BEAM INC DEF 14A 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant ¨ Filed by a Party other than the Registrant ¨
Check the appropriate box:
Fortune Brands, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
2007 PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders of Fortune Brands, Inc. will be held at the
1750 Lake Cook Road
On Tuesday, April 24, 2007 at 1:30 p.m.
PROXY VOTING OPTIONS
YOUR VOTE IS IMPORTANT!
Whether or not you expect to attend in person, we urge you to vote your shares by phone, via the Internet, or by signing, dating and returning the enclosed proxy card at your earliest convenience. This will ensure the presence of a quorum at the meeting. Promptly voting your shares will save the Company the expense and extra work of additional solicitation. An addressed envelope, postage paid if mailed in the United States, is enclosed if you wish to vote your shares by returning your completed proxy card by mail. Submitting your proxy now will not prevent you from voting your stock at the meeting if you desire to do so, as your vote by proxy is revocable at your option.
Voting by the Internet or telephone is fast, convenient, and your vote is immediately confirmed and tabulated. Most important, by using the Internet or telephone, you help Fortune Brands reduce postage and proxy tabulation costs.
PLEASE DO NOT RETURN THE ENCLOSED PAPER BALLOT IF YOU ARE VOTING OVER THE INTERNET OR BY TELEPHONE.
PARKING FACILITY AND DRIVING DIRECTIONS
Directions from Downtown Chicago to Hotel:
Take 94 West to Route 41. Exit Lake Cook Road from Route 41 (one ramp, lighted intersection exit). Turn left on to Lake Cook Road heading West. The hotel is located approximately 4 miles West on the Northeast corner of the Lake Cook Road / I-294 intersection. This route has no tolls.
Directions to Hotel from I-94 Southbound:
Take I-94 heading South to the Lake Cook Road exit (one ramp, lighted intersection exit). Turn left on to Lake Cook Road heading East. Turn left on to Wilmot Road (second traffic light after you exit tollway). First driveway on the left side of street will be the entrance to the Hyatt Deerfield. This route has several tolls.
Directions to Hotel from I-294 Northbound:
Take I-294 heading North to the Lake Cook Road exit (one ramp, lighted intersection, exact change toll plaza). Turn right on to Lake Cook Road. At Wilmot Road (first lighted intersection after exit) turn left. The first driveway on the left side of street will be the entrance to the Hyatt Deerfield. This route has several tolls.
520 Lake Cook Road, Deerfield, Illinois 60015
March 9, 2007
The Fortune Brands, Inc. 2007 Annual Meeting of Stockholders will be held at 1:30 p.m. (CDT) on Tuesday, April 24, 2007 at the Hyatt Deerfield, 1750 Lake Cook Road, Deerfield, Illinois. The sole purpose of the meeting is to consider the business described in the following Notice of Annual Meeting and Proxy Statement.
It is important to ensure that your shares be represented at the meeting, whether or not you personally plan to attend. You can vote by completing and returning the enclosed proxy card, calling the toll-free telephone number or using the Internet. Instructions for using these services are provided on the enclosed proxy card. If you decide to vote your shares using the enclosed proxy card, we urge you to complete, sign, date and return it promptly, using the enclosed postage paid return envelope.
Norman H. Wesley
Chairman of the Board and Chief Executive Officer
520 Lake Cook Road, Deerfield, Illinois 60015
NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
March 9, 2007
The Annual Meeting of Stockholders of Fortune Brands, Inc. (Fortune Brands or the Company) will be held at the Hyatt Deerfield, 1750 Lake Cook Road, Deerfield, Illinois, at 1:30 p.m. (CDT) on Tuesday, April 24, 2007, to consider and vote upon:
to transact such other business as may properly come before the meeting.
If you held common stock or $2.67 Convertible Preferred Stock at the close of business on February 23, 2007, you are entitled to vote at the Annual Meeting. Please submit a proxy as soon as possible so that your shares can be voted at the meeting in accordance with your instructions. You may submit your proxy (1) by mail, (2) by telephone, or (3) through the Internet. For specific instructions, please refer to the next page of this Proxy Statement and the enclosed proxy card.
We are also soliciting voting instructions from participants in the Fortune Brands Retirement Savings Plan, Fortune Brands Hourly Employee Retirement Savings Plan and Future Brands LLC Retirement Savings Plan who have invested in the Fortune Brands Stock Fund. We ask each plan participant to sign, date and return the enclosed proxy card, or provide voting instructions by telephone or through the Internet. The proxy card will serve as a voting instruction card when we forward it to the trustee.
This Proxy Statement and accompanying proxy are being distributed on or about March 13, 2007.
Mark A. Roche
Senior Vice President, General Counsel and Secretary
VOTING AND PROXIES
What is the purpose of the Annual Meeting?
The purpose of the Annual Meeting is for stockholders to act upon the matters outlined in the Notice of Annual Meeting and described in this Proxy Statement, including: (1) the election of directors, (2) the ratification of the appointment of our independent registered public accounting firm, (3) the re-approval of the Fortune Brands, Inc. Annual Executive Incentive Compensation Plan, (4) the approval of the Fortune Brands, Inc. 2007 Long-Term Incentive Plan, (5) if presented, consideration of a stockholder proposal entitled Elect Each Director Annually, and (6) if presented, consideration of a stockholder proposal entitled Pay-for-Superior Performance. In addition, management will respond to questions from stockholders.
Who is entitled to vote?
Only stockholders who owned the Companys common stock or $2.67 Convertible Preferred Stock of record at the close of business on February 23, 2007 are entitled to vote. Each holder of common stock is entitled to one vote per share. Each holder of $2.67 Convertible Preferred Stock is entitled to three-tenths (0.3) of one vote per share. The common stock and $2.67 Convertible Preferred Stock vote together as a single class. There were 152,562,935 shares of common stock and 201,674 shares of $2.67 Convertible Preferred Stock outstanding on February 23, 2007.
What is the difference between being a record holder and holding shares in street name?
A record holder holds shares in his or her own name. Shares held in street name means shares that are held in the name of a bank or broker on a persons behalf. The majority of stockholders hold their shares in street name.
How do I vote?
Record holders can vote by filling out the accompanying proxy card and returning it in the postage paid return envelope. You can also vote by telephone or the Internet. Voting instructions are provided on the enclosed proxy card.
If you hold shares in street name, you must vote by giving instructions to your broker or nominee. You should follow the voting instructions on the form that you receive from your broker or nominee. The availability of telephone and Internet voting will depend on your banks or brokers voting process. Your broker or nominee might not be permitted to exercise voting discretion as to some of the matters to be acted upon. If you do not give your broker or nominee specific instructions, your shares might not be voted on those matters and might not be counted in determining the number of shares necessary for approval. Therefore, please give voting instructions to your broker on all six voting items.
How will my proxy be voted?
Your proxy card, when properly signed and returned to us, or processed by telephone or via the Internet, and not revoked, will be voted in accordance with your instructions relating to the election of directors and Items 2, 3, 4, 5 and 6. We are not aware of any other matter that may be properly presented other than the election of
directors and Items 2, 3, 4, 5 and 6. If any other matter is properly presented, the persons named in the enclosed proxy card will have discretion to vote in their best judgment.
What if I dont mark the boxes on my proxy?
Unless you give other instructions on your proxy card or when you cast your proxy by telephone or the Internet, the persons named as proxies will vote in accordance with the recommendations of the Board of Directors. The Boards recommendation is set forth together with the description of each Item in this Proxy Statement. In summary, the Board recommends a vote
Can I go to the Annual Meeting if I vote by proxy?
Yes. Attending the meeting does not revoke your proxy.
How can I revoke my proxy?
You may revoke your proxy at any time before it is actually voted by giving written notice to the secretary of the meeting or by delivering a later dated proxy.
Do I have dissenters rights?
Under Delaware law, dissenters rights are not available to holders of common stock and $2.67 Convertible Preferred Stock in connection with Items 1, 2, 3, 4, 5 and 6.
Will my vote be public?
As a matter of policy, stockholder proxies, ballots and tabulations that identify individual stockholders are not publicly disclosed, but are available to the independent Inspector of Election, the proxy solicitation firm and certain employees of Fortune Brands, Inc.
What constitutes a quorum?
The presence at the meeting, in person or by proxy, of the holders of a majority in voting power of the outstanding shares of common stock and $2.67 Convertible Preferred Stock entitled to vote will constitute a quorum. Proxies received but marked as abstentions and broker non-votes will be included in the calculation of the number of shares considered to be present at the meeting.
How many votes are needed to approve an Item?
The nominees for director, in non-contested elections, must receive a majority of the votes cast at the meeting, in person or by proxy, to be elected, subject to the recently adopted majority vote by-law provision relating to the election of directors, as discussed below under Election of Directors. A proxy card marked to withhold authority for the election of one or more directors will not be voted with respect to the director or directors indicated.
The affirmative vote of shares representing a majority in voting power of the common stock and $2.67 Convertible Preferred Stock, voting together as a single class, present in person or represented by proxy at the meeting and entitled to vote is necessary for approval of Items 2, 3, 4, 5 and 6. Proxy cards marked as abstentions on Items 2, 3, 4, 5 and 6 will not be voted and will have the effect of a negative vote.
What if I am a participant in the Fortune Brands Retirement Savings Plan, the Fortune Brands Hourly Employee Retirement Savings Plan or the Future Brands LLC Retirement Savings Plan?
We are also mailing this Proxy Statement and a voting instruction card to participants in the Fortune Brands Retirement Savings Plan, the Fortune Brands Hourly Employee Retirement Savings Plan, and the Future Brands LLC Retirement Savings Plan who invest in the Fortune Brands Stock Fund under the Plans. The Trustee of the Plans, as record holder of Fortune Brands common stock held in the Plans, will vote whole shares attributable to your interest in the Fortune Brands Stock Fund in accordance with your directions given on the proxy card, by telephone or the Internet. If you invest in the Fortune Brands Stock Fund under the Plans and you sign and return the enclosed proxy card, we will forward it to the Trustee of the Plans. The proxy card will serve as instructions to the Trustee to vote the whole shares attributable to your interest in the manner you indicate on the card.
ELECTION OF DIRECTORS
The Board of Directors (the Board) currently consists of 10 members and is divided into three classes, each having three-year terms that expire in successive years. The term of office of directors in Class III expires at the 2007 Annual Meeting. The Board proposes that the three nominees described below, each of whom are currently serving as Class III directors, be re-elected to Class III for a new term of three years expiring at the 2010 Annual Meeting of Stockholders and until their successors are duly elected and qualified. Proxies cannot be voted for more than the number of nominees proposed for re-election. All nominees and all current Class I and Class II directors were elected by the stockholders, except for Mr. A. D. David Mackay, who was elected by the Board effective January 13, 2006, and Mr. Richard A. Goldstein, who was elected by the Board effective December 1, 2006. In accordance with the Companys Corporate Governance Principles and the Companys retirement age policy, Mr. Gordon R. Lohman will retire from the Board immediately following the 2007 Annual Meeting of Stockholders.
Fortune Brands has adopted a majority vote by-law provision relating to the election of directors. Under this policy, in non-contested elections, if a director fails to win a majority of affirmative votes for his or her election, the director must tender his or her resignation from the Board promptly after the certification of the stockholder vote. The Board will decide within 90 days of that certification, through a process managed by the Nominating and Corporate Governance Committee and excluding the nominee in question, whether to accept the resignation. The Boards explanation of its decision will be promptly disclosed in a filing with the Securities and Exchange Commission (the SEC).
Each of the nominees has consented to be named as a nominee. If any of them should become unavailable to serve as a director (which is not now expected), the Board may designate a substitute nominee. In that case, the persons named as proxies will vote for the substitute nominee designated by the Board.
The names of the nominees and Class I and Class II directors, along with their present positions, their principal occupations during the past five years, directorships held with other corporations, their ages and the year first elected as a director, are set forth below.
The Board of Directors recommends that you vote FOR election of each nominee.
Meetings of the Board and Committees
Last year there were six meetings of the Board. Each director attended at least 75% of the total meetings of the Board and committees of the Board of which the director was a member. In addition to participation at Board and committee meetings, our directors discharge their responsibilities throughout the year through personal meetings and other communications, including considerable telephone contact with the Chairman and others regarding matters of interest and concern to the Company.
Stock Ownership of Board Members
For information on the beneficial ownership of securities of the Company by directors and executive officers, see Certain Information Regarding Security Holdings on pages 55 and 56.
The Board has adopted Corporate Governance Principles to address significant issues of corporate governance, including Board composition and responsibilities, compensation of directors and executive succession planning. The Corporate Governance Principles provide that a majority of the members of the Board and each member of the Audit, Compensation and Stock Option and Nominating and Corporate Governance Committees, must meet certain criteria for independence. Based on the New York Stock Exchange independence requirements, the Corporate Governance Principles (which are available on our website, www.fortunebrands.com) set forth certain guidelines to assist the Board in its determination of director independence. Section A.3 of the Corporate Governance Principles states:
A director shall be considered independent only if the Board of Directors affirmatively determines that the director has no material relationship with the Company, either directly or as a partner, stockholder, director or officer of an organization that has a material relationship with the Company.
Under no circumstances shall any of the following persons be considered an independent director for purposes of this guideline:
In making its independence determinations, the Board of Directors will perform a subjective evaluation of independence in light of the totality of the circumstances with respect to each situation. This subjective evaluation will not be limited to the eight factors set forth above.
During 2006, all of the non-employee members of the Board (that is, Messrs. Goldstein, Hays, Leroy, Lohman, Mackay, Renna, Reyes, Thomas and Wilson, Mrs. Tatlock and Dr. Ewers) were affirmatively determined by the Board to be independent, as defined in the New York Stock Exchange Listed Company Manual and the Companys Corporate Governance Principles. All of the current non-employee members of the Board (that is, Messrs. Goldstein, Leroy, Lohman, Mackay, Renna, Thomas and Wilson, Mrs. Tatlock and Dr. Ewers) have been affirmatively determined by the Board to be independent pursuant to the same rules and guidelines. When determining each directors independence, the Board considered charitable contributions made by the Company to organizations with which each director is affiliated. All such charitable relationships were deemed immaterial. In addition, with respect to the independence determination regarding Mr. Goldstein, the Nominating and Corporate Governance Committee and the Board considered transactions between the Company and International Flavors & Fragrances Inc. (IFF). Mr. Goldstein, who was elected to our Board effective December 1, 2006, was the Chairman and Chief Executive Officer of IFF until May 2006. During 2006, a subsidiary of the Company acquired approximately $2.4 million of products from IFF. The Nominating and Corporate Governance Committee and the Board determined that Mr. Goldsteins interest in these transactions was immaterial because (1) such amount comprised less than 0.13% of IFFs gross revenues for 2005 (the most recent year for which full-year financial statements were available at that time) and (2) Mr. Goldstein owned only a small percentage (less than 2%, assuming full exercise of his options) of outstanding IFF stock. In addition, Mr. Hays had only an immaterial relationship with the Company. Mr. Hays, who retired in April 2006, was a former employee of the Company and continued to receive health, pension and other benefits generally available to retirees. The Board determined that Mr. Hays continuing retiree benefits constituted an immaterial relationship and he was determined to be independent.
Other than as discussed above regarding Messrs. Goldstein and Hays, none of the non-employee directors has any relationship with the Company other than being a director and stockholder, or any transaction or arrangement that interferes with each directors independence. Mr. Gordon R. Lohman was elected as Lead Director to preside at all executive sessions of the Board.
Audit Committee Financial Expert
Each member of the Audit Committee, as of the date of this Proxy Statement (Messrs. Goldstein, Leroy, Mackay and Thomas and Mrs. Tatlock), is financially literate, has accounting or financial management expertise and is an audit committee financial expert as defined in Item 407(d)(5)(ii) and (iii) of Regulation S-K under the Securities Exchange Act of 1934 (the Exchange Act). Each Audit Committee member has also been determined by our Board to be independent as such term is defined in Item 407(a) of Regulation S-K under the Exchange Act, Rule 10a-3 under the Exchange Act, the New York Stock Exchange Listed Company Manual and the Companys Corporate Governance Principles.
The Board and management encourage communication from the Companys stockholders. Stockholders who wish to communicate with the Companys management should direct their communication to the Chairman and Chief Executive Officer or the Secretary, 520 Lake Cook Road, Deerfield, Illinois 60015. Stockholders, or other interested parties, who wish to communicate with the non-management directors or any individual director should direct their communication c/o the Secretary at the address above. The Secretary will forward communications intended for the Board to the Lead Director, or, if intended for an individual director, to that director. If multiple communications are received on a similar topic, the Secretary may, in his discretion, forward only representative correspondence. Any communications that are abusive, in bad taste or present safety or security concerns may be handled differently.
Annual Meeting Attendance
The Company does not have a formal policy requiring members of the Board to attend the Annual Meeting, although all directors are strongly encouraged to attend. Nine of the ten directors were present at the 2006 Annual Meeting of Stockholders.
The Board has established an Executive Committee, an Audit Committee, a Compensation and Stock Option Committee, a Nominating and Corporate Governance Committee and a Corporate Responsibility Committee. The Audit, Compensation and Stock Option, and Nominating and Corporate Governance Committees are composed entirely of independent directors, as defined under the New York Stock Exchange Listed Company Manual and the Companys Corporate Governance Principles. The charters of each committee, the Companys Corporate Governance Principles, the Companys Code of Business Conduct and Ethics and the Companys Code of Ethics for the CEO and Senior Financial Officers are available on the Companys website (www.fortunebrands.com) and in print to any stockholder upon request.
A list of current Committee memberships may be found on the Companys website at www.fortunebrands.com. The Committee memberships as of the date of the Proxy Statement are set forth below.
Policies with Respect to Transactions with Related Persons
During 2006, the Company did not participate in any transactions in which any of the director nominees, Class I and II directors, executive officers, any beneficial owner of more than 5% of the Companys common stock, nor or any of their immediate family members, had a material direct or indirect interest. In addition, none of director nominees, Class I and II directors, executive officers or any of their immediate family members is or has been indebted to the Company.
The Nominating and Corporate Governance Committee and the Board have adopted a Code of Business Conduct and Ethics which sets forth various policies and procedures intended to promote the ethical behavior of all of the Companys employees, officers and directors. The Code of Business Conduct and Ethics describes the Companys policy on conflicts of interest. The Board has also established a Compliance Committee which is responsible for monitoring compliance with the Code of Conduct. The Compliance Committee periodically reports the Companys compliance efforts to the Audit Committee and to the Board.
The Board has also established a Conflicts of Interest Committee which distributes a Conflicts of Interest Policy to all of the Companys employees, officers and directors. The Conflicts of Interest Policy describes the types of relationships that may constitute a conflict of interest with the Company. All employees, officers and directors are required to periodically complete a questionnaire about potential conflicts of interest and certify compliance with the Companys policy. The Conflicts of Interest Committee reviews potential conflicts of interest and reports its findings to the Audit Committee.
The executive officers and the Board are also required to complete a questionnaire on an annual basis which requires them to disclose any related person transactions and potential conflicts of interest. The General Counsel reviews the responses to the questionnaires and if a transaction is reported by an independent director or executive officer, the questionnaire is submitted to the Chairperson of the Audit Committee for review. If necessary, the Audit Committee, will determine whether the relationship is material and will have any effect on the directors independence. After making such determination, the Audit Committee will report their recommendation on whether the transaction should be approved or ratified by the entire Board. The Audit Committee reviews related person transactions on an annual basis.
Director Nomination Process
The Nominating and Corporate Governance Committee (the Nominating Committee) develops and implements policies and procedures by which the Board exercises its duties for overseeing the performance of the Company. Specific duties and responsibilities of the Nominating Committee include annually assessing the size and composition of the Board and its committees, defining director qualifications, as well as criteria for director independence and the selection of director candidates to be recommended to the Board. The Nominating Committee also performs succession planning for the Companys executives.
The Nominating Committee, when identifying and evaluating candidates, first determines whether there are any evolving needs of the Board that require an expert in a particular field. The Nominating Committee may then retain a third-party search firm to locate candidates that meet the needs of the Board at that time. The firm provides information on a number of candidates, which the Nominating Committee discusses. The Nominating Committee chair and some or all of the members of the Nominating Committee will interview potential candidates that are deemed appropriate. If the Nominating Committee determines that a potential candidate meets the needs of the Board, has the qualifications, and meets the standards set forth in the Companys Corporate Governance Principles, it will vote to recommend to the Board the nomination of the candidate.
The Nominating Committee believes that it is necessary for our directors to possess many qualities and skills. When searching for new candidates, the Nominating Committee considers the evolving needs of the Board and searches for candidates that fill any future
gap. The Nominating Committee believes that all directors must possess a considerable amount of business management and educational experience as well as meet the standards established by the Nominating Committee as set forth in the Companys Corporate Governance Principles. In developing these standards, the Nominating Committee considers issues of judgment, diversity, background, stature, conflicts of interest, integrity, ethics and commitment to the goal of maximizing stockholder value. In considering candidates for the Board, the Nominating Committee considers the entirety of each candidates credentials in the context of these standards. With respect to the nomination of continuing directors for re-election, the individuals contributions to the Board are also considered.
The policy of the Nominating Committee is to consider director candidates recommended by stockholders, if properly submitted to the Company. Stockholders wishing to recommend persons for consideration by the Nominating Committee as nominees for election to the Board can do so by writing to the Secretary of Fortune Brands, Inc. at 520 Lake Cook Road, Deerfield, Illinois 60015. Recommendations must include the proposed nominees name, biographical data and qualifications, as well as a written statement from the proposed nominee consenting to be named and, if nominated and elected, to serve as a director. Our Restated Certificate of Incorporation also contains a procedure for direct nomination of directors by stockholders (see pages 57 and 58 of this Proxy Statement). The Nominating Committee will consider the candidate and the candidates qualifications in the same manner in which it evaluates nominees identified by the Nominating Committee. The Nominating Committee may contact the stockholder making the nomination to discuss the qualifications of the candidate and the stockholders reasons for making the nomination. The Nominating Committee may then interview the candidate if it deems the candidate to be appropriate. The Nominating Committee may use the services of a third-party search firm to provide additional information about the candidate prior to making a recommendation to the Board.
The Nominating Committees nomination process for stockholder-recommended candidates and all other candidates is designed to ensure that the Nominating Committee fulfills its responsibility to recommend candidates that are properly qualified to serve the Company for the benefit of all of its stockholders, consistent with the standards established by the Nominating Committee under the Companys Corporate Governance Principles.
2002 Non-Employee Director Stock Option Plan. The 2002 Non-Employee Director Stock Option Plan expired on December 31, 2006; however, the Board suspended the annual stock option grant for all non-employee directors prior to the Plans expiration. During 2006, no stock options were granted to non-employee directors. Under the terms of the Plan and prior to its suspension, each non-employee director who was first elected to the Board after April 30, 1997 was eligible to receive an annual grant of nonqualified stock options to purchase 2,500 shares of our common stock under our stockholder-approved 2002 Non-Employee Director Stock Option Plan. The terms of the options granted under this plan are:
The option will be canceled to the extent of the exercise of the limited right.
Section 16(a) Beneficial Ownership Reporting Compliance
Each director and executive officer of the Company who is subject to Section 16 of the Exchange Act is required to file reports regarding their ownership and changes in their ownership of our equity securities with the SEC. Reports received by the Company indicate that all these directors and executive officers have filed all requisite reports with the SEC on a timely basis during or for 2006.
Compensation And Stock Option Committee Report
The Compensation and Stock Option Committee (the Compensation Committee) has reviewed and discussed the Compensation Discussion and Analysis with management and based on the review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Companys Annual Report on Form 10-K and the Companys Proxy Statement.
COMPENSATION DISCUSSION AND ANALYSIS
The Companys executive compensation program is designed to attract, motivate and retain talented executives so the Company can produce outstanding results and maximize return to stockholders. The program is rooted in the pay-for-performance principle. The program is designed and approved by the Compensation Committee, which consists entirely of independent Board members.
Executive Compensation Objectives
The Companys executive compensation objectives are to:
Elements of Fortune Brands Compensation Program
The Companys executive compensation program consists of six basic elements:
Allocation of compensation among these elements is designed to provide the appropriate mix of:
The Companys goal for total direct compensation, which consists of base salary, annual incentive bonuses and long-term incentives, is to be in the 50th to 75th percentile
of the Survey Group (described on page 22). Base salary and annual incentive bonuses make up approximately one-third of total direct compensation. The remaining two-thirds is long-term incentive compensation. The focus on long-term incentives is designed to motivate management to generate successful results for the Company over the long-term.
When determining base salary levels for the Chief Executive Officer and other named executive officers the Compensation Committee evaluates base salary levels of similar positions in the Survey Group. Base salaries recognize and reward individual experience, sustained job performance and individual skills.
Annual Incentive Bonuses
The Companys Annual Executive Incentive Compensation Plan is a cash-based, pay-for-performance annual incentive plan. It was approved by stockholders in 2002 and is subject to re-approval at the Annual Meeting as described on pages 39 through 41 of this Proxy Statement. The plan covers Vice Presidents and more senior officers. The annual incentive plan rewards the achievement of actual earnings per share growth that meets or exceeds earnings per share growth targets set by the Compensation Committee at the beginning of each year. The terms of the plan are more fully described on pages 26 and 27 of this Proxy Statement.
The Company believes that earnings per share growth is an appropriate measure for annual incentive bonuses because it provides the executives with an incentive to achieve favorable current results, while also producing long-term growth for the Company. Actual earnings per share targets are derived from analyzing and setting operating income growth goals for each of the Companys operating companies, and then calculating an overall earnings per share growth target. In setting operating company growth goals, the Company considers the historical performance of competitors in each industry in which the Company does business.
All long-term incentive payment opportunities are performance-based. Long-term incentives provided by the Company consist of 1) stock options, and 2) performance share awards (based on a three-year performance period) along with dividend equivalents on earned performance shares. The terms of the long-term incentive awards are more fully described on pages 27 through 29 of this Proxy Statement. Generally, long-term incentives are allocated one-third to performance shares and two-thirds to stock options. The Compensation Committee believes this mix is appropriate and provides an adequate incentive to management to perform well for stockholders.
The Company designs its long-term incentive plans to ensure that incentive compensation reflects the profitability of the Company and the performance of the Companys common stock. The Company offers a combination of awards, each intended to reward specified results. These awards promote a long-term view, reward long-term positive performance of the Company, and are intended to align executives interests with stockholders interests.
Stock options comprise approximately two-thirds of the total long-term incentive grant for individual named executive officers. The Company awards stock options because
it believes they serve a valuable purpose in aligning executive officers interests with stockholders interests. Quite simply, executives do not benefit unless the Companys stockholders benefit. Because stock options vest over time, they serve not only as an incentive for superior performance, but also as a retention device. The Company generally receives an income tax deduction when an executive exercises a stock option.
The Company has not timed grants of options in coordination with the release of non-public information nor has it timed its release of non-public information for the purpose of affecting the value of executive compensation. In 2006, the Compensation Committee determined the exercise price of stock options by using the greater of (a) the mean between the highest and lowest quoted selling prices for the Companys common stock on the New York Stock Exchange, and (b) the quoted closing price for such stock on the New York Stock Exchange, each as of the day prior to the date of grant. Because stock options were granted at a meeting held before the New York Stock Exchange opened for the day, the prior days stock prices were used because they were the most current fair market values available to the Compensation Committee.
The Companys 2003 Long-Term Incentive Plan allows the Compensation Committee to delegate to an officer the authority to grant stock options to employees (other than members of senior management), provided that the Compensation Committee determines the aggregate number of stock options to be awarded and their terms and conditions. The Companys practice had been that the Chief Executive Officer granted stock options to employees at the same time the Compensation Committee granted options to senior management. However, in 2006, the Compensation Committee decided to no longer delegate stock option grant authority and instead grant stock options itself for all employees.
The Company is proposing that stockholders approve a new Long-Term Incentive Plan with substantially similar terms to the existing 2003 Long-Term Incentive Plan (refer to pages 41 through 48 of this Proxy Statement).
Performance Share Awards
Performance share awards provide executives with an opportunity to earn shares of Company common stock if the Company achieves specified performance targets over a three-year performance period. The Company believes that it is appropriate to award performance shares to executives because they are complementary to, and therefore provide different incentives than, stock option awards in two respects. First, the shares are only earned if the performance targets are met. Second, the performance shares provide incentive and retention even in a down market so long as the Company continues to meet its financial objectives. The Company receives an income tax deduction when an executive recognizes taxable income on performance shares.
Performance shares are earned based on achievement of average return on invested capital and cumulative earnings per share growth targets. Return on invested capital and earnings per share growth targets are derived from analyzing and setting operating goals for each of the Companys operating companies, and then calculating overall targets for the Company. These two performance measures are used because we believe they drive long-term stockholder value creation, one capturing growth (earnings per share) and the other capturing returns (return on invested capital).
Prior to 2006, performance share awards were based on earnings per share growth and return on equity targets. In 2006, the Compensation Committee determined that return on invested capital should replace return on equity as a measure for performance share awards because of return on invested capitals broader inclusion of debt as well as equity in capital employed.
No performance shares will be paid unless at least 90% of the targeted consolidated return on invested capital and cumulative diluted earnings per share are achieved. The following matrix shows the percentage of the target number of shares that will be paid to an executive for a given level of performance during the 2006-2008 performance period:
The earnings per share and return on invested capital goals set by the Compensation Committee for the 2006-2008 period are rigorous and were set sufficiently high to require superior performance for target and maximum payouts.
To illustrate that the Company has a practice of setting rigorous targets for performance share awards, the following table discloses minimum, target and maximum goals for the 2004 to 2006 performance period:
The goals in the chart above were adjusted to exclude the office products as a result of the divestiture of that business in 2005. In addition, the goals were increased to reflect the acquisition of the spirits and wine brands in 2005.
If minimum performance share award measures are met, executive officers who receive performance awards will earn cash dividend equivalents equal to the cash dividends that would have been paid on the shares had the recipient owned the shares during the performance period. Dividend equivalents are not paid until the performance period has ended.
The Company believes that it is appropriate to provide retirement benefits to executives in order to recruit and retain executives. The Company provides retirement benefits to executives through a combination of a tax-qualified pension plan, a tax-qualified defined contribution plan and a nonqualified defined benefit and defined contribution plan. The Company also believes that it is appropriate to provide nonqualified plan benefits to make executives whole for the amount of benefit they would have received under the qualified plans but for the limitations on contributions and benefits imposed by the Internal Revenue Code. The nonqualified plan provides supplemental pension and profit sharing benefits that allow these executives to receive contributions and benefits at the same rate applicable to other participants under the qualified plans.
Certain executives are not eligible to participate in the tax-qualified pension plan. As a result, these executives entire pension is provided on a nonqualified basis.
In addition, prior to 1999 certain executive officers were granted, and continue to be covered by, a pension formula not generally available to all employees. The Compensation Committee eliminated this benefit program for any new executives in 1999. The amount of benefits provided by each retirement plan and the pension formulas applicable to named executive officers are described in more detail on pages 29 through 31 of this Proxy Statement.
The Compensation Committee believes that it is appropriate to continue the policy of previous board compensation committees and contribute annually to employee grantor trusts to secure the supplemental retirement benefits of certain executives. These trusts have been approved by stockholders. They are described in more detail on pages 24 and 30 through 31 of this Proxy Statement.
Health and Related Benefits
The Companys health and related plans include medical, dental, life, disability, accidental death and dismemberment and travel accident coverage. The Companys health and related benefit programs are designed to be competitive with other large corporations. The majority of health and related benefits provided to executive officers are offered through broad-based plans applicable to all employees.
The Company provides named executive officers with limited perquisites that are not provided to other employees in order to be competitive with perquisites provided to executives at other companies. These perquisites are described in greater detail on page 25 of this Proxy Statement.
Chief Executive Officers Compensation
The Compensation Committee meets in executive session to evaluate the Chief Executive Officers performance and determine his total compensation. After reviewing competitive compensation data provided by the Compensation Committees outside consultant, the Compensation Committee assessed the individual contributions of Mr. Wesley as well as Company performance relative to both pre-established goals and performance of other companies in the Survey Group.
Mr. Wesleys salary and annual bonus place him at about the 50th percentile of chief executive officers in the Survey Group. Mr. Wesleys performance share award and his stock options for 2006 were granted in accordance with the philosophy and practice described above for other executive officers. His long-term incentive grant placed him within the third quartile of the Survey Group (the fourth quartile being the highest).
Use of Tally Sheet
During 2006, the Compensation Committee used tally sheets to assist in analyzing Mr. Wesleys and the other named executives total compensation and various elements of their compensation, including salary, annual and long-term incentive payments and retirement benefits. This assessment also included a review of compensation payable in connection with a separation of employment under various separation scenarios, such as voluntary separation, involuntary separation and separation following a change in control.
Survey Group Executive Compensation and Company Performance
The Compensation Committee compares the Companys executive compensation program to 29 consumer products companies with median 2005 revenue of $8.3 billion (the Survey Group). The Survey Group consists of companies that are either primary competitors of the Company or that are premier consumer products companies. In either case, we believe we compete with these companies for talented executives. The Survey Group consists of:
The Compensation Committee also compared the Companys performance with the performance of the Survey Group companies.
Stock Ownership Guidelines
The Company believes it is important for executive officers and directors to have a significant equity interest in the Company so that their interests are better aligned with stockholders. Therefore, the Compensation Committee has established stock ownership guidelines for executives and directors. The Compensation Committee annually reviews executives compliance with the Companys stock ownership guidelines. These guidelines are:
In 2006, the Company determined that all executive officers, except one Vice President who was elected to her position in 2006, exceed these guidelines. The Company has a formal policy prohibiting any director, officer or chief executive officer of a first-tier subsidiary from hedging the risk of owning Company common stock or trading in derivatives of the Company.
The Internal Revenue Code limits the income tax deduction that the Company may take for compensation paid to the Chief Executive Officer and the other named executive officers. The limit is $1 million per executive per year. However, performance-based compensation is excluded from the limitation. All compensation of named executive officers is fully tax deductible by the Company with the exception of $3,306,806, primarily due to employee grantor trust funding (described in footnote 4 to the Summary Compensation Table on page 24). The Compensation Committee intends that the annual incentive bonus, stock options and performance share awards qualify as performance-based compensation so that these awards will be deductible by the Company.
It is important to note that the Summary Compensation Table below reflects many types of compensation, such as unvested stock options, that are contingent in nature and that list a value based solely on estimates. Therefore, the Chief Executive Officer and other named executives may never realize the value of certain items included under the column headed Total, or the amounts realized may differ materially from the amount listed in the Summary Compensation Table and related footnotes. In addition, equity compensation is reported in several different tables in this Proxy Statement. For that reason, investors should take care to not double count equity awards.
Summary Compensation Table
GRANTS OF PLAN-BASED AWARDS
Non-Equity Incentive Plan
The Companys non-equity incentive plan is an annual bonus plan approved by stockholders. This is the same plan as mentioned on page 18 of the Compensation Discussion and Analysis section of the Proxy Statement. Bonuses are based on the Companys achievement of earnings per share growth targets approved by the Compensation Committee at the beginning of the year. An executive must continue in employment for the entire year to receive a bonus, unless employment ends due to death, disability or retirement. To determine annual bonus amounts, the Compensation Committee first sets a target level of 110% of salary for the Chief Executive Officer and a fixed percentage ranging from 5075% of salary for all other named executive officers. The target bonus levels were chosen because they are competitive with the Survey Group and therefore support our executive compensation objective of offering competitive compensation. Actual bonus awards can range from 0-200% of the target amount, based on earnings per share performance. Although in most cases bonuses are determined based solely on earnings per share growth, the Compensation Committee does have the discretion to adjust annual incentive bonuses up or down based on an executives individual performance.
In order to satisfy Internal Revenue Code requirements for considering bonuses to be performance-based compensation, at the beginning of 2006, the Compensation Committee established an incentive bonus fund based on Company performance. Each executive officer is allocated a maximum percentage of this fund. In no event can a named executive officers incentive bonus award exceed the maximum percentage of the incentive bonus fund allotted to that officer. The Company receives an income tax deduction when it pays annual bonuses.
Long-Term Equity Incentive Plan
Performance share awards are granted under the Companys Long-Term Incentive Plan, which was approved by stockholders. These awards are based on performance targets approved by the Compensation Committee at the beginning of each three-year performance period. An executive must continue in employment for the entire performance period to receive a performance share payment, except that if the executives employment ends due to death, disability or retirement, the executive will receive payment (subject to the attainment of the performance goals) prorated for the executives length of service during the performance period.
The Compensation Committee also establishes target, maximum and minimum share amounts for awards at the beginning of the performance period. The target number of shares of the Companys common stock will be earned if the Company achieves 100% of the targeted consolidated return on invested capital and cumulative diluted earnings per share. An additional amount of shares will be paid under the terms of the grant if the targeted goals are exceeded. However, the maximum number of shares paid can never exceed 150% of the target amount. No performance share awards will be paid unless approximately 90% of the targeted return on invested capital and cumulative diluted earnings per share are achieved. In that event, 50% of the target number of shares will be earned. Following the end of a performance period, if minimum goals are satisfied, the plan provides cash dividend equivalents equal to the dividends that would have been paid if the recipient had owned the shares during the performance period.
The option awards listed in the table above were granted under the Companys Long-Term Incentive Plan, which was approved by stockholders. Stock options cannot be exercised unless the recipient remains employed by the Company for at least one year from the grant date. The stock options vest ratably over a three-year period and have a seven-year exercise period. If an executive terminates employment, options expire three months after the termination date or the regularly scheduled expiration date (if sooner). If an executive dies, options must be exercised within three years after the date of death (or the expiration date, if earlier,) provided options may be exercised for one year following death even if this period extends beyond the expiration date. If an executive retires or becomes disabled, but has remained an employee for at least one year from the grant date, options may be exercised for up to three years after employment terminates, or the expiration date if earlier.
Messrs. Wesley, Omtvedt, Roche and Hausberg currently are all eligible to retire under the Companys supplemental retirement plan. Accordingly, for purposes of both the annual non-equity incentive bonus plan and the long-term incentive plan, a voluntary termination of employment by any of these executives will be considered a retirement and the more favorable retirement provisions will apply.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Options Exercises and Stock Vested
RETIREMENT AND POST-RETIREMENT BENEFITS
The Fortune Brands Pension Plan is a tax-qualified defined benefit pension plan. It provides a normal retirement benefit equal to the sum of (a) 1.75% of compensation multiplied by benefit service up to 15 years of service, plus (b) 1% of compensation multiplied by benefit service in excess of 15 years of service. In addition, participants will not receive less than a protected benefit that was grandfathered as of December 31, 2001 when the Company changed the pension plan formula. Generally, all employees are eligible for the plan except for certain executives who have the employee grantor trusts described in footnote 4 to the Summary Compensation Table on page 24 of this Proxy Statement. The estimated retirement benefits in the preceding table include any offset for Social Security benefits. The compensation used to calculate retirement benefits generally includes the categories of Salary and Non-Equity Incentive Plan Compensation from the Summary Compensation Table shown above on page 24, averaged over the five highest consecutive years.
The Supplemental Plan pays the difference between the benefits payable under our tax qualified retirement plan (the Fortune Brands Pension Plan) and the amount that would have been paid if the Internal Revenue Code did not limit the amount of compensation taken into account under, or benefits that may be paid from, a tax qualified retirement plan. In calculating benefits, no credit is given for service in excess of 35 years. The Supplemental Plan also provides that certain senior officers of the Company (those who were Vice Presidents or more senior prior to 1999) will receive an annual benefit equal to 52 1/2% of average compensation during the five highest-paid consecutive years of employment. Messrs. Wesley, Omtvedt, Roche and Hausberg are entitled to this retirement benefit. This retirement benefit is reduced by 1 1/2% of such average compensation for each year that the officer retires prior to age 65 unless he has completed 35 years of service. The benefit is also reduced by benefits under the Fortune Brands Pension Plan and the retirement plans of our subsidiaries or any prior employer, including an executives prior employers who are unrelated to the Company. Since 1999, the Compensation Committee has not approved this enhanced benefit for any additional executives.
Mr. Wesley has an additional agreement that provides that his Supplemental Plan pension benefit is based on his average compensation during three highest-paid consecutive years rather than five. This agreement is described on page 33 of this Proxy Statement.
Early retirement annual benefits are calculated assuming a reduction of 6% per year prior to age 62 (unreduced at age 62) for Mr. Klein and 7% per year prior to age 60 (unreduced at age 60) for Messrs. Wesley, Omtvedt, Roche and Hausberg. Mr. Kleins pension reduction is calculated differently than the other named executive officers because the other officers were grandfathered in a plan provision applicable to certain employees who were employed as of December 31, 2001. Mr. Klein was hired in 2003.
Nonqualified Deferred Compensation
The Companys nonqualified deferred compensation plan is a supplemental plan that pays the difference between the profit sharing contribution provided under the tax-qualified profit sharing plan and the contribution that would have been made if the Internal Revenue Code did not limit the compensation that may be taken into account under tax-qualified retirement plans. The contribution amount is equal to 6% of adjusted compensation, which generally includes salary and annual bonus. Compensation is adjusted by multiplying amounts in excess of the Social Security taxable wage base ($94,200 in 2006) by 1.5. This profit sharing formula applies uniformly to all employees and is not enhanced for executives. Nonqualified profit sharing benefits are paid in a lump sum upon termination of an executives employment.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL (1)
A number of Company employee benefit and incentive pay plans provide for payment upon termination of employment of any participant. If terminated on December 31, 2006, the named executive officers would receive benefits and payments under these plans in addition to the amounts described in the table above.
Stock Options and Performance Share Awards. If terminated on December 31, 2006, named executive officers would be able to exercise vested stock options. All participants have a period of time following termination to exercise stock options and in some case will be paid performance shares following termination. Executives who terminate prior to retirement for reasons other than death, disability, position elimination, or following a change in control will forfeit the opportunity to earn performance shares with respect to all open performance periods. Because Messrs. Wesley, Omtvedt, Roche and Hausberg are treated as retired upon any termination of employment, if employment is terminated, they will be eligible for payment of performance shares based on actual Company performance as soon as practicable following a performance period. In addition, they will have the full original ten-year exercise period to exercise options granted prior to 2005 and three years (or end of original term if sooner) to exercise options granted during and after 2005. In the event of termination of employment following a change in control, all outstanding performance share opportunities become nonforfeitable and are paid out on the date employment is terminated as if the target performance share award was earned (but prorated for the period of actual service prior to termination). All stock options become vested upon change in control.
Retirement Benefits. Upon termination of employment, participants in the Companys defined contribution plans (both tax-qualified and nonqualified) may receive a distribution of their account balances. The Nonqualified Deferred Compensation table on page 31 of this Proxy Statement lists each executive officers balance under the nonqualified defined contribution plan as of the last fiscal year end. The Companys tax qualified pension plan and Supplemental Plan both provide pension benefits upon retirement (as defined in the plans). Messrs. Wesley, Omtvedt, Roche and Hausberg are all retirement eligible under the Supplemental Plan and therefore, would receive nonqualified pension benefits upon termination of employment. As of December 31, 2006, Mr. Klein was not retirement eligible under the pension plans and, therefore, would not receive any pension benefits upon termination on December 31, 2006. Mr. Kleins pension benefits could be paid on or after attainment of earliest retirement age. The Pension Benefits table on page 29 of this Proxy Statement and the narrative and footnotes that follow it provide additional detail on the amount and terms of these pension benefits.
Health and Related Benefits. In addition to the dollar values in the chart above for health and related benefit continuation pursuant to severance and change in control agreements, the named executive officers will receive health and related benefits pursuant to the Companys benefit plans applicable to employees generally. Because they are currently retirement eligible, Messrs. Wesley, Omtvedt, Roche and Hausberg are eligible for retiree medical coverage upon any termination of employment. Executive officers (except Mr. Klein) would also be entitled to retain a split-dollar life insurance policy in order to provide a death benefit, but any insurance proceeds after death in excess of the death benefit will be returned to the Company.
Agreement with Mr. Wesley. Mr. Wesley has an agreement that his average annual compensation under the Supplemental Plan will be determined using his three highest-paid consecutive calendar years of employment rather than five. If Mr. Wesley becomes disabled or dies prior to normal retirement age of 65, his employment is terminated for reasons other than cause, or Mr. Wesley terminates his employment for good reason, Mr. Wesleys compensation at the date of his retirement and his service will be deemed to have continued for an additional three years for purposes of calculating this retirement benefit.
Change in Control Agreements. We have agreements with Messrs. Wesley, Omtvedt, Roche, Klein and Hausberg to provide each of them with benefits if they are terminated following a change in control of the Company. Each agreement states that if, subsequent to a change in control, (1) the Company terminates the officers employment for a reason other than disability or cause, or (2) the officer decides to terminate his employment for good reason, the officer will receive:
Payments under these agreements are generally made in a lump sum immediately following termination. If the special excise tax under Section 280G of the Internal Revenue Code applies, the agreements provide that we will restore amounts lost by the executive officer. The Company has established a rabbi trust with a bank for the purpose of making payments under the agreements. This trust currently is not funded. Any amounts payable under these change in control agreements are reduced by amounts payable under the severance agreements referred to below.
Severance Agreements. We have agreements with Messrs. Wesley, Omtvedt, Roche, Klein and Hausberg, to provide each of them with severance benefits without regard to a change in control if the Company terminates their employment for reasons other than disability or cause or if they terminate their employment for good reason. The severance agreements provide the same benefits as those described above for a termination of employment following a change in control except that the multiplier is three in the case of Mr. Wesley and two in the case of Messrs. Omtvedt, Roche, Klein and Hausberg. All the agreements, except for Mr. Kleins, provide for severance payments in a lump sum. Mr. Kleins severance payments are spread over a two-year period. All the agreements, except for Mr. Omtvedts, contain restrictions on soliciting Company employees and competing with the Company for an eighteen-month period following termination of employment.
Compensation Committee Interlocks and Insider Participation
No member of our Boards Compensation Committee (Messrs. Leroy, Lohman, Renna and Wilson and Dr. Ewers) has (i) served as one of our officers or employees; or (ii) any relationship requiring disclosure under Item 404 of Regulation S-K promulgated under the Securities Act of 1933, as amended. None of our executive officers serve as a member of the board of directors or as a member of a compensation committee of any other company that has an executive officer serving as a member of our Companys Board or our Companys Compensation Committee.
Compensation and Stock Option Committee
The Compensation Committee is composed of five directors that are independent, as defined under the New York Stock Exchange Listed Company Manual, and meet the
definition of outside director under Code Section 162(m). The Compensation Committee has a written charter that has been approved by the Board. The Compensation Committee reviews this charter at least annually and revises it as appropriate. A copy of the Compensation Committee charter is available on the Companys website at http://www.fortunebrands.com. The Compensation Committee has the authority to:
Compensation Committee Authority and Delegation of Authority
The Compensation Committee may delegate any of its authority to a sub-committee. However, the members of the sub-committee must meet the same qualifications as for membership on the Compensation Committee, specifically, the members of the sub-committee must also be independent directors, as defined by the New York Stock Exchange Listed Company Manual and the Companys Corporate Governance Principles. During 2006, the Compensation Committee did not delegate any of its authority to a sub-committee.
The Companys 2003 Long-Term Incentive Plan allows the Compensation Committee to delegate to an officer the right to designate key employees (other than members of senior management) to be granted stock options and the amount of options granted to each such key employee, provided that the Compensation Committee determines the aggregate number of stock options to be awarded and their terms and conditions. In 2006, the Compensation Committee decided to discontinue this delegation and retained sole authority with respect to the granting of all stock options to all employees.
Compensation Committee Procedures
The Compensation Committee is presented with recommendations from management as to the level and type of compensation to provide to executive officers. The Chief Executive Officer attends meetings of the Compensation Committee to discuss each of the executive officers performance for the year. The Chief Executive Officers feedback about the executive officers performance is essential in the Compensation Committees determination of each officers salary and target incentive compensation determinations. However, the Compensation Committee meets in executive session without the Chief Executive Officer when discussing his compensation.
The Compensation Committee directs management to prepare financial data used by the Compensation Committee in determining executive compensation. In addition,
members of the Companys human resources department assist in preparation of executive compensation tally sheets and historical information on compensation paid to executives. Members of the Companys legal department provide the Compensation Committee with general advice on laws applicable to executive compensation and the directors fiduciary duties in setting compensation.
Compensation Committee Consultant
The Compensation Committee directly retains a nationally-recognized firm, Hewitt Associates, as its outside compensation consultant. The consultant regularly meets with the Compensation Committee and is included during executive sessions without the presence of management. The outside consultant attended four out of the five Compensation Committee meetings in 2006. In addition, the consultant assisted the Compensation Committee in its assessment of executive compensation levels in light the Companys performance as compared to the Survey Group of companies. Hewitt Associates is separately retained by the Company for pension plan and other employee benefits administration and consulting.
The Compensation Committee retains the compensation consultant and directs it to assist the Compensation Committee in:
In conducting its assignment, the outside consultant may contact the Companys management, including the Chairman and Chief Executive Officer as well as the Executive Director, Compensation and Benefits to carry out its assignment. However, the compensation consultant reports directly to the Compensation Committee.
Report of the Audit Committee
The Audit Committee of the Board (the Audit Committee) is composed of five directors that are independent as defined under the New York Stock Exchange Listing Standards and Rule 10A-3 of the Exchange Act. The Audit Committee has a written charter that has been approved by the Board. A copy of the Audit Committee Charter is available on the Companys website at http://www.fortunebrands.com. The Audit Committee has appointed (subject to stockholder ratification) the Companys independent registered public accounting firm for 2007.
Management has the responsibility for the Companys financial statements and overall financial reporting process, including the Companys systems of internal controls. The independent registered public accounting firm has the responsibility to conduct an independent audit in accordance with generally accepted auditing standards and to issue an opinion thereon. The Audit Committees responsibility is to monitor and oversee these processes.
In this context, the Audit Committee has reviewed and discussed the audited financial statements and the Companys quarterly and annual reports to the SEC with management and the independent registered public accounting firm. Management has confirmed to the Audit Committee that the Companys financial statements were prepared in accordance with generally accepted accounting principles. The Audit Committee has met with the independent registered public accounting firm and discussed matters required to be discussed by SAS No. 61, as amended, (Communication with Audit Committees). The independent registered public accounting firm has provided an unqualified opinion regarding the Companys financial statements for the year ended December 31, 2006 and managements assessment of internal controls over financial reporting and the effectiveness of those controls as of December 31, 2006.
The Companys independent registered public accounting firm has also provided to the Audit Committee the written disclosures and letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committee), and the Audit Committee has discussed with the independent registered public accounting firm that firms independence. The Audit Committee has also reviewed non-audit services provided by the independent registered public accounting firm and has considered the compatibility of these services with maintaining the auditors independence.
Based upon the review and discussions with management and the independent registered public accounting firm, the Audit Committee recommended to the Board that the audited financial statements be included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for filing with the SEC.
David M. Thomas, Chairman
Richard A. Goldstein
Pierre E. Leroy
A.D. David Mackay
Anne M. Tatlock
The Report of the Compensation and Stock Option Committee and the Report of the Audit Committee set forth in this Proxy Statement and the Fortune Brands, Inc. Stock Price Performance graph set forth in the Companys Annual Report on Form 10-K, shall not be deemed to be soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act. In addition, they shall not be deemed incorporated by reference by any statement that incorporates this Proxy Statement by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates this information by reference.
Fees of Independent Registered Public Accounting Firm
The independent registered public accounting firm of the Company during the year ended December 31, 2006 was PricewaterhouseCoopers LLP. All PricewaterhouseCoopers LLP services were approved in advance by the Audit Committee. The aggregate fees billed by PricewaterhouseCoopers LLP during the years 2006 and 2005 are set forth in the table below:
Approval of Audit and Non-Audit Services
The Audit Committee has adopted the following policies and procedures for the pre-approval of all audit and permissible non-audit services provided by our independent registered public accounting firm. The Audit Committee annually reviews the audit and non-audit services to be performed by the independent registered public accounting firm during the upcoming year. The Audit Committee considers, among other things, whether the provision of specific non-audit services is permissible under existing law and whether it is consistent with maintaining the auditors independence. The Audit Committee then approves the audit services and any permissible non-audit services it deems appropriate for the upcoming year. The Audit Committees pre-approval of non-audit services is specific as to the services to be provided and includes pre-set spending limits. The provision of any additional non-audit services during the year, or the provision of services in excess of pre-set spending limits, must be pre-approved by either the Audit Committee or by the Chairman of the Audit Committee, who has been delegated authority to pre-approve such services on behalf of the Audit Committee. Any pre-approvals granted by the Chairman of the Audit Committee must be reported to the full Audit Committee at its next regularly scheduled meeting. All of the fees described above under audit fees, audit-related fees, tax fees and all other fees for 2006 were pre-approved by the Audit Committee pursuant to its pre-approval policies and procedures.
RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has appointed PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2007. The Audit Committee and the Board recommend that you ratify this appointment. In line with this recommendation, the Board intends to introduce the following resolution at the Annual Meeting (designated as Item 2):
RESOLVED, that the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for this Company for the year 2007 is ratified.
A member of PricewaterhouseCoopers LLP will attend the Annual Meeting to make a statement if he or she desires, and respond to appropriate questions that may be asked by stockholders.
The Board of Directors recommends that you vote FOR Item 2.
RE-APPROVAL OF THE FORTUNE BRANDS, INC.
ANNUAL EXECUTIVE INCENTIVE COMPENSATION PLAN
The Board is recommending that stockholders re-approve the Fortune Brands, Inc. Annual Executive Incentive Compensation Plan (the Annual Plan). The Annual Plan was approved by the stockholders of the Company on April 30, 1997 and re-approved by the Companys stockholders on April 30, 2002. Under the rules of the Internal Revenue Service, the Annual Plan must be re-approved by the stockholders every five years in order for the Company to be able to deduct compensation paid to executives in excess of $1 million annually. The Board believes that the Annual Plan advances the interests of the Company and its stockholders in securing and retaining executives of outstanding ability by providing performance-based incentives to senior executives. The Annual Plan is set forth in full in Exhibit A to this Proxy Statement. The description of the Annual Plan which appears below is qualified in its entirety by reference thereto.
Reasons for the Proposal
Re-approval of the Annual Plan by the stockholders is being sought to preserve the Companys ability to deduct, for federal income tax purposes, compensation paid pursuant to the Companys annual executive incentive compensation program. Under Section 162(m) of the Internal Revenue Code, and the rules of the Internal Revenue Service, stockholders must re-approve the Annual Plan every five years in order for the Annual Plan to qualify for the exception to the limitation on the Companys ability to deduct compensation paid to certain specified executives in excess of $1 million annually.
Summary of the Plan
Awards may be granted only to persons elected to the office of Vice President of the Company or a more senior office. The amounts of awards under the Annual Plan for 2007 are not yet determinable. During 2006, however, 12 officers were granted an aggregate of $3,762,300, including $2,934,380 to 5 executive officers in the aggregate. For information about awards under the Annual Plan during 2006 to our Chief Executive Officer and our other named executive officers, see pages 24 to 26. A total of 12 officers are currently eligible for participation in the Annual Plan.
The Annual Plan is administered by the Compensation Committee, which is composed of outside directors within the meaning of Section 162(m) of the Internal Revenue Code who are authorized to make grants of performance-based compensation. The Compensation Committee has authority to administer, construe and interpret the Annual Plan, to make rules for carrying it out and to make changes in such rules.
Awards and Performance Measures
Within the first 90 days of each calendar year, the Compensation Committee will set corporate performance measures for such year which, if attained, will establish an incentive compensation fund for the year. At the same time, the Compensation Committee will determine the allocation of the fund among the participants.
The performance measures will be based on any of the following performance criteria, either alone or in any combination as the Compensation Committee may determine: cash flow; cash flow from operations; earnings per share of the Companys common stock; earnings per share of the Companys common stock from continuing operations; income before income taxes; depreciation and amortization; income from continuing operations; net asset turnover; net income; operating income; operating margin; return on equity; return on net assets; return on total assets; return on total capital; sales; economic value added; and total return to stockholders. Performance measures may be determined on an absolute basis or relative to internal goals or relative to levels attained in prior years or in comparison to other companies. The Compensation Committee may provide, as part of each grant, that the performance measures may be adjusted in the event of certain extraordinary events set forth in the Annual Plan. The maximum amount of an award to any participant for any year will not exceed $3.0 million. No part of the amount available for awards in any year which is not awarded in such year may be carried forward for award in subsequent years.
The Compensation Committee will, promptly after the end of the year on the date on which all necessary financial or other information becomes available, in the manner required by Section 162(m) of the Internal Revenue Code, certify (i) the degree to which performance measures have been attained and (ii) with respect to each participant, the amount of the participants award, if any. The Compensation Committee may, in its sole discretion, reduce or eliminate, but may not increase, any award. No part of any potential award for any year which is not actually awarded to a participant because of any such reduction will be available for award to any other participant whose actual compensation for such year is subject to Section 162(m) of the Internal Revenue Code. Awards are
payable in cash as promptly as practicable after the certifications described above have been made by the Compensation Committee and within 2 1/2 months following the end of the calendar year.
The Compensation Committee has discretion, upon the request of a Participant, to defer the payment of an award (or a portion thereof) to a participant subject to Section 409A of the Internal Revenue Code. The Compensation Committee will have discretion to provide for the payment of an amount equivalent to interest, at such rate or rates or based on such investment fixed by the Compensation Committee, on any such deferred award.
Amendment and Termination
The Board may at any time alter, amend, suspend or terminate the Annual Plan in whole or in part without approval by the stockholders. No amendment may, however, increase the award payable to a participant for a year if the amendment is adopted after the final day for setting the objective performance measures for such year (e.g., after the 90th day of the year) nor may any Annual Plan amendment or termination adversely affect the rights of a participant for whom an award has been determined for a completed year but not yet paid.
The Board intends to introduce the following resolution at the Annual Meeting (designated as Item 3):
RESOLVED, that the Fortune Brands, Inc. Annual Executive Incentive Compensation Plan submitted to this Annual Meeting and as shown in Exhibit A to this Proxy Statement, is re-approved.
The Board of Directors recommends that you vote FOR Item 3.
APPROVAL OF THE FORTUNE BRANDS, INC.
2007 LONG-TERM INCENTIVE PLAN
The Board has adopted, subject to your approval, the Fortune Brands, Inc. 2007 Long-Term Incentive Plan (the New Plan). The New Plan will replace the Fortune Brands, Inc. 2003 Long-Term Incentive Plan (the Old Plan) that was approved by stockholders on April 29, 2003. The Company does not anticipate granting any new awards under the Old Plan between fiscal year-end and the date of the 2007 stockholder meeting, except for a February 2007 grant of 159,975 performance shares. Further, upon approval of the New Plan no additional awards will be granted under the Old Plan. A copy of the New Plan is attached as Exhibit B to this Proxy Statement.
Purpose of Plan
Many corporations, including our competitors, are using long-term performance and stock-based incentive compensation, including stock options, to hire and retain outstanding employees. The New Plan is designed to allow the Company to grant various types of performance-related and stock-based compensation. The New Plan will aid us and our subsidiaries in securing and retaining key employees of outstanding ability by making it possible to offer them performance incentives, including a proprietary interest in the Company, to join or continue in service with us or our subsidiary companies, and to further encourage their efforts to enhance stockholder value.
Summary of Terms of New Plan
The following is a summary of the most important terms of the New Plan and is qualified in its entirety by reference to the full text of the New Plan attached to this Proxy Statement as Exhibit B. Please refer to Exhibit B for a more complete description of the terms of the New Plan.
Types of Awards
The New Plan permits the granting of the same types of awards as under the Old Plan which are:
The New Plan will be administered by the Compensation Committee, which consists entirely of independent directors. The Compensation Committee has the authority to select, from among the employees eligible for awards, the individuals to whom awards will be granted and the type and amount of each award. Although the New Plan allows the Compensation Committee to make awards to any employee of the Company and its subsidiaries, in the past we have made awards to approximately 730 employees annually.
The identity of the key employees to receive awards, and the amounts of awards, under the New Plan are not yet determinable. During 2006, however, 764 key employees were granted stock options covering 2,747,960 shares under the Old Plan, including stock options covering 388,295 shares granted to 5 executive officers. In addition, during 2006 6 executive officers were granted performance awards covering 68,000 shares, assuming performance at target, under the Old Plan. For information about awards under the Old Plan during 2006 to our Chief Executive Officer and our other named executive officers, see Executive Compensation on pages 26 to 29. We have not granted stock appreciation rights since 1991 or restricted stock since 1994, nor have we granted other stock-based awards under the Old Plan.
Maximum Number of Shares Authorized Under the New Plan
Up to 13,000,000 shares of common stock may be granted under the New Plan, but no more than 2,500,000 shares are available for full-value awards (i.e., awards other than stock options and stock appreciation rights). No more than 2,500,000 shares may be granted to any individual under the Plan. These amounts are subject to adjustment for stock splits, stock dividends and other changes in the Companys capital structure. The Company may use authorized and unissued shares or treasury shares in connection with grants under the New Plan. Shares underlying the unexercised or undistributed portion of any terminated, expired or forfeited award are available for further awards under the New Plan. Shares withheld or delivered for tax withholding or as the exercise price of a stock option are not available for future awards. In addition, certain awards may be payable in cash.
No awards may be made under the New Plan after February 27, 2017.
Stock Options and Stock Appreciation Rights
The Compensation Committee will set the terms of each option or stock appreciation right at the time of grant, but the exercise may not be less than 100% of the fair market value at the time of grant. An option or right will not become exercisable until the participant remains in our employ for at least one year after grant and may be exercisable for ten years unless an earlier expiration date is stated in the option. The Compensation Committee may permit a participant to simultaneously exercise an option and sell the shares of common stock acquired pursuant to a brokerage or similar arrangement and use the proceeds from such sale as payment of the purchase price of such shares. The closing price per share of the Companys common stock on the New York Stock Exchange on March 6, 2007 was $80.32.
The New Plan permits the grant of either incentive stock options or options not qualifying under the Internal Revenue Code. To the extent that the aggregate fair market value (determined at the time of grant) of shares with respect to which an incentive stock option is exercisable for the first time by any participant during any calendar year exceeds $100,000, such option will be treated as a nonqualified stock option.
An option will expire three months after termination of employment for reasons other than death, disability or retirement (as defined under the New Plan). If employment terminates by reason of death, disability or retirement (as defined under the New Plan), the option may continue to be exercised for three years or until the expiration date stated in the option, if earlier. In the case of a participant whose principal employer is a subsidiary of the Company, the participants employment shall be deemed to be terminated as of the date on which the principal employer ceases to be one of our subsidiaries.
As under the Old Plan, repricing, changing the terms of an option to lower its option price or taking any other action which has the economic effect of repricing options is not permitted under the terms of the New Plan.
The Compensation Committee is authorized to grant stock appreciation rights either alone or in conjunction with a stock option. Stock appreciation rights entitle recipients to receive payments in cash, shares or a combination, of an amount representing the appreciation in the market value of a specified number of shares from the date of grant until the date of exercise. To the extent an option is exercised, any stock appreciation right granted in respect of such option is canceled. To the extent a stock appreciation right is exercised, its related option is canceled.
The Compensation Committee may grant options that have terms different from incentive stock options and nonqualified stock options in order to comply with foreign tax laws. The Compensation Committee may also grant stock appreciation rights to employees in certain foreign jurisdictions that prohibit them from owning common stock.
The Compensation Committee may also grant performance awards under the New Plan. Performance criteria may be selected by the Compensation Committee from among the following measures or any combination whether applicable to the Company or any subsidiary or business unit:
The Compensation Committee must select a minimum performance goal below which no payment will be made and a maximum performance goal above which no increased payment will be made. The Compensation Committee may adjust the performance goals to take into account changes in law and accounting and tax rules and to make adjustments that it decides are necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances. The Compensation Committee designates the period over which the performance factors are measured, but the performance period must be at least two years.
Performance awards are forfeited if the participant terminates employment prior to the end of the performance period, unless the termination of employment is by reason of death, disability or retirement under one of our retirement plans.
Performance awards are payable in cash or shares of common stock, or a combination of cash and shares, at the end of the performance period, as determined by the Compensation Committee.
The Compensation Committee may award shares of common stock that are subject to restrictions and conditions as determined by the Compensation Committee. The restrictions typically require a period of service after the date of grant. Shares of restricted stock are non-transferable during the restricted period.
If a participant who has shares of restricted stock terminates employment for any reason other than death, disability or retirement under one of our retirement plans before the restrictions have lapsed, the participant will forfeit all shares that are still subject to the restrictions. Prior to the lapse of restrictions on shares of restricted stock, the participant will have all other rights of a stockholder with respect to the shares, including voting rights and the right to receive dividends paid on our common stock.
Other Stock-Based Awards
The Compensation Committee may grant other awards under the New Plan pursuant to which shares of common stock (which may, but need not, be shares of restricted stock) are or may in the future be acquired, or awards denominated in stock units, including ones valued using measures other than market value.
The Compensation Committee may, in its discretion, provide that any award other than awards of options or rights under the New Plan may earn dividend equivalents. If any award is outstanding on a dividend record date for common stock, the Compensation Committee may credit a participant with an amount equal to the cash or stock dividends or other distributions that would have been paid on the shares of common stock covered by such award had such covered shares been issued and outstanding on such dividend record date.
Change in Control
In the event of a change in control of the Company, stock options and stock appreciation rights that are not exercisable will become immediately exercisable.
Each stock option also has a limited right (Limited Right) which may be exercised during the 60-day period beginning on the date of the change in control (Limited Right Exercise Period). The Limited Right entitles the holder to receive the cash equivalent of the number of shares subject to the option multiplied by the difference between the option exercise price per share and the market value of the shares on the exercise date of the Limited Right. A participant whose employment is terminated on or after a change in control may continue to exercise his or her option or stock appreciation right during the Limited Right Exercise Period unless termination of employment is for just cause (as defined in the New Plan). The option is canceled if the Limited Right is exercised. The Limited Right is canceled if the option is exercised.
Performance awards, restricted stock awards, and other stock-based awards will be fully vested (with performance goals deemed to have been achieved at the maximum level) at the date of change in control but the amount of benefit will be prorated based on the length of the performance period or restriction period through the date of the change in control.
A change in control is defined in the New Plan as:
The definition excludes purchases or sales of stock by or from the Company or one of our employee benefit plans or trusts.
Amendment and Termination
The Board has the power to amend the New Plan at any time. It does not have the power, without stockholder approval, to:
The Board may suspend or terminate the New Plan at any time. No such suspension or termination, however, shall affect options or stock appreciation rights previously granted. In the event of termination of the New Plan, performance awards, restricted stock awards and other stock-based awards will be fully vested (with performance goals deemed to have been achieved at the maximum level) but the amount of benefit will be prorated based on the length of the performance period or restriction period through the date of the termination.
The New Plan provides that no award shall be transferable by a participant other than (i) as a gift to extended family members or to a foundation or other entity that they control or (ii) by will or the laws of descent and distribution.
Federal Income Tax Consequences
The following is a brief summary of the principal federal income tax consequences of awards under the New Plan. This summary is not intended to be exhaustive and does not describe state, local or foreign tax laws.
Incentive Stock Options
An incentive stock option grant will not result in any immediate tax consequences to the Company or to the participant. A participant will not realize taxable income upon the exercise of an incentive stock option (except that the alternative minimum tax may apply), provided the participant was an employee of the Company or one of our
subsidiaries at all times from the date the option was granted to the date three months (in the case of a disabled employee, one year) before the date the option is exercised, and we will not be entitled to any deduction. If the participant does not dispose of the stock acquired within one year of receiving it (and two years after such option was granted), gain or loss realized on the subsequent disposition of the stock will be treated as long term capital gain or loss.
If the participant disposes of the stock prior to those times, the participant will realize ordinary income in an amount equal to the lesser of (i) the excess of the fair market value of the stock on the date of exercise over the option price; or (ii) if the disposition is a taxable sale or exchange, the amount of gain realized. Any gain recognized by the participant on the disposition in excess of the amount taxable as ordinary income will be treated as capital gain, long or short term depending on whether the stock has been held for more than one year. Upon such a disposition, we will generally be entitled to a deduction in the same amount and at the same time as the participant realizes such ordinary income.
Nonqualified Stock Options
The grant of a nonqualified stock option will not result in any immediate tax consequence to the Company or the participant. Upon exercise of a nonqualified stock option, the participant will realize ordinary income in an amount equal to the market value of the stock at the time of exercise over the option price, and we will generally be entitled to a deduction in the same amount.
Stock Appreciation Rights
The grant of a stock appreciation right will not result in any immediate tax consequence to the Company or to the participant. Upon the exercise of a stock appreciation right, any cash received and the market value of any stock received will constitute ordinary income to the participant. We will generally be entitled to a deduction in the same amount and at the same time as the participant realizes such income.
A participant who receives restricted stock will in most cases be subject to tax at ordinary income rates on the market value of the restricted stock at the time the restrictions lapse.
In the case of a sale of shares after the expiration of the restriction period, the holding period to determine whether the participant has long-term or short-term capital gain or loss begins upon such expiration and the tax basis for such shares will be equal to the market value thereof on such date. In most instances, we will be entitled to a deduction equal to the amount treated as compensation to the participant.
Performance Awards and Other Stock-Based Awards
A participant who receives any performance award or other stock-based award will recognize income, and we will generally be allowed a deduction, when the award is paid. The amount of cash and the market value of the shares of common stock received will be ordinary income to the participant and we will generally be entitled to a tax deduction for the same amount.
Tax Deductibility Limitation
The Internal Revenue Code limits the allowable tax deduction that may be taken by us for compensation paid to the Chief Executive Officer and the four other highest paid executive officers. The limit is $1,000,000 per executive per year, but compensation payable solely on account of the attainment of performance goals is excluded from the limitation. Under the New Plan, stock options, stock appreciation rights and performance awards (and related performance-based dividend equivalents) are intended to qualify as performance based compensation not subject to the $1,000,000 limitation. Restricted stock and other stock-based awards that are not performance based would be subject to the limitation.
The Board intends to introduce the following resolution at the Annual Meeting (designated as Item 4):
RESOLVED, that the Fortune Brands, Inc. 2007 Long-Term Incentive Plan submitted to this Annual Meeting and as shown in Exhibit B of this Proxy Statement, is approved.
The Board of Directors recommends that you vote FOR Item 4.
ELECT EACH DIRECTOR ANNUALLY
The Company is informed that a Stockholder, Nick Rossi, whose address is P.O. Box 249, Boonville, California 95415, intends to introduce at the Annual Meeting the following resolution (designated as Item 5). The Company has been notified that Mr. Rossi held 1,652 shares of the Companys common stock for at least one year prior to his submission of this proposal and that he has agreed to hold a minimum required number or dollar amount of such common stock until the Annual Meeting.
Statement of Nick Rossi:
5 Elect Each Director Annually
RESOLVED: Comprehensive action to adopt annual election of each director. Shareholders request that our Directors take the steps necessary, in the most expeditious manner possible, to adopt annual election of each director. This includes using all means in our Boards power such as corresponding special company solicitations and one-on-one management contacts with major shareholders to obtain the vote required for formal adoption of this proposal topic.
Also for complete transition from the current staggered system to 100% annual election of each director in one election cycle if feasible. If it is feasible to transition in one-year, 3-years will not substitute for one year. Also to transition solely through direct action of our board if feasible.
This topic won our 66% yes-vote at our 2006 annual meeting. This topic also won a 67% yes-vote average at 43 major companies in 2006. The Council of Institutional Investors www.cii.org, formally recommends adoption of this proposal topic. At least one proxy advisory service has recommend a no-vote for directors who do not adopt a shareholder proposal after it wins one majority vote.
Arthur Levitt, Chairman of the Securities and Exchange Commission, 1993-2001 said: In my view its best for the investor if the entire board is elected once a year. Without annual election of each director shareholders have far less control over who represents them.
Take on the Street by Arthur Levitt.
It is also important to take a step forward and support this one proposal since our 2006 governance standards were not impeccable. For instance in 2006 it was reported (and certain concerns are noted):
The above status shows there is room for improvement and reinforces the reason to take one step forward now and vote yes:
Elect Each Director Annually
Yes on 5
Board of Directors Statement Relating to Item 5:
The Board Recommends that you vote AGAINST Item 5.
The Board recommends a vote against this proposal to elect all of the members of the Board on an annual basis because the Board believes that enacting the proposal would not be in the best interest of the Company or its stockholders.
Throughout 2006, the Board retained independent outside counsel to assist them in assessing the Companys corporate governance processes and takeover defenses, including possible declassification of the Board. After thorough consideration of this
proposal in conjunction with all of the Companys takeover defenses, the Board continues to believe that the Companys existing system of electing directors in three classes, with staggered three-year terms, is in the best interests of the Company and its stockholders.
The Company believes that in considering this proposal it is important to carefully examine its corporate governance practices, its recent adoption of meaningful reforms and rationale for opposing the proposal. Additionally, it is important to recognize that several statements by the proponent of the proposal are misleading or inaccurate.
Majority Vote By-law Provision
In September of 2006, the Board implemented a majority-vote by-law provision relating to the election of directors. Pursuant to this amendment to the Companys By-laws, more than 50% of the votes cast in an individual directors election must be cast for a director in order for him or her to be elected. Any director who fails to receive a majority of affirmative votes must tender his or her resignation. The Board will then make a final determination, taking into account all the relevant facts and circumstances, whether to accept that resignation. Prior to this amendment, a director could have been elected even if he or she received a majority of withhold votes. The Board believes that this by-law amendment provides stockholders with more flexibility and control over who represents the Company.
At companies with both a majority vote provision and a non-classified board, it is possible that a large percentage, or even all, of the directors could fail to be elected in a single year, causing instability on the Board. The Board feels that in light of the adoption of the majority vote provision, staggered (classified) board elections are necessary to help assure that the majority of directors have prior experience and familiarity with the Companys businesses, products, markets, opportunities and challenges. The Board believes that this experience and knowledge gained over time makes directors more effective in fulfilling their responsibilities to maximize stockholder value by appropriately balancing short-term goals and long-term planning. Staggered three-year terms contribute toward stability and continuity in setting and pursuing the Companys business strategies, while at the same time provide flexibility because one-third of the directors are elected annually and a majority of the directors are elected over a two year period. In addition, the Board believes that a three-year board term helps the Company attract and retain individuals with the quality, integrity and caliber required to make the commitment and take on the responsibilities that service as a director entails. The Board also believes that agreeing to serve a three-year term demonstrates the nominees commitment to the Company over the long-term.
Corporate Governance Practices
The stockholder proponent states that our 2006 governance standards were not impeccable. The Board does not believe that any one model of governance standards is appropriate for all companies. The Board believes that it has established strong governance policies and practices. These policies and practices have been recognized as superior to those of our peer companies by independent third parties. For example, Institutional Shareholder Services rates the Company as outperforming 92.0% of the companies in the S&P500 and 99.2% of companies in the consumer durables and apparel group. Also, The Corporate Library, the independent investment research firm that Mr. Rossi cites in his proposal, actually rated the Company as having a low concern corporate governance risk assessment. The stockholder proponent implies that The
Corporate Library rates the Company poorly, when, in fact, The Corporate Library upgraded the Companys rating from last year and gives the Company high marks in several key areas.
In addition, The Corporate Library gave the Company a low concern risk assessment rating relating to takeover defenses, the very topic for which the proposal applies. According to The Corporate Library, the board meets our current tests for board effectiveness and shareholder friendliness in the area of takeover defenses.
The Board also believes that a classified board plays an important role in ensuring that the interests of all stockholders are protected and maximized in connection with an unsolicited takeover proposal. A classified board structure prevents the strategy of a potential acquirer replacing a majority of the Board with its own nominees at a single meeting and thereby gaining control of the Company without paying a fair value to the Companys stockholders. A classified board structure does not preclude a takeover, but rather provides the Board the additional time and leverage necessary to evaluate the adequacy and fairness of a takeover proposal, and to negotiate the best deal possible for the benefit of all stockholders, without the threat of imminent removal of a majority of Board members.
The stockholder proponent argues that a classified board raises concerns about accountability to stockholders. The Board does not believe that a classified board makes directors any less accountable than directors elected on an annual basis. The fiduciary duties of directors elected to three-year terms are identical to those of directors elected annually. The Board does not believe that directors elected for three-year terms approach their responsibilities with less focus or accountability than would be the case if they were elected annually.
The Board has demonstrated that they hold themselves accountable to stockholders and that they are concerned about the Companys corporate governance standards. They have demonstrated this by adopting Corporate Governance Principles that enhance the accountability of the Directors. The classified board structure enhances director independence by minimizing the potential for outside influences that might not be in the interests of all stockholders and reduces the threat that a board member who does not conform will not be renominated.
The proposal contains numerous factual inaccuracies about the Company. The correct information is set forth below:
Adoption of the stockholder proposal does not automatically result in the declassification of the Companys Board. Adoption of this proposal requires an amendment to the Companys Certificate of Incorporation which must first be approved by the Board and then submitted to a vote of the stockholders at a subsequent meeting. A vote in favor of the proposal, therefore, would constitute a recommendation that the Board initiate this amendment. The Board does not believe, however, that such an amendment is in the best interests of the Company or its stockholders.
The Companys stockholders voted to approve the classified board in 1986. Although a majority of the votes cast at the 2006 annual meeting were voted in favor of the declassification proposal, the stockholders rejected similar proposals every year from 1989 to 1998. The Board considered the vote result from the 2006 annual meeting along with all the other factors discussed above and concluded that the classified board structure remains in the Companys, and its stockholders, best interest.
The Board recommends that you vote AGAINST Item 5.
The Company is informed that the United Brotherhood of Carpenters and Joiners of America, on behalf of the United Brotherhood of Carpenters Pension Fund, of 101 Constitution Avenue, N.W., Washington, DC 20001, intends to introduce at the Annual Meeting the following resolution. The Company has been notified that the United Brotherhood of Carpenters Pension Fund held approximately 2,400 shares of the Companys common stock for at least one year prior to his submission of this proposal and has agreed to hold a minimum required number or dollar amount of such common stock until the Annual Meeting.
Statement of United Brotherhood of Carpenters Pension Fund:
Resolved: That the shareholders of Fortune Brands, Inc. (Company) request that the Board of Directors Executive Compensation Committee establish a
pay-for-superior-performance standard in the Companys executive compensation plan for senior executives (Plan), by incorporating the following principles into the Plan:
Supporting Statement: We feel it is imperative that compensation plans for senior executives be designed and implemented to promote long-term corporate value. A critical design feature of a wellconceived executive compensation plan is a close correlation between the level of pay and the level of corporate performance relative to the industry peers. We believe the failure to tie executive compensation to superior corporate performance; that is, performance exceeding peer group performance, has fueled the escalation of executive compensation and detracted from the goal of enhancing long-term corporate value.
We believe that common compensation practices have contributed to excessive executive compensation. Compensation committees typically target senior executive total compensation at the median level of a selected peer group, then they design any annual and long-term incentive plan performance criteria and benchmarks to deliver a significant portion of the total compensation target regardless of the companys performance relative to its peers. High total compensation targets combined with less than rigorous performance benchmarks yield a pattern of superior-pay-for-average-performance. The problem is exacerbated when companies include annual bonus payments among earnings used to calculate supplemental executive retirement plan (SERP) benefit levels, guaranteeing excessive levels of lifetime income through inflated pension payments.
We believe the Companys Plan fails to promote the pay-for-superior-performance principle. Our Proposal offers a straightforward solution: The Compensation Committee should establish and disclose financial and stock price performance criteria and set peer group-related performance benchmarks that permit awards or payouts in its annual and long-term incentive compensation plans only when the Companys performance exceeds the median of its peer group. A senior executive compensation plan based on sound pay-for-superior-performance principles will help moderate executive compensation and create competitive compensation incentives that will focus senior executives on building sustainable long-term corporate value.
Board of Directors Statement Relating to Item 6:
The Board Recommends that you vote AGAINST Item 6.
The Board has thoroughly considered the proposal submitted by the United Brotherhood of Carpenters and Joiners of America. Because the Board believes the adoption of the proposal is not in the best interests of the Company or the Companys stockholders, the Board recommends a vote against the proposal.
A strong majority of the votes cast by the stockholders at the 2006 annual meeting, more than 63% (including abstentions), rejected a nearly identical proposal. The Company already practices pay-for-superior performance and all stockholders have benefited from this practice. In 2006, the Company outperformed its current peer group (see page 21 of our Form 10-K). An investment in the Company including dividends returned 11.6% for the year.
Payments under the annual incentive plan are tied to demanding earnings per share goals. Likewise, performance shares awarded under the Companys long-term incentive plan are tied to rigorous average return on invested capital and cumulative diluted earnings per share improvement targets. The Company also utilizes stock options to attract and retain superior management. The value of stock options earned by executives is directly tied to the increase in the value of the Companys shares. In other words, the Companys executives can realize value in stock options only if the value of the common stock rises benefiting all stockholders. The vast majority, 80%, of the Chief Executive Officers total annual compensation in 2006, as shown on page 24 of the Proxy Statement, was tied to the Companys performance.
As more fully described on page 22 of this Proxy Statement, in 2006 this Boards compensation committee compared the Companys performance to the performance of a survey group of 29 consumer products companies using a range of critical financial and stockholder metrics. The Compensation Committee assessed executive compensation actually paid in light of this comparison in an effort to ensure that the Companys performance (as compared to the survey group) supported the level of compensation provided to executive officers. The Compensation Committee currently intends to continue this peer-group based analysis.
Because the Companys competitors do not have compensation programs like that described in the proposal, adoption of the stockholder proposal would place the Company at a competitive disadvantage, possibly preventing it from attracting and retaining superior management capable of delivering superior performance. The proponent wants the Company to index equity based grants, allowing vesting and/or granting of awards only if the Company outperforms its peers. Indexing equity grants is not common practice for good reason. Indexed equity grants or annual bonuses may allow executives to benefit if the Companys performance exceeds that of its peers, even if the Companys earnings and common stock price decline and stockholders do not benefit. In addition, imposing the specific requirements outlined in the proposal would eliminate the Compensation Committees flexibility, which is essential in order to create effective incentives that work from year to year. Most importantly, adoption of the proposal is simply not necessary because the Companys compensation program already aligns executive compensation with Company performance.
The Board recommends that you vote AGAINST Item 6.
EQUITY COMPENSATION PLAN INFORMATION
CERTAIN INFORMATION REGARDING SECURITY HOLDINGS
We have listed below the beneficial ownership of common stock of Fortune Brands, Inc. by (a) each director, (b) the executive officers of the Company listed on page 24, and (c) directors and executive officers of the Company as a group on February 15, 2007. The table is based on information we received from the nominees, other directors and executive officers, our Corporate Employee Benefits Committee, and the Trustee of our defined contribution plan. Unless otherwise indicated, the business address of each of the Companys directors and executive officers is the same as the Companys address. To our knowledge, no person or entity beneficially owns 5% or more of our outstanding common stock.
SUBMISSION OF STOCKHOLDER PROPOSALS AND NOMINATIONS
What governs stockholder proposals and nominations?
Our Restated Certificate of Incorporation contains procedures for stockholder nomination of directors. Our By-laws contain procedures for other stockholder proposals to be presented before annual stockholder meetings.
Who can make a nomination?
According to our Restated Certificate of Incorporation, any record owner of stock entitled to be voted generally in the election of directors may nominate one or more persons for election as a director at a stockholders meeting at least 120 days prior to the Annual Meeting.
How do I go about making a nomination?
If you are a record owner of stock and you wish to make a nomination, you must notify the Secretary, in writing, of your intent to make a nomination. Written notice must be submitted 120 days before the Annual Meeting, that is, by December 31, 2007 for the 2008 Annual Meeting (assuming the 2008 Annual Meeting is held on April 29, 2008), and it must include:
Who can make a proposal?
According to the By-laws, a proposal or other business to be considered at the Annual Meeting of Stockholders can be made by a person who is a stockholder of record.
How do I go about making a proposal?
If you are a record owner of stock and you wish to make a proposal, you must notify the Secretary, in writing, of your intent. You must give your written notice 120 days before the Annual Meeting, that is, by December 31, 2007 for the 2008 Annual Meeting (assuming the 2008 Annual Meeting is held on April 29, 2008), and it must include:
The By-laws also provide that stockholders who wish to have a proposal included in the Companys Proxy Statement must comply with the applicable requirements of the Exchange Act, as well as its rules and regulations. Such stockholders also have the benefit of the rights provided by Rule 14a-8 of the Exchange Act. In order to be eligible under Rule 14a-8 for inclusion in the Companys Proxy Statement and accompanying proxy at the next Annual Meeting of Stockholders currently scheduled to be held on April 29, 2008, stockholder proposals must be received by the Company on or before November 14, 2007.
A copy of the Restated Certificate of Incorporation and By-law provisions is available upon written request to Mr. Mark A. Roche, Senior Vice President, General Counsel and Secretary, Fortune Brands, Inc., 520 Lake Cook Road, Deerfield, Illinois 60015. The person presiding at the meeting is authorized to determine if a proposed matter is properly before the meeting or if a nomination is properly made.
The distribution of this Proxy Statement with respect to the Companys 2007 Annual Meeting of Stockholders is accompanied by the financial statements and other financial information as required by Securities and Exchange Commission rules. A copy of the Companys Annual Report on Form 10-K as filed with the SEC for its last fiscal year, including any financial statements and financial statement schedules to the Form 10-K, will be made available to stockholders without charge, upon written request to Mr. Mark A. Roche, Senior Vice President, General Counsel and Secretary, Fortune Brands, Inc., 520 Lake Cook Road, Deerfield, Illinois 60015. The Company will furnish any exhibits to Form 10-K to each stockholder requesting them upon payment of a fee of $.10 per page to cover their cost.
Our Board is soliciting this proxy. The Company will bear the expense of soliciting proxies for this meeting, including mailing costs. In addition to mailing copies of this material to stockholders, we will request that persons who hold stock in their names or custody, or in the names of nominees, for the benefit of others, to forward copies of these materials to the beneficial owners of our stock, and to request the authority to execute the proxies. In order to assure that there is sufficient representation at the meeting, our officers and regular employees may solicit proxies by telephone, facsimile, or in person. In addition, we have retained Georgeson Shareholder Communications Inc., to aid in soliciting proxies for a fee, estimated at $10,500, plus reasonable out-of-pocket expenses. Our total expenses will depend upon the volume of shares represented by the proxies received promptly in response to the Notice of Meeting and Proxy Statement.
Stockholders who do not intend to be present at the meeting are urged to send in their proxies without delay or vote their proxies by telephone or through the Internet. Prompt response is helpful, and your cooperation will be appreciated.
Multiple Stockholders Having the Same Address
If you and other residents at your mailing address own shares of common stock in street name, your broker or bank may have sent you a notice that your household will receive only one Annual Report and Proxy Statement for each company in which you hold stock through that broker or bank. This practice, known as householding, is designed to reduce our printing and postage costs. If you did not respond that you did not want to participate in householding, the broker or bank will assume that you have consented, and will send one copy of our Annual Report and Proxy Statement to your address. You may revoke your consent to householding at any time by sending your name, the name of your brokerage firm, and your account number to ADP, Householding Department, 51 Mercedes Way, Edgewood, New York 11717. The revocation of your consent to householding will be effective 30 days following its receipt. In any event, if you did not receive an individual copy of this Proxy Statement or our Annual Report, or if you wish to receive individual copies of our Proxy Statements and Annual Reports for future meetings, we will send a copy to you if you call Alvin Santiago, Manager of Shareholder Services, at (847) 484-4538, or write him at Fortune Brands, Inc., 520 Lake Cook Road, Deerfield, Illinois 60015.
If you and other residents at your mailing address are registered stockholders and you receive more than one copy of the Annual Report and Proxy Statement, but you wish to receive only one copy, you must request, in writing, that the Company eliminate these duplicate mailings. To request the elimination of duplicate copies, please write to The Bank of New York, Shareholder Relations Department, P. O. Box 11258, Church Street Station, New York, New York 10286.
The Company knows of no other matters to be submitted to the stockholders at the meeting. If any other matters properly come before the meeting, people named in the enclosed proxy will vote the shares they represent in accordance with the recommendation of the Board.
March 9, 2007
FORTUNE BRANDS, INC.
INCENTIVE COMPENSATION PLAN
SECTION 1.1 Purpose. The purpose of this Annual Executive Incentive Compensation Plan (the Plan) is to advance the interests of the stockholders of Fortune Brands, Inc. (the Company) by providing performance-based incentives to senior executives of the Company.
SECTION 1.2 Definitions. As used in the Plan, the following terms shall have the following meanings:
SECTION 1.3 Administration of the Plan. The Plan shall be administered by the Committee; provided, however, that (i) the number of directors on the Committee shall not be less than two and (ii) each member of the Committee shall be an outside director within the meaning of Code Section 162(m)(4). The Committee may adopt its own rules of procedure, and the action of a majority of the Committee, taken at a meeting, or taken without a meeting by unanimous written consent of the members of the Committee, shall constitute action by the Committee. The Committee shall have the power and authority to administer, construe and interpret the plan, to make rules for carrying it out and to make changes in such rules.
SECTION 2.1 Awards. The Committee may make Awards to Participants with respect to each Performance Period, subject to the terms and conditions set forth in the Plan.
SECTION 2.2 Terms of Awards. Within 90 days after the commencement of each Performance Period (or prior to such later date as permitted by, or such earlier date as required by, Code Section 162(m) and the regulations promulgated thereunder), the Committee shall establish in writing for such Performance Period (i) the objective formula for determining the Incentive Pool for the Performance Period (using one or more of the Performance Measures) and (ii) the allocable percentage of the total Incentive Pool to which each Participant shall be entitled, provided that the total of all such percentages for all Participants for any Performance Period shall not exceed 100 percent. The Committee shall cause each Participant to be notified in writing of his or her selection as a Participant.
SECTION 2.3 Limitations on Awards. The maximum amount of an Award to any Participant for any Performance Period shall not exceed $3.0 million. No part of the amount of any Incentive Pool for any Performance Period which is not awarded in such Performance Period may be carried forward for award in subsequent Performance Periods.
SECTION 2.4 Determination of Awards.
(a) The Committee shall, promptly after the date on which all necessary financial or other information for a particular Performance Period becomes available, in the manner required by Code Section 162(m), certify (i) the degree to which each of the Performance Measures has been attained and (ii) with respect to each Participant, the amount of the Participants Award, if any.
(b) Notwithstanding anything in the Plan to the contrary, the Committee may, in its sole discretion, reduce or eliminate, but may not increase, any Award. In exercising its discretion, the Committee may use such objective or subjective factors as it determines to be appropriate in its sole discretion. The determination by the Committee as to the terms of any of the foregoing adjustments shall be conclusive and binding. No part of any potential Award for any Performance Period which is not actually awarded to a Participant because of any reduction permitted by this Section 2.4(b) or required by Section 2.3 shall be available for award to any other Participant whose actual compensation for such period is subject to Code Section 162(m).
(c) After the end of each Performance Period when the amount of each Participants Award has been determined, the Committee shall cause each Participant to be provided with written notice of the amount of his or her Award, if any. Awards shall become payable in cash as promptly as practicable after the certifications described in this Section 2.4 have been made by the Committee. The Company intends that the payment will be made within 2 1/2 months of the close of the Performance Period, but in no event later than the subsequent calendar year. In the event that payments are not made within 2 1/2 months of the close of the Performance Period, it is the Companys intent that this Plan be construed in a manner consistent with Code Section 409A.
SECTION 2.5 Deferral of Payment of Awards. Notwithstanding Section 2.4(c), but subject to the requirements of Code Section 409A, the Committee may, in its sole discretion, upon the request of a Participant, determine that the payment of an Award (or a portion thereof) to the Participant shall be deferred and when such deferred Award shall be paid and over what period of time. The Committee shall have discretion to provide for the payment of an amount equivalent to interest, at such rate or rates fixed by the Committee or based on one or more predetermined investments selected by the Committee, on any such deferred Award.
SECTION 3.1 Restriction on Transfer. The rights of a Participant with respect to amounts payable under the Plan shall not be transferable by such Participant, otherwise than by will or the laws of descent and distribution.
SECTION 3.2 Tax Withholding. The Company shall have the right to deduct from all payments made under the Plan to a Participant or to a Participants beneficiary or beneficiaries any Federal, state or local taxes required by law to be withheld with respect to such payments.
SECTION 3.3 Source of Payments. The Company shall not have any obligation to establish any separate fund or trust or other segregation of assets to provide for
payments under the Plan. To the extent any person acquires any rights to receive payments hereunder from the Company, such rights shall be no greater than those of an unsecured creditor.
SECTION 3.4 Employment Rights and Other Benefit Programs. The provisions of the Plan shall not give any Participant any right to be retained in the employment of the Company. In the absence of any specific agreement to the contrary, the Plan shall not affect any right of the Company, or of any affiliate of the Company, to terminate, with or without cause, any Participants employment at any time. The Plan shall not replace any contract of employment between the Company and any Participant, but shall be considered a supplement thereto. The Plan is in addition to, and not in lieu of, any other employee benefit plan or program in which any Participant may be or become eligible to participate by reason of employment with the Company.
SECTION 3.5 Amendment and Termination. The Board of Directors may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part. No termination or amendment of the Plan may, without the consent of the Participant to whom an Award has been determined for a completed Performance Period but not yet paid, adversely affect the rights of such Participant in such Award, nor shall any amendment increase the amount payable to a Participant for Performance Period if such amendment is made after the final day of the period for establishing the objective formula for determining the Incentive Pool for the Performance Period set forth in Section 2.2 of the Plan.
SECTION 3.6 Governing Law. The Plan and all rights and Awards hereunder shall be construed in accordance with and governed by the laws of the State of Delaware. The jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), this Plan shall be exclusively in the courts in the State of Illinois, County of Cook, including the Federal Courts located therein (should Federal jurisdiction exist).
SECTION 3.7 Severability. If any provision of the Plan is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan, such provision shall be stricken as to such jurisdiction, and the remainder of the Plan shall remain in full force and effect.
SECTION 3.8 Effective Date. The Plan shall be effective as of January 1, 2007, subject to the approval thereof by the stockholders of the Company at the 2007 annual meeting of stockholders. Such approval shall meet the requirements of Code Section 162(m) and the regulations thereunder. If such approval is not obtained, then the Plan shall not be effective and any formula for determining the Incentive Pool for any Performance Period, any percentage thereof to which any person otherwise may be entitled and any notice given pursuant to Section 2.2 of the Plan shall be void ab initio.
FORTUNE BRANDS, INC.
2007 LONG-TERM INCENTIVE PLAN
The purpose of this 2007 Long-Term Incentive Plan (the Plan) is to aid Fortune Brands, Inc. and its Subsidiaries in securing and retaining Employees of outstanding ability by making it possible to offer them increased incentives, which may include a proprietary interest in Fortune, to join or continue in the employment of Fortune and to increase their efforts for its welfare.
As used in the Plan, the following words shall have the following meanings:
The Plan shall be administered by the Committee whose members shall be appointed by the Board of Directors and consist of at least three members of the Board of Directors. The members of the Committee shall qualify to administer the Plan for purposes of Rule 16b-3 (and any other applicable rule) promulgated under Section 16(b) of the Exchange Act, must be outside directors within the meaning of Code Section 162(m), and must be independent directors under the New York Stock Exchange rules. The Committee may adopt its own rules of procedure, and the action of a majority of the Committee, taken at a meeting, or taken without a meeting by unanimous written consent of the members of the Committee, shall constitute action by the Committee. The Committee shall have the power and authority to administer, construe and interpret the Plan, to make rules for carrying it out and to make changes in such rules.
The Committee may from time to time make Awards under the Plan to such Employees and in such form and having such terms, conditions and limitations as the Committee may determine. The Committee may delegate to an officer of Fortune the right to designate Employees of Fortune or a Subsidiary (other than the delegate, officers of Fortune at the level of vice president or above, chief executive officers of Fortunes principal operating companies, or any other executive officers (as defined under the Exchange Act)) to be granted Options and Rights and the number of shares of Common Stock subject to Options and Rights granted to each such Employee, provided that the aggregate number of the Options and Rights to be awarded and their terms and conditions shall be determined by the Committee. Awards may be granted singly, in combination or in tandem. The terms, conditions and limitations of each Award under the Plan shall be set forth in the Award, in a form approved by the Committee, consistent, however, with the terms of the Plan.
The terms and conditions with respect to each Award of Restricted Stock under the Plan shall be consistent with the following:
The terms and conditions with respect to each Performance Award under the Plan shall be consistent with the following:
The Committee may grant other Awards under the Plan pursuant to which shares of Common Stock (which may, but need not, be shares of Restricted Stock pursuant to Section 6) are or may in the future be acquired, or Awards denominated in stock units (which may, but need not, be restricted stock units), including ones valued using measures other than market value. Such Other Stock-Based Awards may be granted alone, in addition to or in tandem with any Award of any type granted under the Plan and must be consistent with the purposes of the Plan. Such other Stock-Based Awards may be granted pursuant to the Plan, subject to the limits of Section 10, including the overall limit on full value share awards. Any Other Stock Based Awards granted under this Section 8 will be subject to and conform with the requirements of Code Section 409A.
Any Awards (other than Awards of Options or Rights) under the Plan may, in the discretion of the Committee, earn dividend equivalents. In respect of any such Award
which is outstanding on a dividend record date for Common Stock the Participant may be credited with an amount equal to the cash or stock dividends or other distributions that would have been paid on the shares of Common Stock covered by such Award had such covered shares been issued and outstanding on such dividend record date. The Committee shall establish such rules and procedures governing the crediting of dividend equivalents, including the timing, form of payment and payment contingencies of such dividend equivalents, as it deems are appropriate or necessary.
For purposes of the Plan: (a) a transfer of a Participants employment without an intervening period from Fortune to a Subsidiary or another entity in which Fortune owns, directly or indirectly, an equity interest or vice versa, or from one Subsidiary or another entity in which Fortune owns, directly or indirectly, an equity interest to another, or vice versa, shall not be deemed a termination of employment and such Participant shall be deemed to remain in the employ of Fortune or a Subsidiary, and (b) an Employee who is granted in writing a leave of absence shall be deemed to have remained in the employ of Fortune or a Subsidiary during such leave of absence.
provided that; full vesting of all outstanding Awards shall be immediate unless Fortune is the surviving entity and any adjustments necessary to preserve the value of the Participants outstanding Awards have been made, or Fortunes successor at the time of the Change in Control irrevocably assumes Fortunes obligations under this Plan or replaces each Participants outstanding Award with an award of equal or greater value and having terms and conditions no less favorable to the Participant than those applicable to the Participants Award immediately prior to the Change in Control.
In the event of a termination of the Plan, then each Participants employment shall be deemed to be terminated for purposes of Sections 6 through 9 as of the date of such termination of the Plan and, except to the extent otherwise determined by the Committee and set forth in the applicable Award, the foregoing provisions of clauses (i) and (ii) of this Section 12(d) shall apply to such Participants shares of Restricted Stock, Performance Awards and Other Stock-Based Awards with the same effect as if the date of such termination of the Plan were a Divestiture Date.
The Board of Directors shall have no power to change the terms of any Award theretofore granted under the Plan so as to impair the rights of a Participant without the consent of the Participant whose rights would be affected by such change except to the extent, if any, provided in the Plan or in the Award.
Fortune or a Subsidiary shall have the right to deduct from any cash payment made under the Plan any federal, state or local income or other taxes required by law to be withheld with respect to such payment. It shall be a condition to the obligation of Fortune to deliver shares of Common Stock upon the exercise of an Option or Right, upon payment of a Performance Award, upon delivery of Restricted Stock or upon exercise, settlement or payment of any Other Stock-Based Award that the Participant pay to Fortune or a Subsidiary such amount as may be requested by Fortune or a Subsidiary for the purpose of satisfying any liability for such withholding taxes.
Any Award may provide that the Participant may elect, in accordance with any conditions set forth in such Award, to pay any withholding taxes in shares of Common Stock; provided that, the Participant, by accepting the Award will be deemed to instruct and authorize Fortune for such purpose to withhold a whole number of shares of Common Stock from those shares of Common Stock issuable to the Participant in payment of vested shares of Performance Shares, Restricted Stock or units as Fortune determines to be appropriate to satisfy the minimum tax withholding obligation. This direction and authorization is intended to comply with the requirements of Rule 10b5-1(c)(1)(i)(B) under the Exchange Act, and to be interpreted to comply with the requirements of Rule 10b5-1(c). To the extent the value of shares of Common Stock withheld exceeds the Participants minimum tax withholding
obligation, e.g., because of the need to withhold whole shares, Fortune shall pay such excess in cash to the participant through payroll as soon as practicable. The Participant agrees to pay to Fortune as soon as practicable, including through additional payroll withholding, any amount of the tax withholding obligation that is not satisfied by the withholding of shares described above.
The Plan shall be effective as of February 27, 2007 (the Effective Date), the date of its adoption by the Board of Directors, provided that the Companys stockholders thereafter approve the Plan at a duly held stockholders meeting in accordance with any applicable provisions of the Delaware General Corporation Law. If the Plan is not so approved by stockholders, the Plan (and any Award granted thereunder) shall be null, void and of no force or effect. If so approved, the Plan shall remain in effect until all shares of Common Stock authorized to be issued or transferred hereunder have been issued or transferred or until the Plan is sooner terminated by the Board of Directors, and shall continue in effect thereafter with respect to any Awards outstanding at the time of such termination. In no event shall an Incentive Stock Option be granted under the Plan more than ten (10) years from the date the Plan is adopted by the Board of Directors, or the date the Plan is approved by the Companys stockholders, whichever is earlier, unless within such ten year period stockholders approve an increase in the number of shares of Common Stock available for Awards under the Plan, in which case more than ten (10) years from the last date on which the stockholders so approve any such increase.
C/O BANK OF NEW YORK CHURCH STREET STATION P.O. BOX 11002 NEW YORK, NY 10286-1002
VOTE BY INTERNET- www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the meeting date. Have your proxy card in hand when you call and then follow the instructions.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Fortune Brands, Inc., c/o ADP, 51 Mercedes Way, Edgewood, NY 11717.
ELECTRONIC DELIVERY OF FUTURE SHAREHOLDER COMMUNICATIONS
If you would like to reduce the costs incurred by Fortune Brands, Inc. in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access shareholder communications electronically in future years.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: FORBR1 KEEP THIS PORTION FOR YOUR RECORDS
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
FORTUNE BRANDS, INC.
The Board of Directors Recommends Votes FOR all Nominees:
To withhold authority to vote for any individual nominee(s), mark For All Except and write the number(s) of the nominee(s) on the line below.
Item 1 - Election of Directors - Nominees to Class III:
01) Anne M. Tatlock
02) Norman H. Wesley
03) Peter M. Wilson
The Board of Directors Recommends Votes FOR Items 2, 3 and 4: For Against Abstain
Item 2 - Ratification of the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm for 2007.
Item 3 - Re-approval of the Fortune Brands, Inc. Annual Executive Incentive Plan.
Item 4 - Approval of the Fortune Brands, Inc. 2007 Long-Term Incentive Plan.
The Board of Directors Recommends Votes AGAINST Items 5 and 6:
Item 5 - If presented, a shareholder proposal entitled Elect Each Director Annually.
Item 6 - If presented, a shareholder proposal entitled Pay-for-Superior Performance.
For address changes and/or comments, please check this box and write them on the back where indicated.
Note: Please sign as your name appears on the Proxy. If shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee r guardian, please give your full title as such. If a corporation, please sign in full corporate name by authorized officer. If a partnership, please sign in full partnership name by authorized person.
Signature [PLEASE SIGN WITHIN BOX] Date
Signature (Joint Owners)
ANNUAL MEETING OF STOCKHOLDERS
Tuesday, April 24, 2007
1750 Lake Cook Road
Deerfield, Illinois 60015
Receive Future Proxy Materials Electronically
Help Fortune Brands make a difference by eliminating paper proxy mailings to your home or business. With your consent we can stop sending paper copies of Proxy Statements, Annual Reports and related materials to you and you can conveniently view them on-line. To participate, go to www.icsdelivery.com/fo and follow the prompts.
You may vote by telephone or over the Internet. Voting electronically is quick, easy and also saves the company money. Just follow the instructions on your Proxy Card.
If you vote the shares on the Internet or by phone, you do not need to mail back the proxy card. YOUR VOTE IS IMPORTANT. THANK YOU FOR VOTING.
The Board of Directors solicits this proxy for use at the Annual Meeting on Tuesday, April 24, 2007.
The stockholder(s) whose signature(s) appear(s) on the reverse side of this proxy card appoint N. H. WESLEY, C. P. OMTVEDT, and M. A. ROCHE (and any other person chosen by Messrs. Wesley, Omtvedt or Roche) proxies, to vote all shares of Fortune Brands common stock which the stockholder(s) would be entitled to vote on at Annual Meeting of Stockholders to be held on April 24, 2007 at the Hyatt Deerfield, 1750 Lake Cook Road, Deerfield, Illinois at 1:30 p.m. (CDT), on Items 1, 2, 3, 4, 5 and 6 referred to on the reverse side and described in the Proxy Statement, and on any other matters which may properly come before the meeting, with all powers the stockholder(s) would possess if personally present. A majority of the proxies (or, if only one, then that one) or their substitutes acting at the meeting may exercise all powers conferred.
This proxy when properly executed will be voted in the manner directed by the stockholder. Unless the stockholder(s) indicate(s) otherwise, the proxies will vote FOR the election of the nominees to the Board of Directors (Item 1), FOR Items 2, 3 and 4 and AGAINST Items 5 and 6.
If you participate in the Fortune Brands Stock Fund under a retirement savings trust, your signature on the reverse side will be a direction to the trustee to vote as instructed.
FORTUNE BRANDS, INC.
P.O. BOX 11010
NEW YORK, N.Y. 10203-0010
(If you noted any address changes/comments above, please mark corresponding box on other side.)
Please sign, date and return the proxy promptly using the enclosed envelope.
(Continued and to be signed on other side.)
PLEASE EXECUTE AND RETURN YOUR PROXY PROMPTLY