Be Excluded Under Rule 14a-8(i)(3) and 14a-8(i)(6)
Rule 14a-8(i)(3) allows the exclusion of a stockholder proposal if the proposal
or supporting statement is contrary to any of the Commission's proxy rules or
regulations. The Staff has consistently taken the position that vague and
indefinite stockholder proposals are excludable under Rule 14a-8(i)(3) because
"neither the stockholders voting on the proposal, nor the company in
implementing the proposal (if adopted), would be able to determine with any
reasonable certainty exactly what actions or measures the proposal requires."
Staff Legal Bulletin No. 14B (Sept. 15, 2004). Moreover, a proposal is
sufficiently vague and indefinite so as to justify exclusion where a company and
its stockholders might interpret the proposal differently, such that "any action
ultimately taken by the [c]ompany upon implementation of the proposal could be
significantly different from the actions envisioned by the shareholders voting
on the proposal." Fuqua Industries, Inc. (avail. Mar. 12, 1991). In addition,
Rule 14a-8(i)(6) permits a company to exclude a stockholder proposal if it is
beyond the company's power to implement. A company lacks the power or authority
to implement a proposal and may properly exclude it pursuant to Rule 14a-8(i)(6)
when the proposal in question "is so vague and indefinite that [the company]
would be unable to determine what action should be taken." Int'l Business
Machines Corporation (avail. Jan. 14, 1992).
Although the Proposal might seem simple at first blush, it is quite confusing in
its application to 3M's performance based executive compensation plans
(quarterly profit sharing plan, three-year performance unit plan and the
management stock ownership program), since it can be interpreted in at least
four different ways, with each interpretation giving rise to vastly different
results. As we will show below, the Proposal clearly cannot pass muster under
Rules 14a-8(i)(3) and 14a-9 and should be excluded in its entirety as vague and
indefinite. See General Electric Company (January 23, 2003) (proposal seeking
cap on "salaries and benefits" of one million dollars for GE officers and
directors excluded in its entirety under rule 14a-8(i)(3) as vague and
indefinite); International Business Machines Corporation (January 10,
2003)(proposal requiring two nominees for each "new member" of the board
excluded under rule 14a-8(i)(3) as vague and indefinite); The Proctor & Gamble
Company (October 25, 2002) (permitting omission of a proposal requesting that
the board of directors create a specific type of fund as vague and indefinite
where the company argued that neither the stockholders nor the company would
know how to implement the proposal); Philadelphia Electric Company (July 30,
1992) (permitting omission of a proposal regarding the creation of a committee
of stockholders because "the proposal is so inherently vague and indefinite"
that neither the stockholders nor the company would be able to determine
"exactly what actions or measures the proposal requires"); NYNEX Corporation
(January 12, 1990) (permitting omission of a proposal relating to
noninterference with the government policies of certain foreign nations because
it is "so inherently vague and indefinite" that any company action "could be
significantly different from the action envisioned by the shareholders voting on
the proposal"); Joseph Schlitz Brewing Company (March 21, 1977). As with each of
the letters cited above, the Company also submits that the Proposal is woefully
vague and indefinite, and should be excluded from the 2006 Proxy Materials.
The Proposal can be read in at least four different ways when applied to 3M's
performance based executive compensation plans (quarterly profit sharing plan,
three-year performance unit plan and the management stock ownership program):
1. Is the Proposal suggesting that the Committee abolish the current performance
based compensation plans - the quarterly profit sharing plan and three-year
performance unit plan and Management Stock Ownership Program - and replace them
with an annual incentive plan and an equity compensation plan each with a
"superior performance standard" different from the current performance
standards? or
2. Is the Proposal suggesting that the Committee continue with the current
performance based compensation plans - the quarterly profit sharing plan and
three-year performance unit plan and Management Stock Ownership Program - and
simply change the current performance standards in each of those plans to a
"superior performance standard" even though the Proposal speaks only of the
"annual incentive component of the Company's Plan" and the "long-term equity
compensation component of the Company's Plan"? or
3. Is the Proposal suggesting that the Committee abolish the current quarterly
profit sharing plan and change the current three-year performance unit plan into
an "annual incentive plan" with "superior performance standards" different from
the current performance standards and either abolish the current Management
Stock Ownership Program and replace it with a new long-term equity compensation
plan with "superior performance standards" or keep the current Management Stock
Ownership Program and amend the program by adding "superior performance
standards"? or
4. Is the Proposal suggesting that the Committee abolish the current three-year
performance unit plan and change the current quarterly profit sharing plan into
an "annual incentive plan" with "superior performance standards" different from
the current performance standards and either abolish the current Management
Stock Ownership Program and replace it with a new long-term equity compensation
plan with "superior performance standards" or keep the current Management Stock
Ownership Program and amend the program by adding "superior performance
standards"?
In short, we can't determine which of these four different interpretations may
be the correct one. Although there may be still other ways to interpret the
Proposal, we can see at least four different ways to read this Proposal, but
have no way to interpret the intent of the Proponent with any degree of
certainty, and such intent cannot be gleaned anywhere from the language of
Proposal or the preamble thereto. Moreover, if 3Mas the entity most familiar
with its performance based executive compensation plans, having reviewed the
Proposal in light of those plansfinds the Proposal hopelessly vague and
indefinite, we respectfully suggest that 3M stockholders at large, faced only
with the stark and confusing language of the Proposal, would also be hopelessly
confused if they ever had to interpret, vote upon, and/or suggest the proper
implementation of such submission. As a result, the entire Proposal should
properly be excluded under Rules 14a-8((i)(3) and 14a-9.
In this connection, the U.S. District Court, in the case of NYC Employees'
Retirement System v. Brunswick Corp., 789 F. Supp. 144, 146 (S.D.N.Y. 1992)("NYCERS"),
stated:
the Proposal as drafted lacks the clarity required of a proper shareholder
proposal. Shareholders are entitled to know precisely the breadth of the
proposal on which they are asked to vote.
The very same problem associated with the NYCERS proposal also exists with this
Proposal. Clearly, neither 3M stockholders nor the Company should have to wonder
how the text of the Proposal ought to be interpreted or implemented. Over the
years, there have been many situations in which the staff has granted no-action
relief to registrants with proposals which were similarly infirm. In this
connection, the Commission has found that proposals may be excluded where they
are so inherently vague and indefinite that neither the shareholders voting on
the proposal, nor the Company in implementing the proposal (if adopted), would
be able to determine with any reasonable certainty exactly what actions or
measures the proposal requires. See Philadelphia Electric Company (July 30,
1992).
The staff's response above applies with full force to the Proposal. The courts
have also supported such a view, quoting the Commission's rationale:
it appears to us that the proposal, as drafted and submitted to the company, is
so vague and indefinite as to make it impossible for either the board of
directors or the stockholders at large to comprehend precisely what the proposal
would entail. Dyer v. Securities and Exchange Commission, 287 F. 2d 773, 781
(8th Cir. 1961).
Given the multiple interpretations of the Proposal, it is unclear what actions
3M would be required to take if the Proposal was to be implemented. Thus, the
Proposal is excludable under Rule 14a-8(i)(3) as misleading because neither the
stockholders voting on the proposal, nor 3M in implementing the proposal (if
adopted), would be able to determine with any reasonable certainty exactly what
actions or measures the proposal requires. For the same reason, the Proposal
also may be properly excluded pursuant to Rule 14a-8(i)(6) since it is vague and
ambiguous, with the result that 3M "would lack the power to implement" the
Proposal.
Conclusion
Based on the foregoing analysis, 3M respectfully requests that the Staff concur
that it will not recommend enforcement action if 3M excludes the Proposal from
its 2006 Proxy Materials. Should you disagree with the conclusions set forth in
this letter, we respectfully request the opportunity to confer with you prior to
the determination of the Staffs final position. I would be happy to provide you
with any additional information and answer any questions. Please call me at
651-733-2204 if I can be of any further assistance in this matter.
Sincerely,
/s/
Gregg M. Larson
c: Ed Durkin
United Brotherhood of Carpenters
Corporate Affairs Department
UNITED BROTHERHOOD OF CARPENTERS AND JOINERS OF AMERICA
Douglas J. McCarron
General President
[INQUIRY LETTER]
November 22, 2005
[SENT VIA MAIL AND FACSIMILE 651-737-2553]
Gregg M. Larson
Associate General Counsel and Secretary
3M Company
3M Center, Building 0220-13-W-39
St. Paul, MN 55144-1000
Dear Mr. Larson:
On behalf of the United Brotherhood of Carpenters Pension Fund ("Fund"), I
hereby submit the enclosed shareholder proposal ("Proposal") for inclusion in
the 3M Company ("Company") proxy statement to be circulated to Company
shareholders in conjunction with the next annual meeting of shareholders. The
Proposal relates to the issue of executive compensation for superior corporate
performance. The Proposal is submitted under Rule 14(a)-8 (Proposals of Security
Holders) of the U.S. Securities and Exchange Commission proxy regulations.
The Fund is the beneficial owner of approximately 12,700 shares of the Company's
common stock that have been held continuously for more than a year prior to this
date of submission. The Fund intends to hold the shares through the date of the
Company's next annual meeting of shareholders. The record holder of the stock
will provide the appropriate verification of the Fund's beneficial ownership by
separate letter. Either the undersigned or a designated representative will
present the Proposal for consideration at the annual meeting of shareholders.
If you have any questions or wish to discuss the Proposal, please contact Ed
Durkin, at (202) 546-6206 ext. 221 or at edurkin@carpenters.org. Copies of any
correspondence related to the proposal should be forwarded to Mr. Durkin at
United Brotherhood of Carpenters, Corporate Affairs Department, 101 Constitution
Avenue, NW, Washington D.C. 20001 or faxed to (202) 543-4871.
Sincerely,
/s/
Douglas J. McCarron
Fund Chairman
cc. Edward J. Durkin
Enclosure
[APPENDIX]
EXHIBIT A
Pay-for-Superior-Performance Proposal
Resolved: That the shareholders of 3M Company ("Company") request that the Board
of Director's Executive Compensation Committee establish a
pay-for-superior-performance standard in the Company's executive compensation
plan for senior executives ("Plan"), by incorporating the following principles
into the Plan:
1. The annual incentive component of the Company's Plan should utilize financial
performance criteria that can be benchmarked against peer group performance, and
provide that no annual bonus be awarded based on financial performance criteria
unless the Company exceeds the median or mean performance of a disclosed group
of peer companies on the selected financial criteria;
2. The long-term equity compensation component of the Company's Plan should
utilize financial and/or stock price performance criteria that can be
benchmarked against peer group performance, and any options, restricted shares,
or other equity compensation used should be structured so that compensation is
received only when Company performance exceeds the median or mean performance of
the peer group companies on the selected financial and stock price performance
criteria; and
3. Plan disclosure should allow shareholders to monitor the correlation between
pay and performance established in the Plan.
Supporting Statement: We feel it is imperative that executive compensation plans
for senior executives be designed and implemented to promote long-term corporate
value. A critical design feature of a well-conceived executive compensation plan
is a close correlation between the level of pay and the level of corporate
performance. We believe the failure to tie executive compensation to superior
corporate performance has fueled the escalation of executive compensation and
detracted from the goal of enhancing long-term corporate value. The median
increase in CEO total compensation between 2003 and 2004 was 30.15% for S&P 500
companies, twice the previous year increase of 15.04% according to The Corporate
Library's CEO Pay Survey.
The pay-for-performance concept has received considerable attention, yet most
executive compensation plans are designed to award significant amounts of
compensation for average or below average peer group performance. Two common and
related executive compensation practices have combined to produce
pay-for-average-performance and escalating executive compensation.
First, senior executive total compensation levels are targeted at peer group
median levels. Second, the performance criteria and benchmarks in the incentive
compensation portions of the plans, which typically deliver the vast majority of
total compensation, are calibrated to deliver a significant portion of the
targeted amount. The formula combines generous total compensation targets with
less than demanding performance criteria and benchmarks.
We believe the Company's Plan fails to promote the pay-for-superior-performance
principle. Our Proposal offers a straightforward solution: The Compensation
Committee should establish and disclose meaningful performance criteria on which
to base annual and long-term incentive senior executive compensation and then
set and disclose performance benchmarks to provide for awards or payouts only
when the Company exceeds peer group performance. We believe a plan to reward
only superior corporate performance will help moderate executive compensation
and focus senior executives on building sustainable long-term corporate value.
[STAFF REPLY LETTER]
February 16, 2006
Response of the Office of Chief Counsel Division of Corporation Finance
Re: 3M Company Incoming letter dated January 6, 2006
The proposal requests that the executive compensation committee of the board of
directors establish a pay-for-superior-performance standard in the company's
executive compensation plan for senior executives by incorporating principles
set forth in the proposal.
We are unable to concur in your view that 3M may exclude the proposal under rule
14a-8(i)(3). Accordingly, we do not believe that 3M may omit the proposal from
its proxy materials in reliance on rule 14a-8(i)(3).
We are unable to concur in your view that 3M may exclude the proposal under rule
14a-8(i)(6). Accordingly, we do not believe that 3M may omit the proposal from
its proxy materials in reliance on rule 14a-8(i)(6).
Sincerely,
/s/
Mark F. Vilardo
Special Counsel
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