March 14, 2007

 

Thomas J. Falk

Chairman of the Board and

Chief Executive Officer

 

TO OUR STOCKHOLDERS:

 

     On behalf of the Board of Directors and management of Kimberly-Clark Corporation, I cordially invite you to the Annual Meeting of Stockholders to be held on Thursday, April 26, 2007, at 11:00 a.m. at the Dallas Marriott Las Colinas, which is located at 223 West Las Colinas Boulevard, Irving, Texas.

 

     At the Annual Meeting, stockholders will be asked to elect three directors for a three-year term, approve the selection of the Corporation’s independent auditors, approve a proposal regarding the annual election of directors and vote on three stockholder proposals. These matters are fully described in the accompanying Notice of Annual Meeting and proxy statement.

 

     It is important that your stock be represented at the meeting regardless of the number of shares you hold. You are encouraged to specify your voting preferences by marking and dating the enclosed proxy card, voting electronically using the Internet or using the telephone voting procedures.

 

     If you plan to attend the meeting, please check the card in the space provided or so indicate electronically or by telephone. This will assist us with meeting preparations and will enable us to expedite your admittance. If your shares are not registered in your own name and you would like to attend the meeting, please ask the broker, trust, bank or other nominee that holds your shares to provide you with evidence of your share ownership, which will enable you to gain admission to the meeting.

 

Sincerely,

 

Thomas J. Falk

KIMBERLY-CLARK CORPORATION

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

APRIL 26, 2007

 

 

The Annual Meeting of Stockholders of KIMBERLY-CLARK CORPORATION will be held at the Dallas Marriott Las Colinas, which is located at 223 West Las Colinas Boulevard, Irving, Texas, on Thursday, April 26, 2007, at 11:00 a.m. for the following purposes:

 

 

 

 

Stockholders of record at the close of business on February 26, 2007 are entitled to notice of and to vote at the meeting and any adjournment thereof.

 

It is important that your shares be represented at the meeting. I urge you to sign, date and promptly return the enclosed proxy card in the enclosed business reply envelope, or vote using the Internet or telephone.

 

The accompanying proxy statement also is being used to solicit voting instructions for shares of Kimberly-Clark common stock that are held by the trustees of our employee benefit and stock purchase plans for the benefit of the participants in the plans. It is important that each participant in the plans signs, dates and returns the voting instruction card, which is enclosed with the proxy statement, in the business reply envelope provided, or indicates his or her preferences using the Internet or telephone.

 

By order of the Board of Directors.

 

 

Timothy C. Everett

Vice President and Secretary

 

P.O. Box 619100

Dallas, Texas 75261-9100

March 14, 2007

 

TABLE OF CONTENTS

 

March 14, 2007

 

PROXY STATEMENT

 

PART ONE

 

The accompanying proxy is solicited on behalf of the Board of Directors of Kimberly-Clark Corporation for use at the Annual Meeting of Stockholders to be held on April 26, 2007 and at any adjournment of the Annual Meeting. We are first mailing this proxy statement and the accompanying proxy to holders of Kimberly-Clark common stock on March 14, 2007.

 

Each stockholder of record at the close of business on February 26, 2007 will be entitled to one vote for each share registered in the stockholder’s name. As of that date, there were outstanding 456,446,040 shares of our common stock.

 

You may vote in person by attending the meeting, by completing and returning a proxy by mail, or by using the Internet or telephone. To vote your proxy by mail, mark your vote on the enclosed proxy card, then follow the instructions on the card. To vote your proxy using the Internet or telephone, see the instructions on the proxy form and have the proxy form available when you access the Internet website or place your telephone call.

 

The named proxies will vote your shares according to your directions. If you sign and return your proxy but do not make any of the selections, the named proxies will vote your shares for the election of directors, for approval of the selection of our independent auditors, for approval of the proposal for annual election of directors and against approval of the stockholder proposals.

 

You may revoke your proxy before the time of voting at the meeting in any of the following ways:

 

 

Proxy cards are received by our independent proxy processing agent, and the vote is certified by independent Inspectors of Election. Proxy cards and ballots that identify the vote of stockholders and plan participants will be kept confidential, except as necessary to meet legal requirements, in cases where stockholders and participants request disclosure or write comments on their cards, or in a contested matter involving an opposing proxy solicitation. During the proxy solicitation period, we will receive daily tabulation reports from the independent proxy processing agent, but these reports provide only aggregate data. In addition, the agent will identify stockholders who fail to vote so that we may contact them and request they do so.

 

Kimberly-Clark will bear the cost of preparing, printing and delivering materials in connection with this solicitation of proxies including the cost of the proxy solicitation and the expenses of brokers, fiduciaries and other nominees in forwarding proxy material to beneficial owners. In addition to the use of mail and electronic delivery, solicitation may be made by telephone or otherwise by our employees. We have retained D. F. King & Co., Inc. to aid in the solicitation at a cost of approximately $14,000 plus reimbursement of out-of-pocket expenses.

 

A majority of the shares of our common stock, present in person or represented by proxy, will constitute a quorum for purposes of the Annual Meeting. The three nominees for director receiving a plurality of the votes cast at the meeting in person or by proxy shall be elected, subject to the Board’s existing policy regarding resignations by directors who do not receive a majority of “for” votes. The proposed amendment to the company’s Restated Certificate of Incorporation described below in Proposal 3 requires for approval the favorable vote of a majority of shares outstanding as of the record date. All other matters require for approval the favorable vote of a majority of votes cast on the applicable matter at the meeting in person or by proxy. Abstentions are treated as votes against a proposal and broker non-votes will not be considered present and entitled to vote. Generally, a broker non-vote occurs on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner of the shares, and instructions are not given.

 

If a stockholder is a participant in our Automatic Dividend Reinvestment and Stock Purchase Plan, the proxy card represents the number of full shares in the stockholder’s account in the plan, as well as shares registered in the stockholder’s name.

 

We also are sending this proxy statement and voting materials to participants in various Kimberly-Clark employee benefit and stock purchase plans. The trustee of each plan, as the stockholder of record of the shares of our common stock held in the plans, will vote whole shares of stock attributable to each participant’s interest in the plans in accordance with the directions the participant gives or, if no directions are given by the participant, in accordance with the directions of the respective plan committee.

 

The Notice of Annual Meeting and proxy statement and our 2006 Annual Report are available in the Investors section of our website at www.kimberly-clark.com. Instead of receiving copies of the proxy statement and annual report in the mail, stockholders may elect to receive an e-mail with a link to these documents on the Internet. Receiving your proxy materials online saves us the cost of producing and mailing documents to your home or business and gives you an automatic link to the proxy voting site. Stockholders may enroll to receive proxy materials online as follows:

 

 

Each year in connection with our Annual Meeting, we are required to send to each stockholder of record a proxy statement and annual report, and to arrange for a proxy statement and annual report to be sent to each beneficial stockholder whose shares are held by or in the name of a broker, bank, trust or other nominee. Because many stockholders hold shares of our common stock in multiple accounts or share an address with other stockholders, this process results in duplicate mailings of proxy statements and annual reports. Stockholders may avoid receiving duplicate mailings and save the Corporation the cost of producing and mailing duplicate documents as follows:

 

 

The Board of Directors met six times in 2006. All of the incumbent directors attended in excess of 75 percent of the total number of meetings of the Board and committees of the Board on which they served.

 

Although we do not have a formal policy with respect to director attendance at Annual Meetings, since 1997 all nominees and continuing directors have attended the Annual Meetings. Twelve of our directors, which constituted all nominees and continuing directors, attended the 2006 Annual Meeting.

 

The standing committees of the Board include the Audit Committee, Management Development and Compensation Committee, Nominating and Corporate Governance Committee and Executive Committee. In compliance with applicable New York Stock Exchange (“NYSE”) corporate governance rules, the Board has adopted charters for the Audit, Management Development and Compensation, and Nominating and Corporate Governance Committees. These charters are available in the Investors section of our website at www.kimberly-clark.com. Stockholders may also contact Stockholder Services, P.O. Box 612606, Dallas, Texas 75261-2606 or call (972) 281-1522 to obtain paper copies of the charters without charge.

 

Dennis R. Beresford is the Chairman of our Audit Committee. The other members of the Audit Committee are John R. Alm, John F. Bergstrom, and Mae C. Jemison, M.D. The Committee met eight

times in 2006. In addition, Mr. Beresford participated in three additional conference calls as Chairman of the Committee to preview earnings press releases during 2006.

 

Each member of the Audit Committee is an Independent Director under the independence standards set forth in our Corporate Governance Policies. See “Director Independence” below for additional information on Independent Directors.

 

Each member of the Audit Committee satisfies the financial literacy requirements of the NYSE, and the Board has determined that Mr. Beresford is an “audit committee financial expert” under the rules and regulations of the Securities and Exchange Commission (“SEC”).

 

The principal functions of the Audit Committee, as specified in its charter, include the following:

 

 

For additional information about the Audit Committee’s oversight activities in 2006, see the Audit Committee Report in Part Four of this proxy statement.

 

Marc J. Shapiro is the Chairman of our Management Development and Compensation Committee. The other members of this Committee are Abelardo E. Bru, Pastora San Juan Cafferty, James M. Jenness, and G. Craig Sullivan. Mr. Jenness was appointed to this Committee as of February 1, 2007. The Committee met five times in 2006. Each member of this Committee is an Independent Director.

 

The principal functions of the Management Development and Compensation Committee, as specified in its charter, include the following:

 

 

Compensation Process and Procedures

 

On an annual basis, the Committee reviews and sets the compensation of our elected officers, including all of our executive officers. The Committee’s charter does not permit the Committee to delegate to anyone the authority to establish any compensation policies or programs for elected officers, including our executive officers. Our Chief Executive Officer has the authority to establish compensation programs for non-elected officers. Additionally, as discussed below in “Part Four — Executive Compensation — Compensation Discussion and Analysis,” the Committee has delegated limited authority to our Chief Executive Officer to grant stock options, restricted stock, and restricted share units to non-executive officers for recruiting or retention purposes.

 

Our Chief Executive Officer makes a recommendation to the Committee each year on the appropriate compensation to be paid to our executive officers, excluding himself. The Committee makes the final determination of the amount of compensation to be awarded to each executive officer, including the Chief Executive Officer, based on the Committee’s determination of how that compensation achieves the objectives of our compensation policies. None of our executive officers are present during the portion of the Committee’s meetings when compensation for executive officers is set.

 

For additional information on the Committee’s processes and procedures for determining executive compensation, and for a detailed discussion of our compensation policies, see “Part Four — Executive Compensation — Compensation Discussion and Analysis” below.

 

Use of Compensation Consultants

 

The Committee’s charter provides that the Committee has the authority to retain advisors, including compensation consultants, to assist the Committee in its work. Both we and the Committee believe that compensation consultants can provide important market information and perspectives that can help the Committee develop compensation programs that best meet the objectives of our compensation policies.

 

To assist management and the Committee in assessing and determining appropriate, competitive, compensation for our executives, the Corporation annually engages an outside compensation consultant. In 2006, Mercer Human Resource Consulting was retained for this purpose. The Committee also separately retains an additional compensation consultant, independent of management, who is directed by the Committee to review the analysis and recommendations of the consultant retained by the Corporation, and advise the Committee whether such analysis and recommendations are appropriate and in line with the market and general compensation trends and consistent with our compensation objectives. In 2006, the Committee retained The Delves Group as its independent compensation consultant. The Delves Group had no other business relationship with the Corporation and received no payments from us other than fees for services to the Committee.

 

Committee Report

 

The Committee has reviewed the “Compensation Discussion and Analysis” section of this proxy statement and has recommended that it be included in this proxy statement. The Committee’s report is located below at “Part Four — Executive Compensation — Management Development and Compensation Committee Report.’’

 

Linda Johnson Rice is the Chairman of our Nominating and Corporate Governance Committee. The other members of this Committee are Abelardo E. Bru, Pastora San Juan Cafferty, James M. Jenness, and G. Craig Sullivan. Mr. Jenness was appointed to this Committee as of February 1, 2007. The Committee met four times in 2006. Each member of this Committee is an Independent Director.

 

The principal functions of the Nominating and Corporate Governance Committee, as specified in its charter, include the following:

 

 

 

The Nominating and Corporate Governance Committee, in accordance with its charter and our Restated Certificate of Incorporation, has established criteria and processes for director nominees, including nominations proposed by stockholders. Those criteria and processes are described below in “— Director Nominee Criteria and Process” and “— Stockholder Nominations for Directors.”

 

Robert W. Decherd is our Lead Director and is the Chairman of the Executive Committee. The other members of this Committee are John F. Bergstrom, Thomas J. Falk, and Claudio X. Gonzalez. In 2006, the Executive Committee did not meet and took action by unanimous written consent once with respect to the approval of two subsequent phase projects under our Strategic Cost Reduction Plan pursuant to authority delegated to the Committee by the Board in July 2005.

 

The principal function of this Committee is to exercise the powers of the Board to direct our business and affairs between meetings of the Board.

 

During 2006, the following directors served as members of the Management Development and Compensation Committee of our Board: Abelardo E. Bru, Pastora San Juan Cafferty, Marc J. Shapiro and G. Craig Sullivan.

 

Thomas J. Falk, our Chairman of the Board and Chief Executive Officer, served as a member of the Compensation Committee of the Board of Directors of Kimberly-Clark de Mexico, S.A.B. de C.V. Claudio X. Gonzalez, Chairman of the Board and Managing Director of Kimberly-Clark de Mexico, S.A.B. de C.V., served as a member of our Board in 2006.

 

Since 1996, our By-Laws have provided that a majority of our directors be independent directors (“Independent Directors”). In addition, our Corporate Governance Policies adopted by the Board provide independence standards consistent with the rules and regulations of the SEC and the listing standards of the NYSE. Our Corporate Governance Policies are available in the Investors section of our website at www.kimberly-clark.com.

 

The nominees for director are such that immediately after the election of the nominees to the Board, a majority of all directors holding office will be Independent Directors. Our independent Board helps ensure good corporate governance and strong internal controls. We are in compliance with all corporate governance requirements of the NYSE, the SEC and the Sarbanes-Oxley Act of 2002.

 

The Board has determined that all directors and nominees are Independent Directors, except for Thomas J. Falk and Claudio X. Gonzalez. When making these determinations, the Board considered the following:

 

 

 

The Board of Directors is responsible for approving candidates for Board membership. The Board has delegated the screening and recruitment process to the Nominating and Corporate Governance Committee, in consultation with the Chairman of the Board and Chief Executive Officer. The Nominating and Corporate Governance Committee believes that the criteria for director nominees should ensure effective corporate governance, support our strategies and businesses, account for individual director attributes and the effect of the overall mix of those attributes on the Board’s effectiveness, and support the successful recruitment of qualified candidates for the Board.

 

Qualified candidates for director are those who, in the judgment of the Nominating and Corporate Governance Committee, possess all of the personal attributes and a sufficient mix of the experience attributes described below to assure effective service on the Board. Personal attributes of a Board candidate considered by the Nominating and Corporate Governance Committee include: leadership, ethical nature, contributing nature, independence, interpersonal skills, and effectiveness. Experience attributes of a Board candidate considered by the Nominating and Corporate Governance Committee include: financial acumen, general business experience, industry knowledge, diversity of viewpoints, special business experience and expertise.

 

The Nominating and Corporate Governance Committee may receive recommendations for Board candidates from various sources, including our directors, management and stockholders. In addition, the Nominating and Corporate Governance Committee has retained a search firm to assist the Committee in identifying and recruiting director candidates meeting the criteria specified by the Committee.

 

When a vacancy occurs on the Board, the Nominating and Corporate Governance Committee recommends to the Board a nominee to fill the vacancy. As provided in the Corporation’s Certificate of Incorporation, the Board elects a new director when a vacancy occurs between Annual Meetings of Stockholders. The Nominating and Corporate Governance Committee also annually evaluates and recommends to the Board nominees for election as directors at our Annual Meeting of Stockholders.

 

The Nominating and Corporate Governance Committee considers nominees recommended by stockholders as candidates for election to the Board of Directors. A stockholder wishing to nominate a candidate for election to the Board at the Annual Meeting is required to give written notice to the Secretary of the Corporation of his or her intention to make a nomination. The notice of nomination must be received by us not less than 50 days nor more than 75 days prior to the stockholders’ meeting, or if we give less than 60 days notice of the meeting date, the notice of nomination must be received within 10 days after the meeting date is announced. The notice of nomination is required to contain information about both the nominee and the stockholder making the nomination, including information sufficient to allow the Nominating and Corporate Governance Committee to determine if the candidate meets the director nominee criteria described above. We may require that the proposed nominee furnish other information to determine that person’s eligibility to serve as a director. A nomination that does not comply with the above procedure will not be considered for presentation at the Annual Meeting, but will be considered by the Nominating and Corporate Governance Committee for any vacancies arising on the Board between Annual Meetings in accordance with the process described above in “Director Nominee Criteria and Process.” If the proposed amendments to the Corporation’s Restated Certificate of Incorporation, as set forth in Proposal 3 below, are adopted at the Annual Meeting, the notice of nomination must be received by us not less than 75 days nor more than 100 days prior to the stockholders’ meeting, or if we give less than 75 days notice of the meeting date, the notice of nomination must be received within 10 days after the meeting date is announced.

 

Our Board has established a process by which stockholders and other interested parties may communicate with the Board. That process can be found in the Investors section of our website at www.kimberly-clark.com.

 

Stockholders and other interested parties may send written correspondence to our Board in care of our Lead Director:

 

Lead Director
Kimberly-Clark Corporation
P. O. Box 619100
Dallas, Texas 75261-9100

 

Corporate Governance Policies.  The Board of Directors adopted Corporate Governance Policies in 1994, which have been amended from time to time in accordance with changes in rules and regulations and developing governance practices. These policies guide the Corporation and the Board on matters of corporate governance, including director responsibilities, Board committees and their charters, director independence, director qualifications, director compensation and evaluations, director orientation and education, director access to management, Board access to outside financial, business and legal advisors, and management development and succession planning. These policies, which include our director independence standards, are available in the Investors section of our website at www.kimberly-clark.com. Stockholders also may contact Stockholder Services, P.O. Box 612606, Dallas, Texas 75261-2606 or call (972) 281-1522 to obtain a copy of the Corporate Governance Policies without charge.

 

Code of Conduct.  Kimberly-Clark has a Code of Conduct that applies to all of our directors, executive officers and employees, including the chief executive officer, chief financial officer, and the principal accounting officer and controller. The Code of Conduct is available in the Investors section of our website at www.kimberly-clark.com. Stockholders also may contact Stockholder Services, P.O. Box 612606, Dallas, Texas 75261-2606 or call (972) 281-1522 to obtain a copy of the Code of Conduct without charge.

 

Lead Director.  Mr. Decherd served as Lead Director in 2006. The Lead Director chairs executive session meetings of non-management directors and serves as Chairman of the Executive Committee, among other responsibilities. The non-management directors are scheduled to meet in executive session without the presence of management at least quarterly.

 

Committee Authority to Retain Independent Advisors.  Each of the Audit, Management Development and Compensation, and Nominating and Corporate Governance Committees has the authority to retain independent advisors and consultants, with all fees and expenses to be paid by the Corporation.

 

Whistleblower Procedures.  The Audit Committee has established procedures for (1) the receipt, retention and treatment of complaints we receive regarding accounting, internal accounting controls or auditing matters, and (2) the confidential and anonymous submission by our employees and others of concerns regarding questionable accounting or auditing matters. We also maintain a toll-free, around-the-clock Code of Conduct Line which allows our employees and others to voice their concerns anonymously. The whistleblower procedures and information on how to access the line is available in the Investors section of our website at www.kimberly-clark.com.

 

Chief Compliance Officer.  Ronald D. Mc Cray is the Senior Vice President — Law and Government Affairs and Chief Compliance Officer, overseeing our compliance program. He reports to the Audit Committee on the program’s effectiveness, provides periodic reports to the Board, and works closely with various compliance functions to provide coordination and sharing of best practices across the compliance groups.

 

Disclosure Committee.  We have established a disclosure committee composed of members of management to assist in fulfilling our obligations to maintain disclosure controls and procedures, and to coordinate and oversee the process of preparing our periodic securities filings with the SEC.

 

No Executive Loans.  We do not extend loans to our executive officers or directors and do not have any such loans outstanding.

 

Stockholder Rights Plan.  The Board has adopted the following policy statement on stockholder rights plans: “Kimberly-Clark does not have a ‘poison pill’ or stockholder rights plan. If Kimberly-Clark were to adopt a stockholder rights plan, the Board would seek prior stockholder approval of the plan unless, due to timing constraints or other reasons, a majority of independent directors of the Board determines that it would be in the best interests of stockholders to adopt a plan before obtaining stockholder approval. If a stockholder rights plan is adopted without prior stockholder approval, the plan must either be ratified by stockholders or must expire, without being renewed or replaced, within one year. The Nominating and Corporate Governance Committee shall review this policy statement periodically and report to the Board on any recommendations it may have concerning the policy.”

 

Annual Election of Directors.  The Board has recommended to stockholders that directors be elected on an annual basis instead of for staggered terms of three years each. To effect this change, a majority of the shares outstanding must vote in favor. See Proposal 3 below.

 

Majority Voting for Election of Directors.  In September 2006, the Board amended the Corporation’s By-Laws to provide that, in uncontested elections, directors will be elected by a majority vote rather than by a plurality. If an incumbent director does not receive a majority of votes, the director is required to tender his or her resignation for consideration by the Board. Our By-Laws are available in the Investors section of our website at www.kimberly-clark.com.

 

Charitable Contributions.  The Nominating and Corporate Governance Committee has adopted guidelines for review and approval of charitable contributions by us and any foundation we control to organizations or entities with which a member of the Board of Directors or an executive officer is or may be affiliated.

 

PROPOSAL 1. ELECTION OF DIRECTORS

 

The Board of Directors is divided into three classes, as required by our Restated Certificate of Incorporation (the “Charter”). Directors of one class are elected each year for a term of three years. As of the date of this proxy statement, the Board of Directors consists of thirteen members, including James M. Jenness who was elected to the Board by the Board of Directors as of February 1, 2007. Five of the directors have terms which expire at this year’s Annual Meeting (Class of 2007), four have terms which expire at the 2008 Annual Meeting (Class of 2008) and four have terms which expire at the 2009 Annual Meeting (Class of 2009).

 

Proposal 3 below sets forth the recommendation of the Board to have directors elected on an annual basis instead of for three-year terms. If that proposal is approved by stockholders, then beginning with the Annual Meeting in 2008, new directors, and incumbent directors whose terms are expiring, will be elected annually for one-year terms.

 

The three nominees for director set forth on the following pages are proposed to be elected at this year’s Annual Meeting to serve for a term to expire at the 2010 Annual Meeting of Stockholders (Class of 2010) and until their successors are elected and have qualified. Should any nominee become unable to serve, proxies may be voted for another person designated by management. All nominees have advised us that they will serve if elected. The remaining eight directors will continue to serve as directors for the terms set forth on the following pages.

 

Both Pastora San Juan Cafferty and Claudio X. Gonzalez have announced that they do not intend to stand for re-election to the Board of Directors when their current terms expire at the Annual Meeting of Stockholders on April 26, 2007. Ms. Cafferty and Mr. Gonzalez will continue to serve as directors until the Annual Meeting.

 

The names of the nominees for the Class of 2010 and of the other directors continuing in office, their ages as of the date of the Annual Meeting, the year each first became a director, their principal occupations during at least the past five years, other directorships held by each as of February 28, 2007 and certain other biographical information are set forth on the following pages by Class, in the order of the next Class to stand for election.

 

NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS

 

For a Three-Year Term Expiring at the

2010 Annual Meeting of Stockholders

(Class of 2010)

 

James M. Jenness, 60, Director since February 2007

 

Chairman of the Board, Kellogg Company

 

Mr. Jenness was elected Chairman of the Board of Kellogg Company in 2005. He also served as Chief Executive Officer of Kellogg from 2004 through 2006. Mr. Jenness was Chief Executive Officer of Integrated Merchandising Systems LLC, a market leader in outsource management for retail promotion and branded merchandising, from 1997 to 2004. He served in various positions of increasing responsibility at Leo Burnett Company, Kellogg’s major advertising agency partner, from 1974 to 1997, including as Vice Chairman, Chief Operating Officer and Director. He is a member of the board of directors of Grocery Manufacturers of America, Children’s Memorial Hospital and the Mercy Home for Boys and Girls. He also

serves on the DePaul University College of Commerce Advisory Council, is a member of DePaul’s Board of Trustees and is co-trustee of the W. K. Kellogg Foundation Trust.

 

Linda Johnson Rice, 49, Director since 1995

 

President and Chief Executive Officer, Johnson Publishing Company, Inc.

 

Mrs. Johnson Rice has been President and Chief Executive Officer of Johnson Publishing Company, Inc., a multi-media company, since 2002. She joined that company in 1980, became Vice President in 1985 and was elected President and Chief Operating Officer in 1987. Mrs. Johnson Rice is a director of Bausch & Lomb Incorporated, MoneyGram International, Inc. and Omnicom Group, Inc.

 

Marc J. Shapiro, 59, Director since 2001

 

Retired Vice Chairman, J. P. Morgan Chase & Co.

 

Mr. Shapiro retired in 2003 as Vice Chairman of J. P. Morgan Chase & Co., a financial services company. Before becoming Vice Chairman of J. P. Morgan Chase & Co. in 1997, Mr. Shapiro was Chairman, President and Chief Executive Officer of Chase Bank of Texas, a wholly-owned subsidiary of J. P. Morgan Chase & Co., from 1989 until 1997. He now serves as a consultant to J. P. Morgan Chase & Co. and as non-executive Chairman of its Texas operations. Mr. Shapiro is a member of the board of directors of Burlington Northern Santa Fe Corporation and The Mexico Fund, and a trustee of Weingarten Realty Investors. He also serves on the boards of M.D. Anderson Cancer Center, Baylor College of Medicine, Rice University and BioHouston.

 

MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE

 

Term Expiring at the

2008 Annual Meeting of Stockholders

(Class of 2008)

 

John R. Alm, 61, Director since February 2006

 

Retired President and Chief Executive Officer, Coca-Cola Enterprises Inc.

 

Mr. Alm retired as President and Chief Executive Officer of Coca-Cola Enterprises Inc., a beverage company, in December 2005. He had been Chief Executive Officer since January 2004 and President and Chief Operating Officer since January 2000. Mr. Alm joined Coca-Cola Enterprises Inc. in 1992 and held numerous other senior management positions until his retirement. He is a member of the board of directors of Washington Group International, Inc.

 

John F. Bergstrom, 60, Director since 1987

 

Chairman and Chief Executive Officer, Bergstrom Corporation

 

Mr. Bergstrom has served as Chairman and Chief Executive Officer of Bergstrom Corporation, Neenah, Wisconsin, for more than the past five years. Bergstrom Corporation owns and operates automobile sales and leasing businesses and a credit life insurance company in Wisconsin. Mr. Bergstrom is a director of Midwest Air Group, Inc., the Wisconsin Energy Corporation and its wholly-owned subsidiary Wisconsin Electric Power Company. He also is a member of the board of trustees of Marquette University and the Theda Clark Hospital Foundation, and a member of the board of directors and executive committee of Green Bay Packers, Inc.

Robert W. Decherd, 56, Director since 1996

 

Chairman of the Board, President and Chief Executive Officer, Belo Corp.

 

Mr. Decherd has served as Chairman of the Board and Chief Executive Officer of Belo Corp., a broadcasting and publishing company, since 1987. Mr. Decherd became President of that company in 1994, and previously served as President from 1985 through 1986. He has been a director of Belo Corp. since 1976. Mr. Decherd is a member of the Advisory Council for the Harvard University Center for Ethics and the Board of Visitors of the Columbia Graduate School of Journalism. During the past decade, he has held appointments to Presidential and Federal Communications Commission commissions concerned with public policy matters related to the television industry.

 

G. Craig Sullivan, 67, Director since 2004

 

Retired Chairman and Chief Executive Officer, The Clorox Company

 

Mr. Sullivan retired as Chairman and Chief Executive Officer of The Clorox Company, a consumer products company, in December 2003. He joined The Clorox Company in 1971 and held a number of senior sales and management positions during his career, culminating in his election as Chief Executive Officer and Chairman of the Board in 1992. Mr. Sullivan serves as a director of Mattel, Inc., The Goodyear Tire & Rubber Company and The American Ireland Fund. He also serves on the capital campaign committee for St. Anthony’s Foundation in San Francisco.

 

Term Expiring at the
2009 Annual Meeting of Stockholders
(Class of 2009)

 

Dennis R. Beresford, 68, Director since 2002

 

Ernst & Young Executive Professor of Accounting, University of Georgia

 

Mr. Beresford has served as Ernst & Young Executive Professor of Accounting at the J.M. Tull School of Accounting, Terry College of Business, University of Georgia since 1997. From 1987 to 1997, he served as the Chairman of the Financial Accounting Standards Board. Prior to that, Mr. Beresford held various positions at the accounting firm of Ernst & Young. He serves on the board of directors and audit committees of Legg Mason, Inc. and the Federal National Mortgage Association (Fannie Mae).

 

Abelardo E. Bru, 58, Director since 2005

 

Retired Vice Chairman, PepsiCo, Inc.

 

Mr. Bru retired as Vice Chairman of PepsiCo, a food and beverage company, in 2005. He joined PepsiCo in 1976. Mr. Bru served from 1999 to 2003 as President and Chief Executive Officer and in 2003 to 2004 as Chief Executive Officer and Chairman of Frito-Lay Inc., a division of PepsiCo. Prior to leading Frito-Lay, Mr. Bru led PepsiCo’s largest international business, Sabritas Mexico, as President and General Manager from 1992 to 1999. Mr. Bru is a member of the board of directors of Office Depot, Inc. and the Education is Freedom Foundation.

Thomas J. Falk, 48, Director since 1999

 

Chairman of the Board and Chief Executive Officer

 

Mr. Falk was elected Chairman of the Board and Chief Executive Officer of the Corporation in 2003 and President and Chief Executive Officer in 2002. Prior to that, he served as President and Chief Operating Officer since 1999. Mr. Falk previously had been elected Group President-Global Tissue, Pulp and Paper in 1998, where he was responsible for our global tissue businesses. Earlier in his career, Mr. Falk had responsibility for our North American Infant Care, Child Care and Wet Wipes businesses. Mr. Falk joined the Corporation in 1983 and has held other senior management positions in the Corporation. He also serves on the board of directors of Centex Corporation, Grocery Manufacturers of America, Inc. and the University of Wisconsin Foundation, and serves as a governor of the Boys & Girls Clubs of America.

 

Mae C. Jemison, M.D., 50, Director since 2002

 

President, BioSentient Corporation

 

Dr. Jemison is founder and President of The Jemison Group, Inc., a technology consulting company, and BioSentient Corporation, a medical devices company. She chairs The Earth We Share international science camp. Dr. Jemison served as a professor of Environmental Studies at Dartmouth College from 1995 to 2002. From 1987 to 1993, she served as a National Aeronautics and Space Administration (NASA) astronaut. Dr. Jemison serves on the board of directors of Scholastic Corporation, Valspar Corporation, Gen-Probe Incorporated and The Dorothy Jemison Foundation for Excellence and is a member of the National Academy of Sciences’ Institute of Medicine. She is also the Chair of the State of Texas Biotechnology and Life Science Cluster Report and the Presiding Officer of the State of Texas Product Development and Small Business Incubator Board.

 

Directors who are not officers or employees of the Corporation or any of its subsidiaries, affiliates or equity companies are “Outside Directors” for compensation purposes. Our Outside Directors are compensated for their services under our Outside Directors’ Compensation Plan which we adopted in 2003. Our objectives for outside director compensation are to remain competitive with the compensation paid to outside directors of comparable companies, to keep pace with changes in best corporate governance practices in director compensation, to attract qualified candidates for Board service, and to reinforce our practice of encouraging stock ownership by our directors. In 2004, to assist the Nominating and Corporate Governance Committee in assessing and determining appropriate, competitive outside director compensation, the Committee engaged Mercer Human Resource Consulting, an outside compensation consultant. Based on that assessment, in 2004 the Committee recommended to our Board, and our Board approved, the outside director compensation for 2005 and 2006.

 

2006 Compensation

 

In 2006, each Outside Director received (1) an annual cash retainer of $70,000 payable pro rata quarterly in advance and (2) a grant of 2,000 restricted share units. Outside Directors who join our Board during a calendar year receive a pro-rated portion of the annual retainer and grant of restricted share units. On January 2, 2006, Outside Directors who were also chairmen of the Audit Committee, Management Development and Compensation Committee or Nominating and Corporate Governance Committee each received an additional grant of 300 restricted share units, and the Lead Director received an additional grant of 500 restricted share units. In addition, we reimbursed Outside Directors for expenses incurred as a result of attending Board or committee meetings.

 

Restricted share units are not shares of our common stock. Rather, restricted share units represent the right to receive an amount, payable in shares of our common stock, equal to the value of a specified

number of shares of our common stock within 90 days following the restricted period. The restricted period for the restricted share units begins on the date of grant and expires on the date the Outside Director retires from or otherwise terminates service on our Board. During the restricted period, restricted share units may not be sold, assigned, transferred or otherwise disposed of, or mortgaged, pledged or otherwise encumbered. Outside Directors also receive additional restricted share units equivalent in value to the dividends that would have been paid to them if the restricted share units granted to them were shares of our common stock.

 

Outside Director Compensation

 

The following table sets forth the compensation paid to each Outside Director in 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other than the cash retainer, grants of restricted share units, and the other compensation described above, no Outside Director received any compensation or perquisites from us for services as a director in 2006.

 

A director who is not an Outside Director does not receive any compensation for services as a member of our Board or any committee, but is reimbursed for expenses incurred as a result of the services.

 

2007 Compensation

 

In 2006, the Nominating and Corporate Governance Committee, with the assistance of Mercer Human Resource Consulting, evaluated Outside Director compensation to assess whether it still met the objectives set forth above. The Committee then recommended to the Board and the Board approved changes in compensation for Outside Directors. Beginning in 2007, Outside Directors receive (1) an annual cash retainer of $80,000 payable pro rata quarterly in advance and (2) a grant of restricted share units with a grant date value of $130,000 based on the closing price of the Corporation’s common stock on the first business day of the year. The Chairmen of the Audit, Management Development and Compensation, and Nominating and Corporate Governance Committees each receive an additional grant of restricted share units with a grant date value of $20,000, and the Lead Director receives an additional grant of restricted share units with a grant date value of $30,000.

 

The Board of Directors unanimously recommends a vote FOR the election of the three nominees for director.

 

The Audit Committee of the Board of Directors has selected Deloitte & Touche LLP as the independent registered public accounting firm to audit the financial statements of the Corporation for 2007, subject to ratification by the stockholders. If the stockholders do not approve the selection of Deloitte & Touche LLP, the selection of other independent auditors will be considered by the Audit Committee. Deloitte & Touche LLP have been our independent auditors since 1928.

 

Representatives of Deloitte & Touche LLP are expected to be present at the Annual Meeting with the opportunity to make a statement if they desire to do so, and will be available to respond to questions.

 

The aggregate fees (excluding value added taxes) billed to the Corporation and its subsidiaries for the fiscal years ended December 31, 2006 and 2005 by our principal accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu and their respective affiliates (collectively, “Deloitte”), were:

 

 

 

 

 

All audit and non-audit services provided by Deloitte to the Corporation must be pre-approved by the Audit Committee. The Audit Committee utilizes the following procedures in pre-approving all audit and non-audit services provided by Deloitte. At or before the first meeting of the Audit Committee each year, our Vice President and Controller prepares a detailed memorandum outlining the audit services to be provided by Deloitte together with the related fees. In addition, our business and staff units prepare individual requests for non-audit services to be provided by Deloitte during the year. These requests describe the services to be provided, the estimated cost of such services, why the requested service is not inconsistent with the independence rules of the Securities and Exchange Commission, and why it is appropriate to have Deloitte provide such services. Our Vice President and Controller reviews and summarizes the individual non-audit service requests and fees (separately describing audit-related services, tax services and other services) to be provided by Deloitte. Before each subsequent meeting of the Committee, the Vice President and Controller prepares an additional memorandum that includes updated information regarding approved services and highlights any new audit and non-audit services to be provided by Deloitte. All new non-audit services to be provided are described in individual requests for services. The Audit Committee reviews these memoranda and the individual requests for non-audit services and approves the services described therein if such services are acceptable to the Committee.

 

To ensure prompt handling of unexpected matters, the Committee delegates to the Chairman of the Audit Committee the authority to amend or modify the list of audit and non-audit services and fees; provided, however, that such additional or amended services may not affect Deloitte’s independence under applicable Securities and Exchange Commission rules. The Chairman reports action taken to the Audit Committee at its next Committee meeting.

 

All Deloitte services and fees in 2006 were pre-approved by the Audit Committee.

 

The Board of Directors unanimously recommends a vote FOR approval of this selection.

 

Our Board of Directors is proposing, for approval by our stockholders, an Amended and Restated Certificate of Incorporation (the “Proposed Certificate”) that incorporates proposed amendments to certain provisions of our existing Restated Certificate of Incorporation (the “Existing Certificate”). A stockholder proposal to declassify the Board of Directors was included in the 2006 Proxy Statement and received favorable votes from a majority of the shares of the common stock outstanding and entitled to vote. The Nominating and Corporate Governance Committee of the Board of Directors and the full Board have carefully considered the advantages and disadvantages of maintaining a classified board structure and, as announced on September 14, 2006, have determined that it is an appropriate time to propose amendments to the Existing Certificate to declassify the Board as described below. The Board believes that annual election of directors will enhance accountability to our stockholders and further our goal of maintaining best practices in corporate governance. In conjunction with the proposal to declassify the Board, we also are proposing an amendment to eliminate the provision in the Existing Certificate that allows stockholders to remove directors only for cause and certain other technical changes.

 

Article VIII of the Existing Certificate provides that the Board is divided into three classes, as nearly equal in number as possible, with members of each class serving three-year terms. In addition, Article VIII provides that directors can be removed from the Board only “for cause.” In order to implement annual election of directors and to change the manner in which directors can be removed from the Board, the Existing Certificate must be amended. If stockholders approve the amendments, current directors,

including those re-elected to three-year terms at the 2007 Annual Meeting, will continue to serve the remainder of their elected terms and, beginning with the first Annual Meeting following the stockholders’ approval of the amendments, the 2008 Annual Meeting of Stockholders, directors will be elected annually so that by the 2010 Annual Meeting of Stockholders, all directors will be elected annually.

 

Under Delaware corporate law, stockholders may be limited to removing directors only for cause only if the corporation has a classified board structure. For Delaware corporations without a classified board, the holders of a majority of the voting stock are entitled to remove directors with or without cause. Accordingly, in conjunction with the proposal to declassify the Board, we also are proposing to amend the Existing Certificate to eliminate the provision that allows stockholders to remove directors only for cause. Under Delaware law, directors cannot be removed by other directors, and the proposed amendment will not change this.

 

The Board has unanimously adopted a resolution approving, subject to stockholder approval, and declaring the advisability of, an amendment to Article VIII of the Existing Certificate to declassify the Board and to allow for directors to be removed by the stockholders with or without cause. The amendment does not change the present number of directors, and the directors will retain the authority to change that number and to fill any vacancies or newly created directorships.

 

In connection with the proposed amendments to the Existing Certificate discussed above, the Board reviewed the Existing Certificate for other amendments that may be warranted at this time. As a result of this review, the Board is proposing amendments to the Existing Certificate to (i) change the deadline for receipt of stockholder nominations to conform with the deadline for stockholder proposals contained in the By-Laws of the Corporation, (ii) provide that the number of directors shall be authorized from time to time by the affirmative vote of a majority of the entire Board without specifying a minimum and maximum number of directors, (iii) eliminate references to the eliminated Series A Junior Participating Preferred Stock, and (iv) make certain other technical changes.

 

The full text of the Proposed Certificate is attached as Appendix A to this proxy statement, with additions indicated by underlining and deletions indicated by strikeout. All the proposed amendments, including the proposed technical changes, are included in the Proposed Certificate.

 

To be approved, the proposed amendments require an affirmative vote by the holders of the majority of our common stock outstanding and entitled to vote on the amendments. If approved, these amendments will become effective upon the filing of the Proposed Certificate with the Secretary of State of the State of Delaware, which we would do promptly after the Annual Meeting.

 

The Board of Directors unanimously recommends a vote FOR approval of this proposal.

 

Mr. Nick Rossi, P.O. Box 249, Boonville, California 95415, owning 3,000 shares of our common stock, has given notice that he or his designee intends to present for action at the Annual Meeting the resolution set forth below. The Board of Directors opposes this stockholder proposal for the reasons set forth below the proposal.

 

Proxies solicited by management will be voted against the stockholder proposal below unless stockholders specify a contrary choice in their proxies.

 

In accordance with applicable rules of the Securities and Exchange Commission, we have set forth Mr. Rossi’s proposal below:

 

4 — Adopt Simple Majority Vote

 

RESOLVED:  Shareholders recommend adoption of a simple majority shareholder vote requirement applicable to the greatest number of shareholder voting issues possible. This proposal is focused on adoption of the lowest possible majority vote requirements to the fullest extent possible. This proposal is not intended to unnecessarily limit our Board’s judgment in crafting the requested change to the fullest extent possible in accordance with applicable laws and existing governance documents.

 

Nick Rossi, P.O. Box 249, Boonville, Calif. 95415 sponsors this proposal.

 

67% Yes-Vote

 

This topic won a 67% yes-vote average at 19 major companies in 2006. The Council of Institutional Investors www.cii.org formally recommends adoption of this proposal topic.

 

End Potential Frustration of the Shareholder Majority

 

Our current rule allows a small minority to frustrate the will of our shareholder majority. For example, in requiring an 80%-vote to make certain key governance changes at our company, if our vote is 79% yes and only 1% vote no — only 1% could force their will on our overwhelming 79% majority.

 

On September 14, 2006 our Board took important steps forward in higher standards for our corporate governance and this proposal is intended to continue this trend. Our Board amended our by-laws to implement a majority voting standard for the election of directors. Our Board also voted to submit a management proposal to shareholders that would establish annual election of each director.

 

Under the new majority vote standard, which will be used at our April 26, 2007 annual meeting, directors in uncontested elections will be elected by a majority of votes cast. Shareholders will vote at our 2007 Annual Meeting on a company proposal for annual election of each director.

 

Both of these higher governance standards were recommended in 2006 shareholder proposals by the Carpenters pension funds and Nick Rossi respectively. These proposals won 60% and 78% of the yes and no votes at our 2006 annual meeting.

 

“Today’s [September 14, 2006] actions provide shareholders with a stronger voice in the election of their directors,” said Thomas J. Falk, Kimberly-Clark Chairman and Chief Executive Officer. “These changes underscore the board’s commitment to sound corporate governance principles and are in keeping with recent best practices.”

 

To continue this trend of adopting recent best practices you are encouraged to vote yes for simple majority vote.

 

Adopt Simple Majority Vote
Yes on 4

 

The Board of Directors unanimously recommends a vote AGAINST this proposal for the reasons set forth below.

 

This proposal, which does not pertain to the election of directors, calls for the elimination of special provisions in the Corporation’s Restated Certificate of Incorporation that require more than a simple majority vote for certain actions to be approved. While most proposals submitted to a vote of our stockholders can be adopted by a simple majority vote, certain actions require more than a simple majority vote, including: (i) a merger, consolidation or sale of all or substantially all assets of the

Corporation; (ii) business combinations not approved by continuing directors or at a price not “fair” to our stockholders; (iii) amendments of the provisions in the Restated Certificate of Incorporation relating to actions of stockholders without a meeting and the calling of special meetings of stockholders; and (iv) removal of directors.

 

Recently, Kimberly-Clark has taken significant actions to continue its implementation of best corporate governance practices:

 

 

These actions clearly underscore the Board’s commitment to responsible corporate governance principles and provide our stockholders with a strong voice in the governance of the Corporation and election of our directors. Still, the Board believes that it is in the best interests of the Corporation and its stockholders to maintain the supermajority voting requirements for certain important matters. When our stockholders adopted these supermajority voting provisions, a primary consideration was protecting all stockholders against self-interested actions by one or more large stockholders.

 

The Board is committed to act in the best interests of the Corporation and all its stockholders. These supermajority voting provisions encourage persons making a hostile takeover bid to negotiate with the Board and help assure terms that are in the best interests of all stockholders. For example, these supermajority voting provisions help provide protection for all stockholders in the event of a hostile bid by one or more large stockholders to take over the Corporation at a price the Board does not believe is fair.

 

Therefore, the Board believes it is prudent to maintain protections that require the approval of a substantial majority of stockholders before changing or eliminating important governance rules that serve the best interests of all Kimberly-Clark stockholders.

 

The Board unanimously recommends that the stockholders vote AGAINST the adoption of this proposal.

 

The Comptroller of the City of New York, as custodian and trustee of the New York City Employees’ Retirement System, the New York City Police Pension Fund, the New York City Fire Department Pension Fund, and the New York City Teachers’ Retirement System and custodian of the New York City Board of Education Retirement System, 1 Centre Street, New York, New York 10007-2341 (the “Funds”), owning an aggregate amount of 1,476,456 shares of our common stock, has given notice that he intends to present for action at the Annual Meeting the resolution set forth below. The Board of Directors opposes this stockholder proposal for the reasons set forth below the proposal.

 

Proxies solicited by management will be voted against the stockholder proposal below unless stockholders specify a contrary choice in their proxies.

 

In accordance with applicable rules of the Securities and Exchange Commission, we have set forth the Fund’s proposal below:

 

KIMBERLY-CLARK CORPORATION

 

GLOBAL HUMAN RIGHTS STANDARDS

 

 

Submitted by William C. Thompson, Jr., Comptroller, City of New York, on behalf of the Boards of Trustees of the New York City Pension Funds

 

Whereas, Kimberly-Clark Corporation currently has overseas operations, and

 

Whereas, reports of human rights abuses in the overseas subsidiaries and suppliers of U.S.-based corporations has led to an increased public awareness of the problems of child labor, “sweatshop” conditions, and the denial of labor rights in U.S. corporate overseas operations, and

 

Whereas, corporate violations of human rights in these overseas operations can lead to negative publicity, public protests, and a loss of consumer confidence which can have a negative impact on shareholder value, and

 

Whereas, a number of corporations have implemented independent monitoring programs with respected human rights and religious organizations to strengthen compliance with international human rights norms in subsidiary and supplier factories, and

 

Whereas, many of these programs incorporate the conventions of the International Labor Organization (ILO) on workplace human rights, and the United Nations’ Norms on the Responsibilities of Transnational Corporations with Regard to Human Rights (“UN Norms”), which include the following principles:

 

 

Whereas, independent monitoring of corporate adherence to these internationally recognized principles is essential if consumer and investor confidence in our company’s commitment to human rights is to be maintained,

 

Therefore, be it resolved that the shareholders request that the company commit itself to the implementation of a code of conduct based on the aforementioned ILO human rights standards and United Nations’ Norms on the Responsibilities of Transnational Corporations with Regard to Human Rights, by its international suppliers and in its own international production facilities, and commit to a program of outside, independent monitoring of compliance with these standards.

 

The Board of Directors unanimously recommends a vote AGAINST this proposal for the reasons set forth below.

 

Although the Board agrees with the principles expressed by the proponent relative to human rights in employment, the Board does not believe that adoption of this proposal is in the best interests of the Corporation and our stockholders. Stockholders may be interested to know that the Corporation has received a similar proposal for the past two years, which has received support from less than eight percent of the votes cast each year.

 

Kimberly-Clark has a long-standing and well-recognized record of support for the rights of our employees with emphasis placed on the importance of their health and safety. The Corporation unequivocally prohibits discrimination on the basis of race, color, sex, sexual orientation, age, religion, national origin, disability and other categories. We are committed to conducting business according to the highest ethical standards and in full compliance with applicable laws in every country in which we operate. We hold managers from all of our businesses worldwide responsible for overseeing the proper implementation of these policies, and for being knowledgeable about all laws and regulations related to employees’ human rights. Suppliers, vendors and contractors of the Corporation are expected to meet similar standards.

 

Our Code of Conduct, as described above in “Corporate Governance — Other Corporate Governance Matters — Code of Conduct,” provides a uniform set of workplace standards and principles that apply to the worldwide operations of the Corporation and its affiliates. We have a Code of Conduct hotline for employees to report violations anonymously. We thoroughly investigate alleged violations.

 

Our company culture is characterized by cooperative relationships and high employee involvement. All Kimberly-Clark manufacturing facilities uphold established principles and unifying practices that guide our operations. We also hold these facilities accountable for applying the same standards of safety, human resources, quality, ethics, cost, asset management and customer service. In facilities where union representation exists, we work to build partnerships that meet our collective needs. In the United States, approximately 19.5 percent of the work force is represented by unions. We believe that our relationship with our employees is excellent.

 

The Corporation’s policies and procedures have consistently reflected our position on human rights in the workplace. Our purchase order terms and conditions require our suppliers to warrant that all services have been performed and that all goods shipped to the Corporation have been produced in compliance with all applicable laws, standards or codes. We will not knowingly conduct business with vendors that employ child, prison, indentured or bonded labor, or use corporal punishment or other forms of mental or physical coercion as a form of discipline in their operations.

 

The Board believes the Corporation’s Code of Conduct and our business practices address the substantive areas covered by the proposal, and that our existing monitoring processes effectively ensure compliance with the business principles and human rights standards advocated by the proponent. In addition, the Corporation’s compliance with applicable laws is periodically reviewed by federal, state and local government agencies that are empowered to perform reviews. The Board believes that third party monitoring of the Corporation and our suppliers would require expenditure beyond any benefit which reasonably could be expected, and is not in the best interests of our stockholders.

 

The Board unanimously recommends that the stockholders vote AGAINST the adoption of this proposal.

 

The following stockholders have given notice that they intend to present for action at the Annual Meeting the resolution set forth below: Domini Social Investments, 536 Broadway, 7th Floor, New York, New York 10012-3915; The Basilian Fathers of Toronto, 15015 Piedmont, Detroit, Michigan 48223; Calvert Asset Management Company, Inc., 4550 Montgomery Avenue, Bethesda, Maryland 20814; the Camilla Madden Charitable Trust, 1257 East Siena Heights Drive, Adrian, Michigan 49221-1793; Green Century Capital Management, Inc., 114 State Street, Suite 200, Boston, Massachusetts 02109; the Milwaukee Province of the School Sisters of Notre Dame, 13105 Watertown Plank Road, Elm Grove, Wisconsin 53122-2291; and Vanderryn International Corporation and the Vanderryn Trading Corporation, 8112 Whittier Boulevard, Bethesda, Maryland 20817. These stockholders own shares of Kimberly-Clark common stock ranging from 55 to 107,664 shares for an aggregate amount of 212,236 shares. The Board of Directors opposes this stockholder proposal for the reasons set forth below the proposal.

 

Proxies solicited by management will be voted against the stockholder proposal below unless stockholders specify a contrary choice in their proxies.

 

In accordance with applicable rules of the Securities and Exchange Commission, we have set forth the stockholders’ proposal below:

 

Sustainable Forestry

 

Whereas:

 

Kimberly-Clark is a leader in the global forest products industry and the world’s largest manufacturer of tissue products, using more than 3 million metric tons of virgin fiber, annually.

 

Kimberly-Clark sources 22% of its virgin wood pulp from Canada’s Boreal forest, the largest remaining ancient forest left in North America. As one of the world’s largest storehouses of carbon, preservation of the Boreal is critical to mitigating climate change. The Boreal is home to nearly 50% of North America’s bird species and contains the largest remaining populations of woodland caribou and wolverines.

 

Our company has publicly stated that its “corporate policy prohibits the use of wood fiber from virgin rainforests or from designated ecologically significant old growth areas, including ... temperate rainforests in coastal British Columbia.” Greenpeace recently reported that our company sources fiber from the coastal temperate rainforests of British Columbia, in violation of this policy. In response, Kimberly-Clark now acknowledges that it has “overstated” its actual practices.

 

Kimberly-Clark can ensure access to a sustainable supply of fiber by requiring suppliers to adhere to the Forest Stewardship Council (FSC) certification system. FSC is the only independent forest certification system in the world accepted by the conservation, aboriginal and business communities. FSC is the world’s largest and fastest growing certification system, by hectares.

 

One-half of the certified fiber procured by Kimberly-Clark is certified to the Sustainable Forest Initiative, developed by the American Forest & Paper Association, a forest industry trade association. Credibility is the most important criterion for the selection of any certification scheme.

 

Our company required all of its global fiber suppliers to adhere to one of the five forest certification systems by the end of 2005, a goal it has yet to meet. By accepting virtually every available standard, our company fails to set any standard at all.

 

Major banks, including JP Morgan Chase and Bank of America, have policies limiting or prohibiting investment in companies that negatively impact ancient forests. JP Morgan Chase’s environmental policy expresses a preference for FSC certification when financing forestry projects.

 

RESOLVED:  Shareholders request the Board to prepare a report, at reasonable cost and omitting proprietary information, by November 1, 2007, assessing the feasibility of phasing out our company’s use of non-FSC certified fiber within 10 years.

 

Supporting Statement:

 

Proponents believe that our company’s current practices present serious risks to long-term shareholder value. Kimberly-Clark should develop policies to ensure a long-term sustainable supply of raw materials and mitigate reputational risks by procuring fiber certified using credible standards.

 

We believe a thorough feasibility study should discuss the Company’s goals and timeframes with respect to:

 

 

 

The study should consider Kimberly-Clark’s role in the marketplace, and assess the potential impact of Kimberly-Clark’s purchasing practices on the availability of FSC-certified fiber.

 

The Board of Directors unanimously recommends a vote AGAINST this proposal for the reasons set forth below.

 

Kimberly-Clark’s Dedication to Sustainable Forestry

 

Kimberly-Clark has a long history of responsible use of natural resources. We are committed to the promotion of sustainable forestry and frequently review our sustainable forestry policies and practices to improve our efforts to influence sustainable forestry practices on a global level. We highlight our dedication to sustainable forestry on our website, which includes our annual sustainability report, and we will continue to communicate with our stockholders and the public about our environmental conservation work.

 

The Proposal Has Been Substantially Implemented

 

The stockholder proposal requests our Board to prepare a report, at reasonable cost and omitting proprietary information, by November 1, 2007, assessing the feasibility of phasing out our use of fiber from sources not certified by the Forest Stewardship Council (“FSC”) within 10 years. The Corporation believes it has already substantially implemented this proposal. In December 2006, we engaged Hawkins Wright Ltd., an independent consulting firm and leading independent expert for market pulp supply data, to assess the availability of FSC-certified fiber in areas where we purchase our wood fiber, and the feasibility of phasing out our use of non-FSC certified fiber within 10 years. Once the study is complete, we will develop a report on the results of the study, including an assessment of the feasibility of phasing out our use of non-FSC certified fiber within 10 years, and make this report available to our stockholders, well ahead of the November 1, 2007 deadline included in the proposal.

 

The scope of the feasibility study will include:

 

 

 

Availability and Use of FSC-Certified Fiber

 

The stockholder proposal recommends that Kimberly-Clark only use fiber certified by FSC and not fiber certified by any of the other forest certification systems recognized in our policy. This recommendation is not practical today and the feasibility study will help us assess its practicality in the future.

 

Our use of FSC-certified fiber depends on meeting the following requirements:

 

 

 

 

We purchase FSC-certified fiber to the extent that it is available and meets our product performance and fiber cost requirements. However, the global supply of FSC-certified fiber currently is not sufficient to allow us to rely exclusively on FSC-certified fiber. Based on data from the United Nations Food and Agriculture Organization and publicly available forest certification data bases, as of October 2006, approximately 7.3 percent of the world’s forests were certified, including approximately two percent certified by FSC. None of the internationally recognized forest certification systems has a dominant share of the market for certified fiber.

 

Use of Recycled Fiber

 

The proposal also recommends increasing our use of recycled fiber in both consumer and commercial products as a means to reduce reliance on virgin materials. We have conducted extensive research regarding the various types of fiber, and we are a leader in the industry in the use of recycled fiber in our products. Recycled fiber currently accounts for approximately 29 percent of fiber use for Kimberly-Clark and its subsidiaries and equity affiliates.

 

All the leading premium consumer tissue brands in North America contain primarily virgin fiber. The main reason is consumer preference for certain product attributes, like strength and softness, which decline as the amount of recycled fiber increases. Consumers have voiced this preference through their purchases. Our studies show that consumer tissue products containing recycled fiber accounted for only 1.7 percent of all dollars spent on branded consumer tissue products in the United States in 2006.

 

Away-from-home tissue products often contain a higher percentage of recycled fiber. Some Kimberly-Clark away-from-home tissue products, including a line of Scott branded facial tissue, bath tissue and paper towel products, contain 100 percent recycled fiber. We continue to examine the use of recycled fiber in our products and to seek ways to reduce our need for virgin fiber.

 

Stockholder Communication and Next Steps

 

Representatives of Kimberly-Clark met with representatives of the proponents of the proposal in November 2006 to discuss their concerns and share our sustainable forestry policies and practices and our plans to conduct the requested feasibility study.

 

When we receive the results of the feasibility study, we should have a clearer view of the expected availability of FSC-certified fiber to Kimberly-Clark over the next 10 years. The study should provide us an understanding of the extent to which we could increase our purchases of FSC-certified fiber over time. Following an analysis of the study results, we will develop a report that is communicated to our stockholders.

 

In summary, the Board believes the stockholder proposal has been substantially implemented. Therefore, additional action on this proposal is not necessary and not in the best interests of our stockholders.

 

The Board unanimously recommends that the stockholders vote AGAINST the adoption of this proposal.

 

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

 

The following table sets forth information as of December 31, 2006, unless otherwise indicated, regarding the number of shares of our common stock beneficially owned by each director and nominee, by each executive officer named in “Executive Compensation” below (collectively, the “named executive officers”), and by all directors, nominees and executive officers as a group.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To further align management’s financial interests with those of the stockholders, the Corporation maintains stock ownership guidelines for approximately 400 key managers, including the named executive officers (see “Part Four — Executive Compensation — Compensation Discussion and Analysis — Target Stock Ownership Guidelines”).

 

The following table sets forth the information, as of December 31, 2006, regarding persons or groups known to us to be beneficial owners of more than five percent of our common stock.

 

 

 

 

 

This Compensation Discussion and Analysis is intended to provide investors with an understanding of our compensation policies and decisions regarding our named executive officers for 2006. Our named executive officers are our Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executive officers. We will discuss and analyze the following topics in this Compensation Discussion and Analysis:

 

 

• Base Salary

 

• Annual Incentives

 

 

• Restricted Share Unit Awards

 

• Stock Option Awards

 

• Timing of Long-Term Equity Grants

 

 

 

Our Management Development and Compensation Committee (the “Committee”) is responsible for establishing and administering our policies governing the compensation of our elected officers, including our named executive officers. For a description of the Committee’s charter and the processes and procedures it follows in considering and determining executive compensation, including the use of compensation consultants, see “Part Two — Corporate Governance Information — Management Development and Compensation Committee” of this proxy statement. The Committee is composed entirely of Independent Directors.

 

In accordance with its charter, the Committee has adopted executive compensation policies that are designed to achieve the following four objectives:

 

 

 

To effect these policies, the Committee has authorized compensation programs that provide for the following elements, each of which is discussed in more detail below:

 

 

As previously discussed in this proxy statement, the Committee engaged The Delves Group as its independent consultant to assist it in determining the appropriate executive officer compensation in 2006 pursuant to the above-described compensation policies. The Delves Group had no other business relationship with the Corporation and received no payments from us other than fees for services to the Committee. See “Part Two — Corporate Governance — Management Development and Compensation Committee” for information about our use of compensation consultants.

 

Peer Groups For Executive Compensation Purposes

 

To ensure that our compensation programs are reasonable and competitive in the marketplace, we compare our programs to those at other companies. To facilitate this comparison, we have developed two peer groups. Both peer groups consist of companies that are similar in size to us and against which we believe we compete for executive talent. We develop our peer groups without consideration of individual company compensation practices, and no company has been included or excluded from our peer groups because they are known to pay above average or below average compensation.

 

Our two peer groups consist of consumer goods companies (the “Consumer Goods Peer Group”) and general industry companies (the “General Industry Peer Group”). In 2006, our Consumer Goods Peer Group consisted of 18 companies. The median annual revenues for this peer group was $16.9 billion, with individual company annual revenues ranging from $4 billion to $67 billion, at the time our 2006 compensation and performance objectives were determined. Also in 2006, our General Industry Peer Group consisted of 37 companies. The median annual revenues for this group was $15.4 billion, with individual company annual revenues ranging from $10 billion to $22 billion, at the time our 2006 compensation and performance objectives were determined.

 

The Committee believes these are appropriate peer groups to evaluate our executive compensation against because they consist of similar global organizations, against whom we compete for executive talent. The peer groups are reviewed periodically by us, the Committee, and the compensation consultants retained by us and the Committee and revised as appropriate to ensure that they continue to represent similar global organizations with which we compete for executive talent in the marketplace. Benchmarking our executive compensation programs against these peer groups helps us and the Committee assess whether the compensation we pay is reasonable and competitive in the marketplace.

 

The following companies were included in our 2006 groups:

 

Consumer Goods Peer Group:

 

 

General Industry Peer Group:

 

 

Total Compensation

 

In setting compensation for our executive officers, including our Chief Executive Officer, the Committee focuses on total annual compensation. For this purpose, total annual compensation consists of annual cash compensation, which as described below includes base salary and an annual performance based bonus, and long-term equity incentive compensation. In setting the total annual compensation of our executive officers, the Committee evaluates both market data provided by the compensation consultants and information on the performance of each executive officer for prior years. In order to remain competitive in the marketplace for executive talent, the target levels for the total annual compensation of our executive officers, including our Chief Executive Officer, are set at or near the median of the peer group comparisons described above. In order to reinforce a “pay for performance” culture, targets for individual executive officers may be set above or below the median depending on the individual’s performance in prior years. The Committee believes that setting target levels at the median, permitting adjustments to targets based on past performance, and providing incentive compensation opportunities that will enable executives to earn above target compensation if they perform well, is consistent with the objectives of our compensation policies described above. In particular, the Committee believes that this approach enables us to attract and retain skilled and talented executives to guide and lead our businesses and supports a “pay for performance” culture.

 

In setting compensation for executive officers who join us from other companies, the Committee evaluates both market data for the position to be filled as well as the officer candidate’s compensation history at other companies. The Committee recognizes that in order to be able to successfully recruit the candidate to leave his or her current position and to join us, the candidate’s compensation package will likely have to exceed their current compensation and may put that executive’s compensation above the median of the peer groups.

 

Consistent with its approach to total annual compensation, the Committee established 2006 total annual compensation targets for each of our executive officers after evaluating the market data provided by the compensation consultants and the performance of each of the executives in prior years. The Committee believes that the 2006 target amounts it established were appropriate and consistent with our compensation objectives. The 2006 total annual compensation targets established by the Committee were:

 

 

These target amounts formed the basis for the Committee’s compensation decisions in 2006. The 2006 target amounts differ from the amounts set forth in the Summary Compensation Table below because:

 

 

Consistent with other companies in the peer group comparisons, the target total annual compensation is comprised of annual cash compensation, which generally represents 25 to 45 percent of target total annual compensation, and long-term equity compensation, which generally represents 55 to 75 percent of target total annual compensation. As described in more detail below, the Committee considers annual cash and long-term equity incentive compensation separately and as a package to help ensure that our compensation objectives are met.

 

As described in the preceding paragraph, long-term incentive equity compensation generally represents the majority of the named executive officer’s total annual compensation. The long-term incentive equity compensation is an estimated economic value on the date of grant of the stock options and restricted share unit awards. The actual value of the long-term incentive equity compensation depends on the performance of the Company over the next several years as described below in “Long-Term Equity Incentive Compensation.”

 

Our Chief Executive Officer makes a recommendation to the Committee each year on the appropriate target total annual compensation to be paid to our executive officers, excluding himself. The Committee makes the final determination of the target total annual compensation to be awarded to each executive officer, including the Chief Executive Officer, based on the Committee’s determination of how that compensation will aid in achieving the objectives of our compensation policies. None of our executive officers are present during the portion of the Committee’s meetings when compensation for executive officers is set.

 

Annual Cash Compensation

 

In order to attract and retain high caliber executives, we pay our executives an annual cash amount that is considered by the Committee to be competitive in the marketplace. The cash compensation is divided between base salary and an annual performance-based incentive payment.

 

Base Salary.  Salary ranges and individual salaries for executive officers are reviewed annually, and salary adjustments are generally effective on April 1 of each year. In determining individual salaries, the Committee considers the market levels of similar positions at our peer group companies, the individual executive’s performance and experience in the position, and our salary increase guidelines. These guidelines currently permit annual salary increases from zero to ten percent depending on the executive’s individual performance during the prior year against results-based objectives established at the beginning of each year, and the executive’s leadership performance as measured against the following six leadership attributes:

 

 

In addition, executives and other employees may receive an additional increase if warranted because of promotion, retention concerns, or market conditions. In general, an experienced executive who is performing at a satisfactory level will receive a base salary at or around the median of the peer companies. Executives may be paid above or below the median depending on their experience and performance. The base salaries paid to our named executive officers in 2006 can be found below in the “Summary Compensation Table.”

 

Annual Incentives.  Our Executive Officer Achievement Award Program, which was approved by stockholders in 2002, is the cash bonus plan pursuant to which annual cash incentive payments are made to our executive officers. The target level for these annual payments is a percentage of the executive’s base salary, and, subject to adjustments as described above under “Total Compensation,” that percentage is set at or near the median of the peer group comparison described above. This program is consistent with our compensation objective to support a performance-oriented environment. As a result of this program, a significant percentage of annual cash compensation is dependent on performance measured against corporate goals and business unit or function goals established by the Committee at the beginning of each year. These performance goals, which are communicated to our executives at the beginning of each year, are derived from the financial and strategic goals stated in our global business plan. These performance goals and target levels represent an exercise of discretion by the Committee under this program to limit the amount of the incentive payments. Under the program, in the absence of this exercise of discretion, each of the executives would be entitled to an award equal to 0.3 percent of the Corporation’s adjusted earnings. This program was established in 2002 to ensure that the tax deductibility limitations of Section 162(m) of the Internal Revenue Code would not apply to our incentive cash payments.

 

For 2006, the Committee established key financial goals at the corporate level that focused on increasing net sales, increasing adjusted earnings per share for compensation purposes (“Adjusted EPS”), and improving our adjusted return on invested capital (“Adjusted ROIC”). Adjusted EPS consists of diluted net income per share which is then adjusted to eliminate the effect of items or events that the

Committee determines in its discretion should be excluded for compensation purposes. In 2006, the following adjustments were made to diluted net income per share to determine Adjusted EPS:

 

 

Return on invested capital is a measure of the return we earn on the capital invested in our businesses. For purposes of determining annual cash incentive amounts, we calculate Adjusted ROIC using our reported financial results, adjusted for the same items described above in determining Adjusted EPS. The formula we use to calculate ROIC is described in detail under “Additional Information — Non-GAAP Financial Measures” in our Annual Report for 2006.

 

The Committee also established other financial and non-financial strategic performance goals which are discussed below. The financial and non-financial goals established by the Committee are intended to challenge our executives and to incentivize them to stretch to exceed our long-term objectives.

 

Depending upon the performance for the year, actual amounts earned may range from zero to 240 percent of the target payment amount established by the Committee. This range of possible payouts was determined based on competitive factors and the goal of encouraging a performance-oriented environment. Target payment amounts currently are established at 120 percent of base salary for our Chief Executive Officer and 80 percent of base salary for our other named executive officers. These targets were set based on the Committee’s market assessment of annual incentive levels at peer group companies.

 

For the Chief Executive Officer, 2006 performance was measured against our corporate objectives. For all other named executive officers, 2006 performance was measured 70 percent on corporate performance and 30 percent on the performance of the business unit or function for which the executive was responsible. The Committee has established this 70/30 split to strike an appropriate balance between aligning the executives with our overall corporate objectives and with individual performance accountability for each executive’s area of responsibility. The Committee determines each year the appropriate split between corporate and business unit or function objectives based on its assessment of the appropriate balance. For 2007, the Committee has determined to adjust this split for certain executive officers. See “Executive Compensation for 2007” below for a discussion of this change.

 

Committee Assessment of 2006 Performance.  In 2006, the key financial goals at the corporate level, the potential payouts for achieving those goals, and the actual 2006 results as determined by the Committee were as follows:

 

 

Based on these results, the Committee determined that the payout percentage for achieving the key financial goals should be 91.7 percent.

 

The Committee also assessed performance against the other financial and strategic performance goals established at the beginning of 2006. These goals, which were intended to further align compensation with achieving the goals of our Global Business Plan, included:

 

 

 

With respect to these goals, the Committee determined that most were successfully achieved or exceeded, and that some progress was made on the other goals. On balance, the Committee determined that the payout percentage for achieving these other financial and strategic goals should be 110 percent.

 

Corporate Objectives Assessment.  Based on the Committee’s assessment of our performance measured against our corporate objectives, the Committee approved a payout percentage for corporate performance at 97 percent. This payout percentage reflects the Committee’s determination of the appropriate payout based on the combination of 91.7 percent and 110 percent for achieving key financial goals and our other financial and strategic goals, respectively. The annual incentive payment for our Chief Executive Officer set forth in the “Summary Compensation Table” below reflects this percentage multiplied by his target annual cash incentive payment.

 

Unit or Function Objectives Assessment.  Our Chief Executive Officer provides the Committee with an assessment of each individual business unit’s or function’s performance against the objectives for those business units or functions. Based on that assessment, the Committee approved payout percentages for business unit or function performance that ranged from 80 percent to 150 percent of target, depending on the performance of the business unit or function.

 

2006 Payouts.  The 2006 annual incentive payments for each named executive officer, other than the Chief Executive Officer, reflect the combination of the 70 percent/30 percent weighting of the payout percentages for performance against the corporate and business unit objectives. As a result of this weighting and the Committee’s determination of performance, our executive officers earned incentive payments for 2006 that ranged from 95 percent to 105 percent of their target amounts. The incentive payments were paid to the executives in February 2007, and are quantified below in the “Summary Compensation Table.”

 

Long-Term Equity Incentive Compensation

 

We award long-term equity incentive grants to executive officers as part of our overall compensation package. These awards are consistent with our policies of offering competitive compensation packages, supporting our performance-oriented environment and aligning our senior leaders with the financial interests of our stockholders. When determining the amount of long-term equity incentive plan awards to be granted to executives, the Committee considered the following factors, among others: the specific responsibilities and performance of the executive, our business performance, our stock price performance and other market factors. The 2006 long-term equity incentive awards were granted in April 2006 based on an assessment of those factors at that time. Because these awards are part of our annual compensation program that targets total annual compensation at or near the median of our peer group comparison, subject to adjustment as described under “Total Compensation,” grants from prior years were not considered when setting 2006 targets or granting awards.

 

Executive officers may receive long-term incentive awards of stock options, restricted stock or restricted share units, or a combination of stock options, restricted stock and restricted share units under an equity participation plan that was approved by stockholders in 2001 (the “2001 Plan”). The 2001 Plan

provides the Committee with discretion to require performance-based standards to be met before awards vest.

 

Prior to 2004, our primary long-term incentive program consisted of stock option awards. Restricted stock had been used on a periodic basis, primarily for retention of key individuals. Beginning in 2004, we changed the mix of long-term equity incentive grants for key executives to consist of a combination of time-vested restricted share units, performance-based restricted share units, and stock options. The Committee made this change to better align our program with market practices and to put greater emphasis on performance-based compensation.

 

For 2006, the Committee set the long-term equity incentive compensation grant value for each executive based on the goal of first targeting total annual compensation at the median of the peer groups, subject to adjustment as described above under “Total Compensation,” and then adjusting that target to reflect the performance of the executive officer. The grant date value was then divided into three separate grants each with a value equal to one-third of the target level established by the Committee. These grants which consist of time-based restricted share units, performance-based restricted share units, and stock options, are described below.

 

Restricted Share Unit Awards.  The Committee determines the number of restricted share units to be granted to executives and the time period and conditions for vesting. During the restricted period, an executive who is awarded restricted share units will not be entitled to vote the units but receives cash equal to dividends paid on our common stock. Upon expiration of the restricted period, payment of restricted share units will be made in shares of our common stock.

 

In 2006, executives received awards of both time-vested and performance-based restricted share units with a value equal to one-third each of the target grant date value for long-term equity incentive compensation. For this purpose, time-based and performance-based restricted share units are valued on the basis that one unit has the same value as one share of our common stock on the date of grant. For the performance-based restricted share unit awards, the actual number of shares to be received by the executives will range from zero to 150 percent of the target levels established by the Committee for each executive, depending on the degree to which the performance objective is met. The performance objective for the 2006 awards is based on the average ROIC for the period January 1, 2006 through December 31, 2008, as follows:

 

 

This goal is based on an improvement over our 2005 ROIC of 15.2% and is consistent with our global business plan objective to improve ROIC 40 to 50 basis points per year during this period. Information regarding restricted share unit awards granted to our named executive officers can be found below under “Summary Compensation Table”, “Grants of Plan Based Awards” and “Discussion of Summary Compensation and Plan-Based Awards Tables.”

 

Stock Option Awards.  In 2006, executive officers also received awards of stock options with a value equal to one-third of the target grant date value for long-term equity incentive compensation. For this purpose, stock options are valued on the basis that one option has the same value as 25% of one share of the Company’s common stock on the date of grant. The value we use for this purpose is higher than the value we use for financial statement purposes. The Committee believes that this value is an appropriate way to determine the number of options to be granted under the 2001 Plan because it provides more consistent application and is not subject to the volatility inherent in the Black-Scholes valuation method used for financial statement purposes. Information regarding stock options granted to our named executive officers can be found below under “Summary Compensation Table,” “Grants of Plan-Based Awards,” and “Discussion of Summary Compensation and Plan-Based Awards Tables.”

 

Timing of Long-Term Equity Grants.  Our policies and stock option plans require options to be granted at no less than the closing price of our common stock on the date of grant. Our practice has been to

award options at our February or, more recently, April Committee meeting. Committee meeting dates are set by the Committee at least one year in advance. The February Committee meeting is typically three to four weeks after our earnings release for the prior quarter, and the April Committee meeting is typically three to four days after our first quarter earnings release.

 

Beginning in 2004, the Committee began to award executive officers restricted share units at the April Committee meeting, the same time as it was granting stock options as part of the annual long-term incentive compensation awards described above. Prior to 2004, restricted stock was awarded at various meetings of the Committee for retention purposes. Our executives are not permitted to choose the grant date for their individual restricted stock or restricted share unit awards.

 

The Committee administers our equity plans, which were approved by our stockholders in 1992 and 2001. Two categories of stock options have been granted under our equity plans: annual grants and recruiting and retention grants. Annual grants are made each year at a meeting of the Committee, as described above. Annual grants have accounted for more than 99.5 percent of all options granted under these plans since 1993. Our executives are not permitted to choose the grant date for their individual stock option grants.

 

Our Chief Executive Officer has limited authority to grant employee stock options, restricted stock and restricted share units in connection with recruiting and special employee recognition and retention matters. These recruiting and retention grants may not exceed 200,000 stock options, restricted stock or restricted share units, in the aggregate, in any calendar year. Our Chief Executive Officer is not permitted to make any recruiting and retention grants to any of our executive officers. These recruiting and retention grants are made on regularly scheduled dates during each quarter.

 

Retirement Benefits

 

We maintain a funded, tax-qualified, non-contributing defined benefit pension plan that covers certain employees, including our named executive officers. We also maintain supplemental pension plans that provide benefits to the participants in the pension plan as are necessary to fulfill the intent of our pension plan without regard to the limitations imposed by the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) on qualified pension plans. The supplemental pension plans are unfunded and non-qualified. The benefits payable to our named executive officers under our pension and supplemental plans depends on the participants’ years of service under our plan and their monthly average earnings over the last 60 months of service or, if higher, the monthly average earnings for the five calendar years in their last fifteen years of service for which earnings were the highest. For pension calculation purposes, earnings include annual cash compensation described above and do not include long-term equity compensation. For a more detailed explanation of our pension plans, and the present value of the accumulated benefits of our named executive officers, see “Pension Benefits” below.

 

For employees who joined the Company on or after January 1, 1997, or for those employees who elected to opt out of continuing participation in our pension plans, we also maintain two qualified defined contribution plans, the Incentive Investment Plan (“IIP”) and the Retirement Contribution Plan (“RCP”). The IIP is a contributing plan and we match contributions made by our employees in the IIP up to the limit set by the Committee from time to time, which was $6,600 in 2006. The RCP is a non-contributing plan under which we make contributions to accounts established for the participants that vary depending on their compensation level and age. We also maintain an Excess Benefit Program (“EBP”), which is a non-qualified, non-contributing defined contribution plan. We provide benefits under the EBP to the extent necessary to fulfill the intent of the RCP without regard to the limitations imposed by the Internal Revenue Code on qualified defined contribution plans. For each executive officer who participates in the RCP, the benefit accrues to the officer’s account each month based on a formula that varies depending on the officer’s age at the end of the year and a percentage of the officer’s base and excess earnings. For a more detailed explanation of our RCP, and the current balance of amounts paid to our named executive officer who participates in that plan, see “Nonqualified Deferred Compensation” below.

 

We and the Committee believe that the retirement benefit and contribution plans described above are important parts of our compensation program. These plans are consistent with those maintained by our peer companies and are therefore necessary in order to remain competitive with them for recruiting and retaining executive talent. Additionally, these plans help encourage retention of our senior executives because their retirement benefits under these plans increase for each year they remain employed by us.

 

Other Compensation

 

We provide all of our executive officers with the following perquisites: personal financial planning services provided by an independent firm; and an executive health screening program where executives may receive comprehensive physical examinations from an independent health care provider. The personal financial planning program is designed to provide executives with access to knowledgeable resources that understand our compensation and benefit plans and can assist our executives in efficiently and effectively managing their financial and tax planning issues. Beginning in 2007, our Chief Executive Officer will no longer receive personal financial planning services pursuant to our program. The executive health screening program provides executives with additional services that help maintain their overall health. We encourage our executives to take advantage of this service.

 

The Board of Directors has approved an executive security program for our Chief Executive Officer. Under this program, our Chief Executive Officer is required to use our corporate aircraft for all business and personal travel, and security services are provided for him at all times, including at his office, other company locations and his residence. Periodically, a security assessment is conducted by an independent security consultant, and the program is reviewed by our Board, to ensure that security measures provided by us are appropriate. The Board considers these security arrangements to be appropriate and reasonable in light of the security risks identified in the independent security assessment. The incremental cost to us of providing security services at Mr. Falk’s residence and his personal travel on our corporate aircraft, and the related tax reimbursements and gross-ups, are included in “All Other Compensation” in the “Summary Compensation Table” below. We calculate the incremental cost of his personal travel on our corporate aircraft based on our variable cost per hour of operating the aircraft multiplied by the number of hours of personal travel.

 

Severance Benefits

 

We maintain several severance plans for our executive officers, depending on the circumstances that resulted in their termination. These severance plans are described below under “Executive Officer Severance Plans.” An executive officer may not receive severance under more than one severance plan.

 

We believe that our severance plans are consistent with those maintained by our peer companies and therefore are important for attracting and retaining executives who are critical to our long-term success and competitiveness. Two of our severance pay plans are specifically designed to ensure that executive officers are incentivized to stay with us during periods of uncertainty. One of those plans relates to the implementation of our Global Business Plan and the related Strategic Costs Reduction program, including the announced reduction in workforce. At the time this plan was established, there was uncertainty regarding which employees would be affected by the workforce reductions. The other plan relates to potential changes in control, and the resulting uncertainty of continued employment following any such change in control.

 

Policy on Incentive Compensation Claw-back

 

As described above, a significant percentage of our executive officer compensation is incentive-based. This is an important aspect of our “pay for performance” culture. The determination of the extent to which the incentive objectives are achieved is based in part on the Committee’s discretion and in part on our published financial results. The Committee has the right to reassess its determination of the performance awards if the financial statements on which it relied are restated. The Committee has the right to direct the Corporation to seek to recover from any executive officer any amounts determined to have been

inappropriately received by the individual executive officer. In addition, the Sarbanes-Oxley Act of 2002 mandates that the chief executive officer and the chief financial officer reimburse us for any bonus or other incentive-based or equity-based compensation paid to them in a year following the issuance of financial statements that are later required to be restated as a result of misconduct.

 

Executive Compensation for 2007

 

On February 20, 2007, the Committee established objectives for 2007 annual cash incentives payable in 2008 to our executive officers. Incentive payments for 2007 will be based on the Committee’s judgment regarding our corporate and the executive officers’ performance in 2007 against those objectives. The corporate objectives include both key financial and other financial and strategic goals. The key financial goals for 2007 are aligned with our long-term global business plan objectives and include growth in net sales, growth in adjusted earnings per share and improvement in adjusted ROIC. Non-financial goals for 2007 include various qualitative and quantitative measures that are intended to further align compensation with achieving our global business plan, including:

 

 

In addition, goals have been established for each executive officer, other than the Chief Executive Officer, relating to their specific function or business unit. Depending on actual performance in 2007 against the financial and non-financial goals, 2007 incentive payments could range from zero to 240 percent of each executive officer’s target payment. As discussed above in “Annual Cash Compensation — Annual Incentives,” the Committee sets the appropriate split between corporate and business unit or function objectives each year. For 2007, the Committee determined that the appropriate split for those executive officers who have business unit responsibilities should be 50 percent corporate objectives and 50 percent business unit objectives. For executive officers with responsibilities for staff functions, the Committee determined that the appropriate split for 2007 would again be 70 percent corporate objectives and 30 percent function objectives.

 

Also on February 20, 2007, the Committee approved the following base salaries for our named executive officers, effective on April 1, 2007:

 

 

Target Stock Ownership Guidelines

 

We strongly believe that the financial interests of our executives should be aligned with those of our stockholders. Accordingly, we maintain stock ownership guidelines for approximately 400 key managers, including the named executive officers. All executive officers are expected to own our common stock in an amount equivalent to three times their annual base salary. The Chief Executive Officer is expected to own an amount of our common stock which is six times his annual base salary. These guidelines have been met or exceeded by each of the named executive officers. Failure to attain targeted stock ownership levels within three years can result in a reduction in future long-term incentive awards granted to the executive.

 

In determining whether our stock ownership guidelines have been met, restricted shares and time-based restricted share units are considered as being owned and performance-based restricted share units are excluded until they vest.

 

We have a policy that mandates that all executive officers must review transactions involving our common stock or other securities related to our common stock with our legal department prior to entering into the transactions. Although we do not have a formal policy that prohibits transactions that hedge an executive officer’s economic risk of owning shares of our common stock, none of our executive officers have engaged in any such hedging transactions in 2006. Any shares that an employee may own subject to a market put or call option are excluded for purposes of determining compliance with our stock ownership guidelines.

 

Tax Deduction for Executive Compensation

 

The United States income tax laws generally limit the deductibility of compensation paid to each named executive officer to $1,000,000 per annum. An exception to this general rule exists for performance-based compensation that meets certain Internal Revenue Service requirements. The annual incentive payments and option grants to executive officers are designed to meet these requirements for deductibility. The other long-term incentive awards described above may be subject to the $1,000,000 deductibility limit.

 

Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. In our view and the view of the Committee, meeting the compensation objectives set forth above is more important than the benefit of being able to deduct the compensation for tax purposes.

 

In accordance with its written charter adopted by our Board, the Management Development and Compensation Committee has oversight of compensation policies designed to align compensation with our overall business strategy, values and management initiatives. In discharging its oversight responsibility, the Committee has retained an independent compensation consultant to advise the Committee regarding market and general compensation trends.

 

The Committee has reviewed and discussed the Compensation Discussion and Analysis with our management, which has the responsibility for preparing the Compensation Discussion and Analysis. Based upon this review and discussion, the Committee recommended to our Board that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2006.

 

MANAGEMENT DEVELOPMENT AND
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

 

Marc J. Shapiro, Chairman
Abelardo E. Bru
Pastora San Juan Cafferty
James M. Jenness
G. Craig Sullivan

 

The following table sets forth information concerning compensation awarded to, earned by, or paid to our named executive officers in the last three years. Our named executive officers include our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers serving as of December 31, 2006.

 

 

 

 

 

 

 

 

 

 

Except with respect to Mr. Falk, amounts shown as perquisites consist solely of amounts paid pursuant to our Executive Financial Counseling Program and our executive health screening program. Perquisites for Mr. Falk included the following: